3 ms·

Now let's say the price collapses by 50%. You're stuck and can't sell in a "frozen" housing market... like how the housing market has been since May 2022. And t

by panny 3mo ago

Now let's say the price collapses by 50%. You're stuck and can't sell in a "frozen" housing market... like how the housing market has been since May 2022. And the problem is structural. And it's only going to get worse as interest rates continue to rise to battle inflation. Here's a nice explainer. https://youtu.be/qROG2uXPChY?t=608 https://youtu.be/qROG2uXPChY?t=608

AnthonyMouse 3mo ago
The assumption for a couple of generations has been that housing costs will always increase over time as a percent of wages. The problem with that is that it's unsustainable. The next generation has to be able to afford it in order to buy it, and they also need to buy food and utilities etc., which also cost more when real estate does. Investors can't save you either when the next generation can't afford the rent they would have to charge to turn a profit. But in order for housing to be a good investment, it has to have competitive returns with other investments, i.e. it needs to increase by at least as much as GDP per capita. Meanwhile median wages have been increasing slower than GDP per capita, which as above is the long-term cap on housing prices. In other words, housing can't long-term sustainably beat other market investments unless wages do, which they haven't, in which case people would get better returns by putting their money in stocks etc. Worse, years of ZIRP inflated housing prices beyond any sustainable level even with the scarcity being maintained by existing zoning restrictions, i.e. the "eventually it's not sustainable" point is already in the past. The result is that in order for housing to be a good investment going forward from now, there would first have to be a major housing crash so that "investors" (i.e. home buyers) could buy low instead of buying high. Which thereby implies that it wouldn't be a good long-term investment at current prices. And by major housing crash, notice what "enormous housing bubble that crashed the world economy" looks like on this chart in 2007 and compare it to what things look like since then, especially since 2020: https://fred.stlouisfed.org/series/MSPUS https://fred.stlouisfed.org/series/MSPUS A lot of people haven't realized that the party is over and are expecting housing to still be a good investment.
- coryrc 3mo ago
  Nothing you said is wrong, but you could say that in 2013 too, and in that time apparently prices have nearly doubled and you missed out if you didn't take advantage. Mortgages are "heads I win, tails you lose" in non-recourse states like California. You're not down more than your down payment, but the upside is huge, and for the past fifty years it has been more financially advantageous to use that leverage to buy the most expensive home they will allow you to.
  - AnthonyMouse 3mo ago
    > Nothing you said is wrong, but you could say that in 2013 too, and in that time apparently prices have nearly doubled and you missed out if you didn't take advantage. In 2013 you couldn't say that prices have nearly doubled since 2013 under ZIRP, which is the argument that buying now would be buying high. > Mortgages are "heads I win, tails you lose" in non-recourse states like California. You're not down more than your down payment, but the upside is huge, and for the past fifty years it has been more financially advantageous to use that leverage to buy the most expensive home they will allow you to. You're not down more than your down payment plus whatever principal and interest you've paid since then. On top of that, it's still leverage. Suppose you buy a $1M house with a $200k down payment and ~$5000/mo going to principal and interest. In five years you've paid out the $200k down payment, another ~$50k in principal and ~$250k in interest. If the value at that point declines by 25% since you bought, you're not down 25%, you're wiped out, -$500k, because you're left with a $750k house where you still owe $750k having already paid $500k. Let's say it's only -$380k because you'd have had to pay $2000/month to rent a smaller apartment in the alternative. Whereas if you put the $380k into non-leveraged investments and the market declined by 25%, you'd still have $285k instead of $0. If the overall market does better than housing or it was "safe" investments like CDs then you'd still have the entire $380k plus whatever interest it earned. Worse yet, if housing costs declined then your monthly rent would go down but your mortgage is fixed for 30 years. You could still make the argument that it's worth it to take the leverage if the upside is expected to be large, i.e. you expect the value to keep going up, but suppose you don't.
    - 3mo ago
coryrc 3mo ago
That's the bank's problem.

by panny 3mo ago

AnthonyMouse 3mo ago

The assumption for a couple of generations has been that housing costs will always increase over time as a percent of wages. The problem with that is that it's unsustainable. The next generation has to be able to afford it in order to buy it, and they also need to buy food and utilities etc., which also cost more when real estate does. Investors can't save you either when the next generation can't afford the rent they would have to charge to turn a profit. But in order for housing to be a good investment, it has to have competitive returns with other investments, i.e. it needs to increase by at least as much as GDP per capita. Meanwhile median wages have been increasing slower than GDP per capita, which as above is the long-term cap on housing prices. In other words, housing can't long-term sustainably beat other market investments unless wages do, which they haven't, in which case people would get better returns by putting their money in stocks etc. Worse, years of ZIRP inflated housing prices beyond any sustainable level even with the scarcity being maintained by existing zoning restrictions, i.e. the "eventually it's not sustainable" point is already in the past. The result is that in order for housing to be a good investment going forward from now, there would first have to be a major housing crash so that "investors" (i.e. home buyers) could buy low instead of buying high. Which thereby implies that it wouldn't be a good long-term investment at current prices. And by major housing crash, notice what "enormous housing bubble that crashed the world economy" looks like on this chart in 2007 and compare it to what things look like since then, especially since 2020: https://fred.stlouisfed.org/series/MSPUS https://fred.stlouisfed.org/series/MSPUS A lot of people haven't realized that the party is over and are expecting housing to still be a good investment.

coryrc 3mo ago
Nothing you said is wrong, but you could say that in 2013 too, and in that time apparently prices have nearly doubled and you missed out if you didn't take advantage. Mortgages are "heads I win, tails you lose" in non-recourse states like California. You're not down more than your down payment, but the upside is huge, and for the past fifty years it has been more financially advantageous to use that leverage to buy the most expensive home they will allow you to.
- AnthonyMouse 3mo ago
  > Nothing you said is wrong, but you could say that in 2013 too, and in that time apparently prices have nearly doubled and you missed out if you didn't take advantage. In 2013 you couldn't say that prices have nearly doubled since 2013 under ZIRP, which is the argument that buying now would be buying high. > Mortgages are "heads I win, tails you lose" in non-recourse states like California. You're not down more than your down payment, but the upside is huge, and for the past fifty years it has been more financially advantageous to use that leverage to buy the most expensive home they will allow you to. You're not down more than your down payment plus whatever principal and interest you've paid since then. On top of that, it's still leverage. Suppose you buy a $1M house with a $200k down payment and ~$5000/mo going to principal and interest. In five years you've paid out the $200k down payment, another ~$50k in principal and ~$250k in interest. If the value at that point declines by 25% since you bought, you're not down 25%, you're wiped out, -$500k, because you're left with a $750k house where you still owe $750k having already paid $500k. Let's say it's only -$380k because you'd have had to pay $2000/month to rent a smaller apartment in the alternative. Whereas if you put the $380k into non-leveraged investments and the market declined by 25%, you'd still have $285k instead of $0. If the overall market does better than housing or it was "safe" investments like CDs then you'd still have the entire $380k plus whatever interest it earned. Worse yet, if housing costs declined then your monthly rent would go down but your mortgage is fixed for 30 years. You could still make the argument that it's worth it to take the leverage if the upside is expected to be large, i.e. you expect the value to keep going up, but suppose you don't.
  - 3mo ago

coryrc 3mo ago

That's the bank's problem.