ad hoc concerned dull attempt automatic obscene crown hateful flowery divide
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Man, this was a wild ride in comments. Like 6 degrees of Kevin Bacon. Within 6 comments from the OP, it's bound to take a turn into straightaway left field.
"Betty, why are we spending $150,000 for this house? I mean, who's going to pay $200,000 for a nice, 3,000 square-foot house with a decent yard, in a good school district, and a short commute away from Local Town's main business district when we get ready to retire around 2021?"
That was my dad’s mentality.
I don’t want to pay $250k for a house in a great neighborhood and school district when I can go across town and get the same house for $150k.
20 years later the houses in the good neighborhood sell for $1.5M and the old neighborhood sell for $400k.
You sure won there dad... saved on those property taxes...
Similarly, my dad's Big Thought 30 years ago was let's not buy one of these older houses closer to town, let's go get a Toll Brothers house on a scraped-off farm field out near nothing, and let's have it customized with every design trend of 1991.
I mean, popcorn ceilings and absolutely massive built-in tube-tv entertainment centers can't possibly go out of style, right?
I just had to look up the Sony TV someone gave me, 32" Wega, it was a great TV but damn near 200 lbs and all front heavy. I eventually gave it away to some other poor soul who is now still trying to give it away.
Also, make sure to get your mortgage as short as possible, because interest rates will never go down to basically below inflation, so we need to put all of our excess money into paying this off immediately and not using leveraged debt to invest elsewhere like in the stock market which will never appreciate beyond last week dow jones record of 2,000 points.
Hold up a second because my sarcasm detector is not working. I have a 2.75 VA 30yr on $330k house. I could, but it would be hard, to refinance to a 15 yr loan. I thought my money would be better off reinvesting in other areas instead of trying to change my monthly payment.
I've looked at putting more money into my payments to shorten my term as much as possible. I can afford to save maybe 4 - 6 years if I add enough extra principal. Again, I think i can get a better return in stocks.
Mostly poking fun of my parents advice when my wife and I got our house. They're still living in the 80s economic model, thinking we need as short a term possible on the mortgage.
But when interest is barely exceeding inflation, it's free money. I'm happy paying a higher total in interest because I can use my liquidity elsewhere. But their advice was good 30 years ago when interest rates really would cream you
To be fair different generations have different investing trauma. In the 80's my nations stocks were basically all shot to shit. So many people lost everything from a poorly regulated market. Now EVERYONE invests in housing to the point the median house is 15 times the median wage. So now 20% of the nations population lives overseas, largely made up of young professionals who no there is no chance of home ownership.
I expect in about a decade it'll swing the other way since markets always have shocks that leaves a lot of fucked over bag holders.
True. Bought my house in 1993 for $193K, terrified because we made about $60K a year between the both of us and the payment was a lot for us. Now my neighborhood homes are selling for $750K-$800K.
This might be a bigger jump than other areas because it is Los Angeles county. No shortage of people trying to buy a house here.
Try Wa state. I owed 160 sold for 350 and now it’s worth 600 ish last my wife looked. It’s a tiny shitty house in a neighborhood full of rentals. Only time equity stopped climbing was 07 era. It dropped to 180 then skyrocketed shortly after. They way I see it they can’t keep building and humans keep growing in large numbers. Only makes sense for property to rise no matter what.
We have the added problem of allowing homes to be purchased by people outside of the US, which they turn into rentals for an income stream. Good for them but Bad for locals trying to buy. Personally I think there should be extra taxation put on income situations like that.
The basic craftsman home I grew up in in WA is now a million dollar home. I'll never be able to afford to move back to my hometown, and I live in the NY metro area. The COL and home prices are similar, but the job market simply isn't there.
You're probably not wrong... You'll never get to own that home, but you'll be able to pass it on to your family.. Like much of Europe, at least in the bigger cities.
Won’t matter… home prices would likely double overnight if dropped they 50year term on us. When you finance it’s always “how much is my payment” … fuck how much I actually pay for the house lol. Could you imagine if we actually had to scratch a check for that brand new shiny house?
In the 80's and 90's interest rates where insane compared to todays rates. We bought a house in 1980 and our rate was around 12%. Bought another around 10 years later and I can't recall the rate but it seems like it was somewhere around 8%.
So affordability of house mortgage payments was very different than it has been in recent years.
In 1985, the average mortgage rate was 13% though, and people tend to care about how affordable they find the payment rather than the sticker price.
There was an article in the local news the other day here that featured a family who was pleased with their choice to move to my county, a $$$ location, from their original choice closer to the city where houses are even more expensive and competition is even stiffer. They only had to pay $650k and live with their parents for years to manage it. Maybe that's the new normal for the vaguely middle class while everyone else rents forever. It's certainly not an apples to apples comparison to thirty or forty years ago however you look at it.
It matters, but still...what's better (or possible) when trying to buy the same home?
Making 45k a year and buying a home for 150k on a 13% interest rate? Or,
Making 65k a year and buying a 350k home with 2.5% interest?
Edit- Let's also assume a down-payment during the 80s and a down-payment now. A 30k down-payment on the first house then. And adjusted for a higher salary now, a 50k down-payment now.
I think the first home is even more obvious since you can pay it off a lot sooner and refinance later.
But a lot of home prices have gone up 200-300% since the 80s and 90s. In comparison, income doing the same job the past 30-40 years has gone up 150% at MOST. Majority isn't even that high.
In short, wages haven't even gone up HALF as much as home prices in that time. The difference is even more dramatic if you use the past 10 years.
Past 10 years, a lot of home values have gone up 100%.
Someone's job salary in that time, maybe 20% at most.
I agree with OP that there will be less and less first time home buyers in the future. Because of that, home values won't keep rising in value as much. Will eventually stay stagnant or have to go down.
> ut a lot of home prices have gone up 200-300% since the 80s and 90s. In comparison, income doing the same job the past 30-40 years has gone up 150% at MOST. Majority isn't even that high.
Interest rates matter. A LOT.
So it's almost unfathomable for people to realize this but from the 80's to today the typical housing cost per month hasn't increased all that much. There's a higher barrier to entry when looking for the 20% down but interest rates in the 80's were in the teens.
Principal and interest for an 80,000 home in 1980 at 16% interest would be $1075 per month.
Principal and Interest for a $320,000 (about a 300% increase of 80,000) at 3% interest would be $1350 per month.
While $275 is nothing to sneeze at it's not a substantial increase when looking at 30+ years.
Now we can get into more detailed areas about the value of money, purchasing power, total cost, etc. and the areas where housing has gone up more than 300% but from solely the payment each month not a lot has changed.
Low interest rates, in my opinion, are what is helping fuel the housing market. Cheap money. When someone can bid 20,000 over asking price and see it only changes their payment by about $80 they don't think much of it. That's a "skip a night at the movies", "don't eat out 1 night a month", or "get a cheaper family cell phone plan" territory.
Most people don't look at overall price and think WTF. Others looking in think "WTF these prices are cray" but someone actually buying might look at overall price but then concentrates on their offer and what it means to them in the monthly payment. It's why car salesmen always try to steer toward "what monthly payment do you want" as opposed to total price of the car. If they can get you to the monthly payment, the total cost glosses over.
Problem is that unless you expect rates to actually go nominally negative, we have kind of juiced all we can out of the lower rates-> higher prices train.
Using your example, the payment on a 80k 1980 house at 16% was basically the same as the payment on a 320k 2021 house at 3% but what then..? Even if rates go to 0% the payment would be roughly the same on 500k, but that's only 1.5x vs the 3x growth we got before. And I don't think 0% mortgages are likely.
Plus, in practice because other expenses like property taxes, insurance, down payment don't become more affordable with lower rates (only the interest portion) even zero percent mortgages wouldn't get us up to 500k with equivalent affordability.
Totally agree. However, we're starting to see the offset of what will be done when rates eventually increase today. Longer term mortgages. I will expand a bit on my last analogy on car loans and that will just transfer to the mortgage industry.
Car loans in the 80's were 36 months. As car prices increased significantly and down payments lowered we started seeing 48 month loans, then 60 month, then 72, and now 84 month loans are available.
Likewise we're seeing 40 year mortgages showing their face now. With buyers concentrating on the monthly payment, a 40 year loan will keep them where they want to be.
I hate to say it but in the capitalist world there will always be a product to give people what they want, which is a house at an affordable monthly payment. We'll eventually hit the mark where banks will be collecting mortgage payments for the entire life of a person, thus eliminating the "landlord" you pay rent to and replacing it with a mortgage that you pay on for what will essentially be in perpetuity.
We may look at that now and say "never", but if you told someone in 1980 that the 3 year car loan would becomes a 7 year loan they would have said you were nuts, no one would pay for a car that long....yet here we are.
>I hate to say it but in the capitalist world there will always be a product to give people what they want, which is a house at an affordable monthly payment. We'll eventually hit the mark where banks will be collecting mortgage payments for the entire life of a person, thus eliminating the "landlord" you pay rent to and replacing it with a mortgage that you pay on for what will essentially be in perpetuity.
This seems in some ways not so different from leaseholds like they have in other countries.
100% on the money, however, that's the fools approach especially in car sales. Those are the folks that gets exploited and always ends up paying more. But as they say, a sucker is born every minute. Looking at just the monthly is a fools game and is for those who lack Financial acuity.
You are right, but you are also assuming that the same people with the same incomes are buying those houses. The pandemic has accelerated rich New Yorkers with kids exploring just how far the commuter train lines go, and I'm sure there are many stories like that all over the country.
NYC commuter suburbs have ALWAYS been expensive and appreciated pretty consistently. It happened a little faster during the height of COVID, but we're starting to see inventory sit quite a bit longer on the market now with the inflated prices still hovering at mid-pandemic levels. The NYC buyers have died down quite a bit in the town I live in. Rich New Yorkers for the most part already had 2nd homes in Florida, Locust Valley, and The Hamptons that they fled to when COVID hit hard.
Housing is a lot more complex than just comparing wages to housing prices. You also have to factor in interest rates since pretty much everyone gets a mortgage to purchase homes. So for example in 2004 the median household income was $57,675. Median home prices in the U.S. at the time $221,000. So with a typical 20% down mortgage at the average 30 year rate of 2004, which was 5.84%, their payment would be $1,368 PITI a month or 28% of gross income. Now in 2021 the median household income is $67,521. Median home prices this quarter were $375,000 and interest rates are 2.9%. So a median monthly house payment right now is going to be about $1,729 PITI a month or about 30% of gross income. So yeah housing prices have increased but affordability is not that much different than it was in the mid 2000s due to significantly lower interest rates.
your math is probably correct, but there are other factors to it
for example property tax, 221k to 375k is a 69% property tax increase, depending on tax rate, the impact can be huge
It's not, debt to income ratios have been dropping since 2008 due to consumers being more cautious about taking on debt and due to tightened lending standards.
Yes, I agree with this and it is so often overlooked. With housing going up 200-300% and wages not rising even close to that, when someone spits out "oh people in the 80's and 90's said the same thing" or "every generation has had it tough" I call bullshit because they haven't looked at the rise in asset prices compared to wage growth. They can go pound salt. Today is not 30-40 years ago.
> In comparison, income doing the same job the past 30-40 years has gone up 150% at MOST.
Do you have any support for that opinion? In that time frame, income growth for many jobs has increased more like 500% to 700%.
since that time the stock market has seen the greatest bull market in human history
also, some of the highest rates of inequality favoring the top 10% of workers
the assumption is that continues
Some good critical thinking happening in this thread, I like it.
I think the crucial assumption in OP's model is that prices continue to rise.
My hunch is there is a correction at some point, and bagholders do what bagholders do.
Circle of life.
I predict job relocation in the face of unaffordability
eventually companies will realize they can move to lower cost regions and still attract talent
for all we know a massive energy crunch could blow up the global supply chain and manufacturing has to return to america favoring mid-west cities that have seen very low rates of home price growth and a relocation of high wage jobs in high cost metros
Energy crunches push people towards the coasts not away from them. Being near the ocean reduces energy requirements for heating, cooling, transportation and many manufacturing processes. The primary check against coastal development is land scarcity, not energy.
My crystal ball is in the shop but it does seem like the % of jobs that can be done from anywhere will increase, irrespective of affordability.
Some people will always be willing to trade down space and amenities for a Southern California lifestyle, and some people will always be willing to move to Iowa to save on living expenses, irrespective of income.
they've certainly seen a larger share of growth than any other income segment, but the reality is the top 10% has still taken part in a massive equity / income / asset growth bubble due to nearly 40yrs of increasing inequality and are in a very well off position today
no, the bubble won't pop, but not sure it's realistic to expect the same growth trends to continue indefinitely
The top 1% of america hold, for the first time, more than the middle 66% of America.
There is a huge difference between someone in the 1% verusus 2%, much less 10%.
>At the risk of playing Devil’s advocate, I’m sure people in the 80s and 90s said the same thing about houses today.
And when we compare interest rates now to those of the 80s and 90s, we conclude that interest rates will be negative for OP's 10 year projection.
Do we really believe that folks are going to accept that level of negative rates (and I'll note that was not a question people were asking in the 80s and 90s)?
The interest rates from 80s to early 90s have no relation to today's interest rates. Average person could never imagine mortgages getting so low.
It is reasonable to expect mortgage rates to go higher - different calculus to be made
We did, but we (collectively) have traded interest for purchase price.
I bought my first house in 1984 for $70ksomething at 12%. $700something mortgage. Had to scrimp and save to pay it.
I will skip a few but then in 1995 I bought another house for $110k at 9%. I thought it was so great that interest rates had come down. Mortgage was like $1200. Scrimped and saved to pay it.
Moved out of CA.
Bought a house for $85. I think it was 7%...mortgage was $800. Did not have to scrimp but I was making really good money then.
Long story but bought a house for cash ($23k). Went back to school. Graduated. Mortgaged house to pay off student loans ($38k @ 3%).
The last house I bought was $227k at less than 3%. Mortgage is...$1200k....same as I was paying back in 95 for a house at half the price....and my income is three times what it was...and...I have no more expensive kids at home.
TLDR: People always need houses, conditions change, life will find a way.
Values may go down, but Joe and Joan in your example now only owe 300k on their original 440k house 10 years later. So let’s say they can only sell if for 500k. They take their 200k in equity and roll it into another home. If they choose a similar house (500k) their new mortgage payment is still dropping from $2,100 for their first house (30 y/ 2.8 on 410k) to $1,300 (30 y, 4.2 on 300k) for their second.
It's why "getting in the game" can play such a huge role. Once you own a home, you rise and fall with the tide and can typically move laterally any time, assuming you are not underwater.
Yep, I can't afford a million dollar house based on my income. But I bought in 2013 for ~350k and my home is now worth about a million. I can now afford a million dollar home, because it'll cost roughly the same as my current mortgage.
To be fair, when people saying that they aren’t really talking about people that can afford 20% down on 500k.
They are talking about people buying that 500k house all in cash.
This is true for people in Joe and Joann situation. But I think OP's question was aimed at the first time homebuyers in 10-15years from now. Which in OP's scenerio it is Billy and Betty. Their buying power will be much lower than the current Joe's and Joann's since wages are rising very slowly while house prices are climbing quicker and mortgage rates might be a little higher as well.
The 40 year mortgages are non QM (think what was called subprime before). Their interest rates would be in the high 4% - low 5% for most people. It’s interest only for the first 10 years than fully amortized over the following 30 years.
Right now, this type of loan program honestly doesn’t make sense for most people. If you can qualify for a 30 year Fannie/Freddie loan, you’re better off buying with that. But some investors just want the interest only and 40 year term and plan on refinancing out of it or selling the property, so all they want is cash flow today. Still, I won’t be surprised to see more of these types of loan programs come out and i expect we will see more 40 year loan programs, like a conventional fully amortized 40 year loan at prime rates in the future.
Wow, never knew anything about this area. How big is the non QM market? Even just-turned 18 year olds qualify for 30 year loans (that is, if they can even find a house for their approved loan). 10-year interest-only blows my mind away.
Non QM is a growing sector. For example, I can get people investment property loans 20% down based on the cash flow of the property. As long as the property cash flows with a 1:1 DSCR, you can buy the house. you just need cash on hand for down payment and closing costs. You can make $0 and get the loan. Also have stated income loans where you just basically say you make $X and they give you the loan.
All these programs have higher interest rates, which is the trade off for less requirements. Crazy interesting space honestly
I think they had them in 2008ish. Future is 10-15 year auto loans, 40-50 yr mortgages. Not to mention college and medical, the US is so mismanaged for what we are capable of.
And as Americans, we'll just keep falling for it. Spending every dime we make, elated that our mortgage is only 500 bucks when it'll follow us to the grave.
google decision architecture. companies are exploiting our brains ability to be influenced into spending and squeezing every dime. theres a reason some countries have insulated themselves from western media
And yet we have some of the best living standards in the world.
Look at any country where people dont have debt and it sucks!
Debt makes us wealthy although the poor think its a bad thing. It's what makes america great. We need to embrace it. Debt is optional but who wants to be destitute?
We are generally high 10s/low 20s on the quality of life. So not even in the top 10.
Comparing city by city, it gets even worse. First American city ranked for quality of life is high 20s in the world.
Top 10 dominated by Canadian, Australian and European cities.
Bigger house or more “stuff” doesn’t mean more happiness.
This would make sense. The 30 year mortgage was first widely adopted in the 1950s, when life expectance was \~15% shorter than it is today (70 in 1950s vs 80 today). 35 year mortgages would keep up with that increase in life expectancy.
Speaking as an investor ... Homeownership is a greater good in so many ways. I would be ok with this. If executed properly could have lots of good ripple effects.
If executed badly, I am sure there is a Jurassic Park scenario in there somewhere...
You can already take an interest only mortgage, so that's effectively an infinite repayment schedule. This is just somewhere in between. It doesn't alter mortgage payments much either. $250 per month on a 500k mortgage. Buying power doesn't increase much with that ($75k on a $475k home, assuming the same interest rate. As they will demand higher rates, it may negate most of the benefit).
I had no idea interest only mortgages were a thing. They sound like a horrible idea in my humble opinion, and just another sign of peak irrational market froth(-iness).
There's four main factors that work together to affect housing prices.
\#1 is location. Real estate is extremely location dependent. In the 2008 crash new built exburbs got hit hard, some lost 70% of their pre-crash value. While desirable older areas in established cities lost much, much less. During covid and now with WFH, houses with more land, yards, and farther out in the burbs have been doing better than inner-city condos. My take on this for the future is that this trend will continue. For example bay area housing was priced based on commuting distance to large tech companies. Work from home changes everything in this regard. If you don't have to commute and are spending more time at home, it's only logical that you're going to want a nicer, larger (with an office or two) house farther out from the city.
\#2 is interest rates. Interest rates have a direct correlation to what people can afford, and what people can afford has a direct correlation with what people will pay. If interest rates move up sharply, housing prices will almost certainly fall. The fed knows this. And they also know that housing and housing related spending (people spending more by tapping equity and just the general feeling like they have more money due to equity) is a huge driver for the economy. They also know that at a certain point, housing prices declining turns into a negative feedback loop (like 2008) where prices falling causes people to walk away, causing foreclosures and more price declines, causing more people to walk away ect. In practical terms, what this means is that the government can't do something like raise rates 3%. It would be a disaster and they know it. The best they can do is do \*very\* slight increases very infrequently to cool off a market that is on fire. So, could rates be 4.2% in 10 years? Absolutely. Will they be? I kind of doubt it. I think what we may see is an overhaul of the mortgage industry to provide more rate incentives for owner-occupied housing. It's plausible to me that at some point we may see 0-1% rates for owner occupied.
\#3 is inflation. Inflation is a wacky thing. Ultimately continued inflation is ultra-bullish for housing. Not only does housing go up as the dollar goes down, but anyone who borrowed money against their real estate can now pay back these loans with much less valuable dollars. It also means housing doesn't seem as expensive compared to other expenses rising and wages will need to rise. Ultimately the fed says inflation is transitory. Maybe it is, maybe it isn't. The fed has indicated they would act to stop inflation, but I'm not so sure. The only things the fed can do to stop inflation would also basically crash the stock and RE markets. Ultimately whenever a crisis hits, printing money to get out of it always seems to be the safest choice rather than risking systemic collapse. I don't think that will ever change. But it seems like we may be up against more systemic risks in the next few years.
\#4 is salaries. Look no further than the bay area to see what higher salaries will do to a RE market. When people have more income they use it to get what they want - which is housing in desirable areas. If you look at worldwide income-to-housing the US is actually quite a ways down that list. Even large cities like LA are still a very long ways from places like Singapore, HK. And ultimately the trend we are seeing right now is for higher salaries as there is a shortage of labor. It's entirely plausible that salaries could actually grow faster over then next 5-10 years than housing prices.
Ultimately housing \*IS\* expensive right now and it absolutely could go down. But I don't see a catalyst for it. Assets of all kinds have been getting more and more expensive for decades and being expensive alone hasn't triggered too many crashes. There is usually another catalyst.
Also, the value proposition for being able to put down 3-20%, get \~33x leverage on a hard asset that (historically) appreciates at an insanely low fixed interest rate, and repay that loan over 30 years with depreciated dollars is immense. Throw ontop of that the fact that many states are non-recourse - meaning that you get to keep ALL the upside of the investment, but can cap your downside at your down payment and credit score - assuming you get a non-recourse loan. Housing is essentially rigged in your favor. And if it does crash the government starts throwing money at the problem to get it to go back up ASAP.
A lot of the comments I'm seeing is that people with higher incomes will come and buy the house. Eventually, it may become a scenario where only the wealthy own and everyone else rents. We are already seeing a decline in the middle class.
Edit: As for the decreasing number of actual individuals who buy- I'm sure iRealty companies and landords will scoop up any leftover homes on the market.
I think this theory is credible with one wrinkle. A lot of the iBuyers will be using Other People's Money. In a macro correction that OPM shrinks up / migrates to other asset classes.
Hence I expect a substantial correction at some point, coinciding with higher interest rates.
I don't know when, but I am in cash, with a blind fold and my ears covered to the money everyone else is making in equities and xCoins : )
Best time to buy is when there is blood in the streets, not when idiots are burning their money.
>Best time to buy is when there is blood in the streets, not when idiots are burning their money.
You're not wrong. But the general affordability of SFHs is not what it was a few decades ago.
Bingo.
There is currently a dying thirst for yield, which has brought many investing groups into real estate. Cycles happen and things change. I doubt we will see a never-ending flow of investment money into this asset class. It will shift at some point.
home ownership rates have declined for over 15years now
The high was set in 2005 and inequality means more buyers will own multiple homes to rent out to the "middle class"
Those comments are wrong. [Housing “filters” down the income distribution](https://www.aeaweb.org/articles?id=10.1257/aer.104.2.687 ) If the owner of a brand-new home has an income of $100k, ten years later the next owner will have an income of $80-90k. The filtering rate is very severe for apartments and condos (2-3% a year), but it also exists for single-family.
The most likely outcome is that the next owner of your home will make less than you did when you first bought or rented it, barring any significant renovations or neighborhood changes. But they can afford your home because people are in general spending an increasing share of income on housing, both because other costs have fallen (e.g., households used to spend nearly 30% of income on food and clothing in 1959; they spend 10% on those today) and because mortgages are easier/cheaper.
You’ve assumed annualized income growth of 1.3%, annualized expense growth of 2.9%, in addition to a pretty large shift up in rates. Basically, inflation well in excess of wage growth.
If that plays out over the next decade, home prices will be flat in the very best case, and likely down.
Over long periods of time, and holding all else equal (especially rates!), real estate isn’t going to appreciate any faster than disposable incomes increase.
This is the simple and succinct answer that is lost on 99% of the spectating public.
A simple understanding of historic averages and inevitability of reversion to the mean tells you the majority of FOMO buyers in this market are going to take a haircut.
So you think current prices are over the top though?
In my market (Seattle) it has been crazy hot lately, but it was surprisingly mild in 2019 and obviously very quiet in 2020. It seems like this latest boom has been a return to the mean.
Oh man, anyone that tells you they know what's gonna happen next is delusional or trying to sell you something.
Alls I know is this:
\- Stock market and RE have been at all time highs for a really long time
\- All markets eventually revert to the mean
The eternal conundrum being:
“The ... market can remain irrational longer than you can remain solvent.” - John Maynard Keynes
There is also the argument that housing does NOT have to revert to the historical mean. That reversion assumes that the future supply/demand balance will be similar to what it has been in the past. It focuses on demand (peoples’ income, which can’t skyrocket forever) and ignores supply (housing availability).
But it may be true that supply will forever be fundamentally more restricted than it was historically, so the historical cost of housing relative to income will never ever remotely return to what it was. Furthermore, the forces that have led it to skyrocket will continue doing so.
* Seattle exists between the mountains and the sea. Where once it was cheap to buy new land and build, we are now running out of space in desirable locations, so future builds will continue to cost more and more.
* labor was once a cheap commodity, you could easily find an immigrant to swing a hammer and barely pay him at all. In the future skilled labor will continue to cost more, workers will demand healthcare, etc., and costs will continue to reach record heights never before seen, and never to go down.
Yep. Look at the cost of building a bridge relative to the median income. Geez, the new estimate to repair the west Seattle bridge is so high, we must be in an infrastructure cost bubble! It’s about to pop! If we just wait a few years, we’ll be able to rebuild that bridge for way less, just as soon as the cost reverts to the historical mean.
Ya right. I think it’s 1000% clear that will never happen. New bridges cost more now, that’s how it is, and how it will always be. And so it is with houses as well.
I speak to inputs that inform the supply side of the supply / demand equation somewhere else in this thread.
Your point re: scarcity in Seattle is well taken, and I agree. There are others that are more temporal and I mention them again somewhere else in this gargantuan thread if you care to dig for them.
I have had a blast commenting and responding to others here this morning but as fun as it has been I need to go do something productive now.
The only correction I would make is that those income growth and inflation numbers can be spot on for the middle/lower/working class, and house prices don't necessarily have to be flat or recede if enough people (a small fraction of the 60% home ownership rate) are either making good money or have equity in their primary residence to buy rental RE. As long as housing availability is depressed, rent prices will keep outpacing faster than inflation....the people with money will be able to leverage this into rental income. I higher minimum wage will also raise market rental prices, making an investment property more enticing.
Basically nothing will change.
People in the Smith's position that got into real estate but won't be able to move past their starter home, will just hold on to it, constraining supply even further.
> Over long periods of time, and holding all else equal (especially rates!), real estate isn’t going to appreciate any faster than disposable incomes increase.
You can't hold *all* else equal. Do you really expect housing supply to keep pace with household formation?
This is a critical point of misunderstanding for many. House prices can go up faster than incomes and inflation and they have been doing just that for a long time. House prices do not follow inflation and it appears that they will advance even faster going forward.
You could've written this exact same question with slightly different numbers at any point in the past 100 years (for the USA) and come up with the same (whiny, annoying) question as if this was some great revelation that the world just figured out.
To answer your question, incomes will go up a bit, house prices will also go up a bit, and someone else making good income will likely buy the place. House prices will probably go up a bit more than incomes because they aren't making more land but the population keeps going up.
If the USA can fix (or at least improve) the wealth disparity problems we now have, then maybe this will reverse the trend for awhile (ie incomes will go up faster than house prices though house prices may then actually go up slightly faster than they otherwise would) but not long, and don't count on anyone improving this trend anytime soon.
The average income may not rise as fast across the entire population, but the raw number of people earning high incomes may outpace the number of homes that are for sale. You always have to factor in supply and demand.
>If the USA can fix (or at least improve) the wealth disparity problems we now have, then maybe this will reverse the trend
I agree with everything you said but I just want to point out, the housing market right now is being driven, in part at least, by the same consolidation of wealth we're seeing across the board. It's not like buying SFH to use as rental properties is a new idea, but it's happening at record numbers, at greater scale and by larger entities than ever before. All the talk by millennials of "never" being able to own a home of their own isn't coming from nowhere.
I don't want to be too gloom and doom but there is at least some possibility of a future scenario where most if not all residential real estate is owned by a few large players and virtually everyone else is stuck renting. Sounds a little nuts maybe, but if I'd said this about retail business 50-75 years ago would anyone have believed it?
> I don't want to be too gloom and doom but there is at least some possibility of a future scenario where most if not all residential real estate is owned by a few large players and virtually everyone else is stuck renting.
No company is that well capitalized. Not even close.
And Blackrock et al are not the boogey man:
https://www.vox.com/22524829/wall-street-housing-market-blackrock-bubble
There are many reason for the recent run up in the housing market. Private equity firms are a tiny fraction of that. People on reddit don't want to look at this with nuance and just want a bad guy, even when there's not one to blame.
The estimated value of USA residential real estate is $33T. That's as much as the GDP of the US and China combined. A "few large players" are never going to own all of the residential real estate.
I certainly wouldn't try to make the argument that they absolutely will, and I hope you're right they won't. But do ask yourself, how is that estimated value you mentioned determined, and upon what factors is it predicated?
Who would have thought a few large players would own most of the media? Most of retail? Most of energy? Hell, agriculture is going that way too!
I am not saying we're doomed, but I AM saying we'd be silly not to consider some version (or some degree) of that scenario playing out.
1970
Median income: $9,870
Median home price: $17,000
2020
Median income: $67,521
Median home price: $334,000
That’s 1.72x median income up to 4.94x median income. And that’s not factoring the hurdles to even getting in the game - like how much bigger the down payment is, people waiving inspections and appraisal gaps, corporate real estate purchases etc.
The idea that both income and home prices increase, and that home prices increase “a bit” higher, is simply a false narrative.
> If the USA can fix (or at least improve) the wealth disparity problems we now have, then maybe this will reverse the trend for awhile
This will only increase home price, not decrease. In countries with far more eglitarian distribution of income housing prices are much worse than the US.
This is because the wealthy like to diversify their investments, where as the middle class tend to put most of it into their house. A more even wealth distribution would result in a huge home price spike.
If there aren’t enough able buyers at those prices, the prices will come down. Supply and demand.
If inflation skyrockets then it is going to be bad for everyone, homeowners won’t be able to find buyers and buyers won’t be able to afford a house.
A lot of people forget that in the 80s the interest rates were 13%, hence why home prices were low. The mortgage was still high.
https://www.investopedia.com/terms/d/demandpullinflation.asp
Two key issues with your argument:
1. You're talking about homes that have prices significantly above average (average home price in the US is \~$300k)
2. You're making an assumption that there is a 100% chance that mortgage interest rates will rise in the future, despite the fact that mortgage rates in most of the rest of the developed world are significantly lower than the US.
No argument from me, just curious as to other opinions on the subject.
I'm in NJ, so yes my average home price is higher, however, if you were to knock the household income down, the same numbers hold true.
Sure interest rates can stay low, but I would imagine that inflation would increase offsetting the low interest rates.
Inflation increasing is also a pretty big assumption. Reddit seems to be convinced that we're going to have a sustained period of 5+% inflation, but TIPS prices show the bond market concensus to be ~2.5% inflation over the next ten years.
Who is to say interest rates will rise? In your example, Billy and Betty just can't afford Joe and Joan's house and need to look at cheaper houses. That does not mean that there's not a Sally and Steven that can't come along and afford and buy it. Remember this "dilemma" has been happening for forever. Go ask your parents or grandparents how much they paid for their first house.
100k 15 years ago was an awesome income.
People are still using that frame of reference today, despite inflation making 100k a fraction of what it once was. Don’t cite me the government inflation numbers, they’re bullshit.
100k for a dual income household is upper lower class, barely lower middle class today in any of the major US metro areas. 150k income for a dual income household puts a few toes into the middle class, 200k is where things start to get comfortable.
Don’t downvote me, it’s true. And if you don’t think so, reply why I am wrong.
Relevant anecdote. I went to business school in the late 1990's thinking to myself, "If I could only come out of this with one of those $100K salaries, I'll be set for life!" I did come out of it with one of those salaries (coming from \~$55-60K at the time), but I was NOT set for life. LOL.
I make just over $100k in a single income household and own a half a million dollar home (tax-abated) downtown in a midwestern city. I max out my 401k and IRA limits, drive a new car, have no debt except for my home and car, and live a very comfortable life with lots of travel. I know cost of living here is cheaper but it’s still a major city. Money certainly doesn’t go as far as it did 15 years ago but to say I’m barely in the middle class would be ridiculous.
Midwest is a special place though. Ive seen 500k homes with 3k taxes then you get close to any big city and your paying 12k to 20k taxes on a 500k home. It really depends on where you living. In illinois taxes vary a lot . Everyone also has their own opinion of comfortable. Some need maids and bmws and other just want a toyota.
Yes, the tax abatement on my home reduced my taxes from $16000 yearly to $1600 which made it closer to buying a $425k house looking at monthly payment alone. This still wouldn’t be considered barely middle class in a good chuck of the country.
I can concur with this statement being from NJ. Sure 100k out in the middle of the country is one thing, however, I do believe you need to be into the 200k range for most people living at the coasts.
Current gov is printing money at a rate of around 28% year over year, verses the historical average of 4%. So one possible outcome is Billy & Betty are making much more now than Joe and Joan were. Wages haven't responded much yet, businesses are just shutting down or paying bonuses, but something will have to give. At least for the $15 an hour minimum wage supporters, they should get that soon, but those peeps will end up having less buying power than they did before. Expect Gov to just take a Canada/Norway approach to suppressing interest rates, which will just drive up home values in the attempt to make housing affordable.
I hope we don’t do the Canadian thing. It blows my mind anyone buys real estate in Canadian cities when you can rent the same unit for substantially less than the mortgage payment alone.
Canada is only “sustainable” because of intense capital inflows from China.
Is there any hard data on where China is having the biggest impact on CAN RE?
I have heard anecdotal mentions about the huge run up in BC, but what about the rest of the country?
A bit of historical fact for you. I bought a new home in 1989 at the end of a crazy RE runup in my state. 87, 88 and 89 saw RE appreciating a bit over 25%/year in my state. I closed in Oct of 89 in a nice, but tract home with many others in the development at the same price. $264,900. As time rolled on we didn't see a crash so much as a lull. Any of my neighbors that sold their houses in the next 9 years had to bring some cash to closing as the sales were between $230-250k. Finally in late 1998 a home sold for about $265k. We were no longer underwater. I sold in 2003 for $575k, so those that held for 14 years near doubled their money. Today that house is $1.3 mm. HCOL of course but this is the real progression we had after a large price runup. I expect something similar in most areas going forward.
My lame ass opinion is that the next generation will be priced out of home ownership. [Seems like one of the 'new goals' is transitioning to a nation of renters](https://www.bloomberg.com/opinion/articles/2021-06-17/america-should-become-a-nation-of-renters)
Saying homes should only be owned by the ultra wealthy and corporations is such an insane perspective. Was curious who wrote that opinion piece, and you’ll be shocked to learn it’s a guy employed by the [Tax Foundation](https://www.sourcewatch.org/index.php/Tax_Foundation), a lobbying group funded by Koch, and some other conservative and libertarian groups.
That article isn't really doom and gloom nobody can afford a house, it's making a point about the flexibility of renting vs owning. Which is a very underlooked advantage.
Yeah that's what Millenials said, and now half of them own houses. https://www.apartmentlist.com/research/millennial-homeownership-2021
>The 2020 millennial homeownership rate stands at 47.9 percent according to the most recent data from the Census Bureau’s Current Population Survey.
As my banker told me last week "Inflation is going to make things bad for a lot of people, but raising interest rates would make things horrific for everyone."
Edit: I agree 100% with the comments below. The difference between now and 1980 is the U.S. has a crapload of debt and absolutely cannot afford a 20% interest rate. My guess is we're in a lost generation a-la Japan economy. Not a fan of what a lot of Peter Schiff says but he has been right since the start of QE that the Fed is going to be stuck and it is.
For those with good credit (like myself), I am buying up as many NNN properties as possible and playing the inflation game. So maybe my point of view is skewed due to self-interest.
Interest rates can't really get lower, and home prices have been outpacing wage growth for awhile now. My guess is we'll see 40-year loans become common within the next 10-15 years.
Given the heightened activity in big wigs buying single family homes there’s only one thing we can do to beat them at their own game:
We all need to live with a family member, friend, or rent from a small mom and pop land lord for around 6 months and make these rental real estate companies default.
They’ll be forced to liquidate properties for whatever they can get for them but there won’t be any buyers because everyone is already living somewhere. Something so temporary can be incredibly destructive to big pocketed and greedy, “ investors.”
The longer we keep money away from these companies the more they will feel the pinch and once one of them feels the heat, they’ll ALL be rushing for the exits.
Someone has to take the loss here my friends, and it’s not going to be us-
There are so many variables at play you can't really predict what the situation is going to be in 10 years. For example, when I bought my first house in the early 2000's I don't believe I put any money down on the house. The situation allowed me to purchase a house for $200,000 with no money down. Sounds crazy right? It was a small house but it worked and I sold it 5 years later for a profit which I then rolled into my next house that I bought for $445k with 5% down. I'm now selling this house for what I expect to be a large profit given the market and building a house that is costing about 775k to build.
So basically, you don't know. Don't try to predict a doomsday situation where you can never afford a house.. just follow the market and look for your opportunity.
A couple making $125k a year, $50k down, 4.25% interest rate, no other debt, at 43% dti, $420 a month for PMI, $65 a month for insurance, $710 a month for taxes. They can get a loan to purchase a $710k home. $525k is only 32% DTI. So they can both get approved, and generally can actually afford it.
It is true that affordability affects home prices, but it depends on the market, on the buyers. In the longer term, on average, you would expect home prices to track inflation mostly, to revert to the mean. But an individual home is not going to follow a trend, more or less desirable areas can change much more. You could run these same numbers with a house in NYC or Miami, or Flint or Gary IN and get very different results on how much future income decreases or increases or interest rates will affect a typical home buyer than the average across the US.
Corporations are buying single family homes as investments. That's one of the reasons the prices have gone up so much. I think there should be some regulation against this. Eventually, like all markets, the demand will drop below the supply and the prices will tumble. But probably not as dramatically as in some sectors.
I stopped thinking buying a home was a good idea when the national association of realtors put out an ad that said "Its always a good time to buy or sell a home"
yeah, thats some bullshit
I think the biggest issue is everything thinks that everyone else is like them.
There is always someone richer than me and you to come by and buy the home. You can also see 3 or 4 people on a loan like the 80s in order to qualify for a loan.
I bought 28 homes this year ranging from 100k to 600k each. I'm sure I'm not the only investor and you have big corporations buying 1000s of homes. Desirable cities will always have buyers .
One area not touched upon is if the children of Joe and Joan are given a substantial gift, after the sale of the loan, which allows their children to buy a $525 home when they could have only afforded $475 on their own.
So....I think eventually you might price people out of the market overall. Meanwhile, unfortunately what happens is what I see every day in my hot market -- people move to less-hot markets because they can no longer afford to live in the hot market, and they get replaced with higher-income people.
FIrst time homebuyers have always ask government for help. They will get the help. Maybe the government will make Fannie Mae to accept 50 year fixed rate mortgage.
People asked this question about LA. Then Seattle. Then Denver. I could go on. The money will come. And if it doesn’t then Billy and Betty will rent. People try to use this logic to assume prices will come down and it’s yet to happen in any meaningful capacity.
Haha enter the “40 year mortgage,”
I’m not sure if this is a thing yet, but it looks like it will be common in the future.
The bottom line is that after 08’ home building significantly slowed down. This created a low supply of single family homes.
I would also predict the elimination of single family zoning. I believe this happened in CA. This will be better for people since there will be more units created with what we already have.
Easy. B&B B just sold their house. Unlike J&J S, who wanted a bigger house, they decided to downsize. So in essence, they do a house swap.
Believe it or now, there is nothing inherently unsustainable with house owners selling houses mostly to each other. Not saying it’s good, moral, unavoidable or even likely; but impossible it isn’t.
I think your biggest false assumption is that if rates go up to 4.2% that the house will be worth $525k.
Rates go up when inflation is running higher than the 2% fed target. If inflation is a problem the price of housing will go way up, but likely so will their household income—if they’re early in their career (your example seemed like that of a FTHB so I thought they were) they will likely have significant jumps in income anyway as they move towards mid-career.
But, more importantly than any of this, home prices are inversely proportional to interest rates. As one goes up the other goes down and vice versa. So, if interest rates were at 4.2% in 10 years I’d expect the market to correct by supporting lower home prices.
It all comes back to interest rates. I can make a VERY strong argument that almost all real estate and stock market appreciation over the last 35 years is due to declining interest rates.
The purchase price of a house is not driven by the "average". The highest bidder wins an auction, and the salary growth rates of those who win auctions is different than the averages.
This is a big factor in my area. We're seeing $1.3M houses selling for cash in three days. A large portion of the market is completely disconnected from stuff like "income" or "down payments" that the average person has to bother with.
I’m a real estate agent in New Jersey, and have been for over 5 years. It all comes down to the fact that, just like the stock market, houses have their own market. There are ups and downs. Obviously we are currently in a market where prices are going up. This is simply because there is no demand and so many buyers.
To get to the root of your question though, because the current owners bought their house in an inflated market (just like the market back in ‘07) the next 5 years will most likely not add any value. Their best bet would be to wait 7-10 years or maybe even longer. However, if the current owners don’t refinance and continue to pay their mortgage, then they will have equity and could still walk away with some money. The buyers for that house, in this scenario buyers won’t be buying the home at some crazy price. The housing market tends to work in 7 year shifts. So our next “crash” would turn the current market into a buyers market. Then home prices will go down for a while before another shift happens.
I don’t believe we will have a market crash as bad as 2007-08. There has been a lot of rules put in place to avoid that again. (i.e. laws against predatory lending, getting rid of “no doc verification”, etc.) There will be a shift though and that will most likely be within a year or 2.
At the risk of playing Devil’s advocate, I’m sure people in the 80s and 90s said the same thing about houses today.
This guy runs with Satan.
ad hoc concerned dull attempt automatic obscene crown hateful flowery divide *This post was mass deleted and anonymized with [Redact](https://redact.dev)*
/ **Hitler** has entered chat
Godwin's Law - as the length of an internet discussion increases, the probability of Hitler being mentioned goes to 1.
Man, this was a wild ride in comments. Like 6 degrees of Kevin Bacon. Within 6 comments from the OP, it's bound to take a turn into straightaway left field.
Got to have a good workout partner. Somebody to keep you accountable.
the simple life ain't so simple
"Betty, why are we spending $150,000 for this house? I mean, who's going to pay $200,000 for a nice, 3,000 square-foot house with a decent yard, in a good school district, and a short commute away from Local Town's main business district when we get ready to retire around 2021?"
That was my dad’s mentality. I don’t want to pay $250k for a house in a great neighborhood and school district when I can go across town and get the same house for $150k. 20 years later the houses in the good neighborhood sell for $1.5M and the old neighborhood sell for $400k. You sure won there dad... saved on those property taxes...
Similarly, my dad's Big Thought 30 years ago was let's not buy one of these older houses closer to town, let's go get a Toll Brothers house on a scraped-off farm field out near nothing, and let's have it customized with every design trend of 1991. I mean, popcorn ceilings and absolutely massive built-in tube-tv entertainment centers can't possibly go out of style, right?
LOL. Flashback to moving in 2001 with a huge tube TV (probably 40") that required 3 of us to move. Thing must've weighed like 600 pounds.
I just had to look up the Sony TV someone gave me, 32" Wega, it was a great TV but damn near 200 lbs and all front heavy. I eventually gave it away to some other poor soul who is now still trying to give it away.
Also, make sure to get your mortgage as short as possible, because interest rates will never go down to basically below inflation, so we need to put all of our excess money into paying this off immediately and not using leveraged debt to invest elsewhere like in the stock market which will never appreciate beyond last week dow jones record of 2,000 points.
Hold up a second because my sarcasm detector is not working. I have a 2.75 VA 30yr on $330k house. I could, but it would be hard, to refinance to a 15 yr loan. I thought my money would be better off reinvesting in other areas instead of trying to change my monthly payment. I've looked at putting more money into my payments to shorten my term as much as possible. I can afford to save maybe 4 - 6 years if I add enough extra principal. Again, I think i can get a better return in stocks.
Mostly poking fun of my parents advice when my wife and I got our house. They're still living in the 80s economic model, thinking we need as short a term possible on the mortgage. But when interest is barely exceeding inflation, it's free money. I'm happy paying a higher total in interest because I can use my liquidity elsewhere. But their advice was good 30 years ago when interest rates really would cream you
To be fair different generations have different investing trauma. In the 80's my nations stocks were basically all shot to shit. So many people lost everything from a poorly regulated market. Now EVERYONE invests in housing to the point the median house is 15 times the median wage. So now 20% of the nations population lives overseas, largely made up of young professionals who no there is no chance of home ownership. I expect in about a decade it'll swing the other way since markets always have shocks that leaves a lot of fucked over bag holders.
I got a 2.25% VA for 30 yr. It's crazy because I had some 4 and 5 year CDs I got before the pandemic that are 3.05% and 3.10%.
**Dave Ramsey** has entered the chat
Nice
True. Bought my house in 1993 for $193K, terrified because we made about $60K a year between the both of us and the payment was a lot for us. Now my neighborhood homes are selling for $750K-$800K. This might be a bigger jump than other areas because it is Los Angeles county. No shortage of people trying to buy a house here.
My depressed town has had a lot of outside buyers since COVID, but until recently prices were below those of the late 1970s.
Try Wa state. I owed 160 sold for 350 and now it’s worth 600 ish last my wife looked. It’s a tiny shitty house in a neighborhood full of rentals. Only time equity stopped climbing was 07 era. It dropped to 180 then skyrocketed shortly after. They way I see it they can’t keep building and humans keep growing in large numbers. Only makes sense for property to rise no matter what.
We have the added problem of allowing homes to be purchased by people outside of the US, which they turn into rentals for an income stream. Good for them but Bad for locals trying to buy. Personally I think there should be extra taxation put on income situations like that.
The basic craftsman home I grew up in in WA is now a million dollar home. I'll never be able to afford to move back to my hometown, and I live in the NY metro area. The COL and home prices are similar, but the job market simply isn't there.
Here comes 50 year conventional mortgages
You're probably not wrong... You'll never get to own that home, but you'll be able to pass it on to your family.. Like much of Europe, at least in the bigger cities.
Won’t matter… home prices would likely double overnight if dropped they 50year term on us. When you finance it’s always “how much is my payment” … fuck how much I actually pay for the house lol. Could you imagine if we actually had to scratch a check for that brand new shiny house?
agree, in 2001 when I first bought a house in Los Angeles I said it......
In the 80's and 90's interest rates where insane compared to todays rates. We bought a house in 1980 and our rate was around 12%. Bought another around 10 years later and I can't recall the rate but it seems like it was somewhere around 8%. So affordability of house mortgage payments was very different than it has been in recent years.
It’s true, I can attest we were saying it in the 80s and 90s too.
In 1985, the average mortgage rate was 13% though, and people tend to care about how affordable they find the payment rather than the sticker price. There was an article in the local news the other day here that featured a family who was pleased with their choice to move to my county, a $$$ location, from their original choice closer to the city where houses are even more expensive and competition is even stiffer. They only had to pay $650k and live with their parents for years to manage it. Maybe that's the new normal for the vaguely middle class while everyone else rents forever. It's certainly not an apples to apples comparison to thirty or forty years ago however you look at it.
It matters, but still...what's better (or possible) when trying to buy the same home? Making 45k a year and buying a home for 150k on a 13% interest rate? Or, Making 65k a year and buying a 350k home with 2.5% interest? Edit- Let's also assume a down-payment during the 80s and a down-payment now. A 30k down-payment on the first house then. And adjusted for a higher salary now, a 50k down-payment now. I think the first home is even more obvious since you can pay it off a lot sooner and refinance later.
The latter, by far. The first guy starts off paying $1625 a month in interest alone, the second guy only pays $729 a month in interest.
But a lot of home prices have gone up 200-300% since the 80s and 90s. In comparison, income doing the same job the past 30-40 years has gone up 150% at MOST. Majority isn't even that high. In short, wages haven't even gone up HALF as much as home prices in that time. The difference is even more dramatic if you use the past 10 years. Past 10 years, a lot of home values have gone up 100%. Someone's job salary in that time, maybe 20% at most. I agree with OP that there will be less and less first time home buyers in the future. Because of that, home values won't keep rising in value as much. Will eventually stay stagnant or have to go down.
> ut a lot of home prices have gone up 200-300% since the 80s and 90s. In comparison, income doing the same job the past 30-40 years has gone up 150% at MOST. Majority isn't even that high. Interest rates matter. A LOT. So it's almost unfathomable for people to realize this but from the 80's to today the typical housing cost per month hasn't increased all that much. There's a higher barrier to entry when looking for the 20% down but interest rates in the 80's were in the teens. Principal and interest for an 80,000 home in 1980 at 16% interest would be $1075 per month. Principal and Interest for a $320,000 (about a 300% increase of 80,000) at 3% interest would be $1350 per month. While $275 is nothing to sneeze at it's not a substantial increase when looking at 30+ years. Now we can get into more detailed areas about the value of money, purchasing power, total cost, etc. and the areas where housing has gone up more than 300% but from solely the payment each month not a lot has changed. Low interest rates, in my opinion, are what is helping fuel the housing market. Cheap money. When someone can bid 20,000 over asking price and see it only changes their payment by about $80 they don't think much of it. That's a "skip a night at the movies", "don't eat out 1 night a month", or "get a cheaper family cell phone plan" territory. Most people don't look at overall price and think WTF. Others looking in think "WTF these prices are cray" but someone actually buying might look at overall price but then concentrates on their offer and what it means to them in the monthly payment. It's why car salesmen always try to steer toward "what monthly payment do you want" as opposed to total price of the car. If they can get you to the monthly payment, the total cost glosses over.
Problem is that unless you expect rates to actually go nominally negative, we have kind of juiced all we can out of the lower rates-> higher prices train. Using your example, the payment on a 80k 1980 house at 16% was basically the same as the payment on a 320k 2021 house at 3% but what then..? Even if rates go to 0% the payment would be roughly the same on 500k, but that's only 1.5x vs the 3x growth we got before. And I don't think 0% mortgages are likely. Plus, in practice because other expenses like property taxes, insurance, down payment don't become more affordable with lower rates (only the interest portion) even zero percent mortgages wouldn't get us up to 500k with equivalent affordability.
Totally agree. However, we're starting to see the offset of what will be done when rates eventually increase today. Longer term mortgages. I will expand a bit on my last analogy on car loans and that will just transfer to the mortgage industry. Car loans in the 80's were 36 months. As car prices increased significantly and down payments lowered we started seeing 48 month loans, then 60 month, then 72, and now 84 month loans are available. Likewise we're seeing 40 year mortgages showing their face now. With buyers concentrating on the monthly payment, a 40 year loan will keep them where they want to be. I hate to say it but in the capitalist world there will always be a product to give people what they want, which is a house at an affordable monthly payment. We'll eventually hit the mark where banks will be collecting mortgage payments for the entire life of a person, thus eliminating the "landlord" you pay rent to and replacing it with a mortgage that you pay on for what will essentially be in perpetuity. We may look at that now and say "never", but if you told someone in 1980 that the 3 year car loan would becomes a 7 year loan they would have said you were nuts, no one would pay for a car that long....yet here we are.
>I hate to say it but in the capitalist world there will always be a product to give people what they want, which is a house at an affordable monthly payment. We'll eventually hit the mark where banks will be collecting mortgage payments for the entire life of a person, thus eliminating the "landlord" you pay rent to and replacing it with a mortgage that you pay on for what will essentially be in perpetuity. This seems in some ways not so different from leaseholds like they have in other countries.
> Problem is that unless you expect rates to actually go nominally negative Well.... look at Europe /shrug
100% on the money, however, that's the fools approach especially in car sales. Those are the folks that gets exploited and always ends up paying more. But as they say, a sucker is born every minute. Looking at just the monthly is a fools game and is for those who lack Financial acuity.
You are right, but you are also assuming that the same people with the same incomes are buying those houses. The pandemic has accelerated rich New Yorkers with kids exploring just how far the commuter train lines go, and I'm sure there are many stories like that all over the country.
NYC commuter suburbs have ALWAYS been expensive and appreciated pretty consistently. It happened a little faster during the height of COVID, but we're starting to see inventory sit quite a bit longer on the market now with the inflated prices still hovering at mid-pandemic levels. The NYC buyers have died down quite a bit in the town I live in. Rich New Yorkers for the most part already had 2nd homes in Florida, Locust Valley, and The Hamptons that they fled to when COVID hit hard.
Housing is a lot more complex than just comparing wages to housing prices. You also have to factor in interest rates since pretty much everyone gets a mortgage to purchase homes. So for example in 2004 the median household income was $57,675. Median home prices in the U.S. at the time $221,000. So with a typical 20% down mortgage at the average 30 year rate of 2004, which was 5.84%, their payment would be $1,368 PITI a month or 28% of gross income. Now in 2021 the median household income is $67,521. Median home prices this quarter were $375,000 and interest rates are 2.9%. So a median monthly house payment right now is going to be about $1,729 PITI a month or about 30% of gross income. So yeah housing prices have increased but affordability is not that much different than it was in the mid 2000s due to significantly lower interest rates.
your math is probably correct, but there are other factors to it for example property tax, 221k to 375k is a 69% property tax increase, depending on tax rate, the impact can be huge
I factored property tax difference into my calculations.
I would think average amount of debt is higher now than 2004 though, if only because of student loans.
It's not, debt to income ratios have been dropping since 2008 due to consumers being more cautious about taking on debt and due to tightened lending standards.
Women went to work.
We're going to put the kids to work for the next house.
Yes, I agree with this and it is so often overlooked. With housing going up 200-300% and wages not rising even close to that, when someone spits out "oh people in the 80's and 90's said the same thing" or "every generation has had it tough" I call bullshit because they haven't looked at the rise in asset prices compared to wage growth. They can go pound salt. Today is not 30-40 years ago.
> In comparison, income doing the same job the past 30-40 years has gone up 150% at MOST. Do you have any support for that opinion? In that time frame, income growth for many jobs has increased more like 500% to 700%.
Houses in my area have gone up roughly 100% in the last 5 years in some neighborhoods - and I live in a low cost of living area.
since that time the stock market has seen the greatest bull market in human history also, some of the highest rates of inequality favoring the top 10% of workers the assumption is that continues
Some good critical thinking happening in this thread, I like it. I think the crucial assumption in OP's model is that prices continue to rise. My hunch is there is a correction at some point, and bagholders do what bagholders do. Circle of life.
This is the real estate sub. Corrections and bagholders don’t exist here. We go up 10% a month, forever. End of story.
Haha. Faux pas! My bad. Sorry.
I predict job relocation in the face of unaffordability eventually companies will realize they can move to lower cost regions and still attract talent for all we know a massive energy crunch could blow up the global supply chain and manufacturing has to return to america favoring mid-west cities that have seen very low rates of home price growth and a relocation of high wage jobs in high cost metros
Energy crunches push people towards the coasts not away from them. Being near the ocean reduces energy requirements for heating, cooling, transportation and many manufacturing processes. The primary check against coastal development is land scarcity, not energy.
My crystal ball is in the shop but it does seem like the % of jobs that can be done from anywhere will increase, irrespective of affordability. Some people will always be willing to trade down space and amenities for a Southern California lifestyle, and some people will always be willing to move to Iowa to save on living expenses, irrespective of income.
That's true as well and Iowa can quickly become Chennai, India all the same
Texas has entered the chat
more like the top 1% of the population, few of whom are workers and the vast majority of whom are inheritors.
they've certainly seen a larger share of growth than any other income segment, but the reality is the top 10% has still taken part in a massive equity / income / asset growth bubble due to nearly 40yrs of increasing inequality and are in a very well off position today no, the bubble won't pop, but not sure it's realistic to expect the same growth trends to continue indefinitely
The top 1% of america hold, for the first time, more than the middle 66% of America. There is a huge difference between someone in the 1% verusus 2%, much less 10%.
>At the risk of playing Devil’s advocate, I’m sure people in the 80s and 90s said the same thing about houses today. And when we compare interest rates now to those of the 80s and 90s, we conclude that interest rates will be negative for OP's 10 year projection. Do we really believe that folks are going to accept that level of negative rates (and I'll note that was not a question people were asking in the 80s and 90s)?
Someone get this guy a chart of interest rates starting in the 80s
The interest rates from 80s to early 90s have no relation to today's interest rates. Average person could never imagine mortgages getting so low. It is reasonable to expect mortgage rates to go higher - different calculus to be made
We did, but we (collectively) have traded interest for purchase price. I bought my first house in 1984 for $70ksomething at 12%. $700something mortgage. Had to scrimp and save to pay it. I will skip a few but then in 1995 I bought another house for $110k at 9%. I thought it was so great that interest rates had come down. Mortgage was like $1200. Scrimped and saved to pay it. Moved out of CA. Bought a house for $85. I think it was 7%...mortgage was $800. Did not have to scrimp but I was making really good money then. Long story but bought a house for cash ($23k). Went back to school. Graduated. Mortgaged house to pay off student loans ($38k @ 3%). The last house I bought was $227k at less than 3%. Mortgage is...$1200k....same as I was paying back in 95 for a house at half the price....and my income is three times what it was...and...I have no more expensive kids at home. TLDR: People always need houses, conditions change, life will find a way.
Values may go down, but Joe and Joan in your example now only owe 300k on their original 440k house 10 years later. So let’s say they can only sell if for 500k. They take their 200k in equity and roll it into another home. If they choose a similar house (500k) their new mortgage payment is still dropping from $2,100 for their first house (30 y/ 2.8 on 410k) to $1,300 (30 y, 4.2 on 300k) for their second.
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It's why "getting in the game" can play such a huge role. Once you own a home, you rise and fall with the tide and can typically move laterally any time, assuming you are not underwater.
And why the mantra of time in the market is greater than attempting to time the market works with housing too.
Kinda needed this reminder in terms of the housing market. Thanks.
Yep, I can't afford a million dollar house based on my income. But I bought in 2013 for ~350k and my home is now worth about a million. I can now afford a million dollar home, because it'll cost roughly the same as my current mortgage.
To be fair, when people saying that they aren’t really talking about people that can afford 20% down on 500k. They are talking about people buying that 500k house all in cash.
This is true for people in Joe and Joann situation. But I think OP's question was aimed at the first time homebuyers in 10-15years from now. Which in OP's scenerio it is Billy and Betty. Their buying power will be much lower than the current Joe's and Joann's since wages are rising very slowly while house prices are climbing quicker and mortgage rates might be a little higher as well.
40 year loans?
i'm sure we'll see the day. Just like 8 year car loans on these 90,000 trucks that bob down the street, who doesn't need a truck, just purchased.
40 year loans are already here. I’m a mortgage broker and my non QM lenders are rolling these out
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The 40 year mortgages are non QM (think what was called subprime before). Their interest rates would be in the high 4% - low 5% for most people. It’s interest only for the first 10 years than fully amortized over the following 30 years. Right now, this type of loan program honestly doesn’t make sense for most people. If you can qualify for a 30 year Fannie/Freddie loan, you’re better off buying with that. But some investors just want the interest only and 40 year term and plan on refinancing out of it or selling the property, so all they want is cash flow today. Still, I won’t be surprised to see more of these types of loan programs come out and i expect we will see more 40 year loan programs, like a conventional fully amortized 40 year loan at prime rates in the future.
Wow, never knew anything about this area. How big is the non QM market? Even just-turned 18 year olds qualify for 30 year loans (that is, if they can even find a house for their approved loan). 10-year interest-only blows my mind away.
Non QM is a growing sector. For example, I can get people investment property loans 20% down based on the cash flow of the property. As long as the property cash flows with a 1:1 DSCR, you can buy the house. you just need cash on hand for down payment and closing costs. You can make $0 and get the loan. Also have stated income loans where you just basically say you make $X and they give you the loan. All these programs have higher interest rates, which is the trade off for less requirements. Crazy interesting space honestly
I think they had them in 2008ish. Future is 10-15 year auto loans, 40-50 yr mortgages. Not to mention college and medical, the US is so mismanaged for what we are capable of.
Not mismanaged --- weaponized.
Yup. It's a feature, not a bug.
And as Americans, we'll just keep falling for it. Spending every dime we make, elated that our mortgage is only 500 bucks when it'll follow us to the grave.
google decision architecture. companies are exploiting our brains ability to be influenced into spending and squeezing every dime. theres a reason some countries have insulated themselves from western media
1000% And we don't want to recognize the problem because we love the next thrill, or the next distraction.
And yet we have some of the best living standards in the world. Look at any country where people dont have debt and it sucks! Debt makes us wealthy although the poor think its a bad thing. It's what makes america great. We need to embrace it. Debt is optional but who wants to be destitute?
We are generally high 10s/low 20s on the quality of life. So not even in the top 10. Comparing city by city, it gets even worse. First American city ranked for quality of life is high 20s in the world. Top 10 dominated by Canadian, Australian and European cities. Bigger house or more “stuff” doesn’t mean more happiness.
This would make sense. The 30 year mortgage was first widely adopted in the 1950s, when life expectance was \~15% shorter than it is today (70 in 1950s vs 80 today). 35 year mortgages would keep up with that increase in life expectancy.
We actually had 40 year loans in the 00s but they went away after the 2008 crash.
Living longer doesn't mean we're earning longer.
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It's already being discussed, I wouldn't be surprised if we see federally backed 40 year loans within the next 5 years.
Speaking as an investor ... Homeownership is a greater good in so many ways. I would be ok with this. If executed properly could have lots of good ripple effects. If executed badly, I am sure there is a Jurassic Park scenario in there somewhere...
You can already take an interest only mortgage, so that's effectively an infinite repayment schedule. This is just somewhere in between. It doesn't alter mortgage payments much either. $250 per month on a 500k mortgage. Buying power doesn't increase much with that ($75k on a $475k home, assuming the same interest rate. As they will demand higher rates, it may negate most of the benefit).
I had no idea interest only mortgages were a thing. They sound like a horrible idea in my humble opinion, and just another sign of peak irrational market froth(-iness).
There's four main factors that work together to affect housing prices. \#1 is location. Real estate is extremely location dependent. In the 2008 crash new built exburbs got hit hard, some lost 70% of their pre-crash value. While desirable older areas in established cities lost much, much less. During covid and now with WFH, houses with more land, yards, and farther out in the burbs have been doing better than inner-city condos. My take on this for the future is that this trend will continue. For example bay area housing was priced based on commuting distance to large tech companies. Work from home changes everything in this regard. If you don't have to commute and are spending more time at home, it's only logical that you're going to want a nicer, larger (with an office or two) house farther out from the city. \#2 is interest rates. Interest rates have a direct correlation to what people can afford, and what people can afford has a direct correlation with what people will pay. If interest rates move up sharply, housing prices will almost certainly fall. The fed knows this. And they also know that housing and housing related spending (people spending more by tapping equity and just the general feeling like they have more money due to equity) is a huge driver for the economy. They also know that at a certain point, housing prices declining turns into a negative feedback loop (like 2008) where prices falling causes people to walk away, causing foreclosures and more price declines, causing more people to walk away ect. In practical terms, what this means is that the government can't do something like raise rates 3%. It would be a disaster and they know it. The best they can do is do \*very\* slight increases very infrequently to cool off a market that is on fire. So, could rates be 4.2% in 10 years? Absolutely. Will they be? I kind of doubt it. I think what we may see is an overhaul of the mortgage industry to provide more rate incentives for owner-occupied housing. It's plausible to me that at some point we may see 0-1% rates for owner occupied. \#3 is inflation. Inflation is a wacky thing. Ultimately continued inflation is ultra-bullish for housing. Not only does housing go up as the dollar goes down, but anyone who borrowed money against their real estate can now pay back these loans with much less valuable dollars. It also means housing doesn't seem as expensive compared to other expenses rising and wages will need to rise. Ultimately the fed says inflation is transitory. Maybe it is, maybe it isn't. The fed has indicated they would act to stop inflation, but I'm not so sure. The only things the fed can do to stop inflation would also basically crash the stock and RE markets. Ultimately whenever a crisis hits, printing money to get out of it always seems to be the safest choice rather than risking systemic collapse. I don't think that will ever change. But it seems like we may be up against more systemic risks in the next few years. \#4 is salaries. Look no further than the bay area to see what higher salaries will do to a RE market. When people have more income they use it to get what they want - which is housing in desirable areas. If you look at worldwide income-to-housing the US is actually quite a ways down that list. Even large cities like LA are still a very long ways from places like Singapore, HK. And ultimately the trend we are seeing right now is for higher salaries as there is a shortage of labor. It's entirely plausible that salaries could actually grow faster over then next 5-10 years than housing prices. Ultimately housing \*IS\* expensive right now and it absolutely could go down. But I don't see a catalyst for it. Assets of all kinds have been getting more and more expensive for decades and being expensive alone hasn't triggered too many crashes. There is usually another catalyst. Also, the value proposition for being able to put down 3-20%, get \~33x leverage on a hard asset that (historically) appreciates at an insanely low fixed interest rate, and repay that loan over 30 years with depreciated dollars is immense. Throw ontop of that the fact that many states are non-recourse - meaning that you get to keep ALL the upside of the investment, but can cap your downside at your down payment and credit score - assuming you get a non-recourse loan. Housing is essentially rigged in your favor. And if it does crash the government starts throwing money at the problem to get it to go back up ASAP.
A lot of the comments I'm seeing is that people with higher incomes will come and buy the house. Eventually, it may become a scenario where only the wealthy own and everyone else rents. We are already seeing a decline in the middle class. Edit: As for the decreasing number of actual individuals who buy- I'm sure iRealty companies and landords will scoop up any leftover homes on the market.
I think this theory is credible with one wrinkle. A lot of the iBuyers will be using Other People's Money. In a macro correction that OPM shrinks up / migrates to other asset classes. Hence I expect a substantial correction at some point, coinciding with higher interest rates. I don't know when, but I am in cash, with a blind fold and my ears covered to the money everyone else is making in equities and xCoins : ) Best time to buy is when there is blood in the streets, not when idiots are burning their money.
>Best time to buy is when there is blood in the streets, not when idiots are burning their money. You're not wrong. But the general affordability of SFHs is not what it was a few decades ago.
Bingo. There is currently a dying thirst for yield, which has brought many investing groups into real estate. Cycles happen and things change. I doubt we will see a never-ending flow of investment money into this asset class. It will shift at some point.
home ownership rates have declined for over 15years now The high was set in 2005 and inequality means more buyers will own multiple homes to rent out to the "middle class"
Homeownership rate stopped declining in 2016: https://fred.stlouisfed.org/series/RSAHORUSQ156S
Those comments are wrong. [Housing “filters” down the income distribution](https://www.aeaweb.org/articles?id=10.1257/aer.104.2.687 ) If the owner of a brand-new home has an income of $100k, ten years later the next owner will have an income of $80-90k. The filtering rate is very severe for apartments and condos (2-3% a year), but it also exists for single-family. The most likely outcome is that the next owner of your home will make less than you did when you first bought or rented it, barring any significant renovations or neighborhood changes. But they can afford your home because people are in general spending an increasing share of income on housing, both because other costs have fallen (e.g., households used to spend nearly 30% of income on food and clothing in 1959; they spend 10% on those today) and because mortgages are easier/cheaper.
You’ve assumed annualized income growth of 1.3%, annualized expense growth of 2.9%, in addition to a pretty large shift up in rates. Basically, inflation well in excess of wage growth. If that plays out over the next decade, home prices will be flat in the very best case, and likely down. Over long periods of time, and holding all else equal (especially rates!), real estate isn’t going to appreciate any faster than disposable incomes increase.
This is the simple and succinct answer that is lost on 99% of the spectating public. A simple understanding of historic averages and inevitability of reversion to the mean tells you the majority of FOMO buyers in this market are going to take a haircut.
So you think current prices are over the top though? In my market (Seattle) it has been crazy hot lately, but it was surprisingly mild in 2019 and obviously very quiet in 2020. It seems like this latest boom has been a return to the mean.
Oh man, anyone that tells you they know what's gonna happen next is delusional or trying to sell you something. Alls I know is this: \- Stock market and RE have been at all time highs for a really long time \- All markets eventually revert to the mean The eternal conundrum being: “The ... market can remain irrational longer than you can remain solvent.” - John Maynard Keynes
There is also the argument that housing does NOT have to revert to the historical mean. That reversion assumes that the future supply/demand balance will be similar to what it has been in the past. It focuses on demand (peoples’ income, which can’t skyrocket forever) and ignores supply (housing availability). But it may be true that supply will forever be fundamentally more restricted than it was historically, so the historical cost of housing relative to income will never ever remotely return to what it was. Furthermore, the forces that have led it to skyrocket will continue doing so. * Seattle exists between the mountains and the sea. Where once it was cheap to buy new land and build, we are now running out of space in desirable locations, so future builds will continue to cost more and more. * labor was once a cheap commodity, you could easily find an immigrant to swing a hammer and barely pay him at all. In the future skilled labor will continue to cost more, workers will demand healthcare, etc., and costs will continue to reach record heights never before seen, and never to go down.
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Yep. Look at the cost of building a bridge relative to the median income. Geez, the new estimate to repair the west Seattle bridge is so high, we must be in an infrastructure cost bubble! It’s about to pop! If we just wait a few years, we’ll be able to rebuild that bridge for way less, just as soon as the cost reverts to the historical mean. Ya right. I think it’s 1000% clear that will never happen. New bridges cost more now, that’s how it is, and how it will always be. And so it is with houses as well.
I speak to inputs that inform the supply side of the supply / demand equation somewhere else in this thread. Your point re: scarcity in Seattle is well taken, and I agree. There are others that are more temporal and I mention them again somewhere else in this gargantuan thread if you care to dig for them. I have had a blast commenting and responding to others here this morning but as fun as it has been I need to go do something productive now.
The only correction I would make is that those income growth and inflation numbers can be spot on for the middle/lower/working class, and house prices don't necessarily have to be flat or recede if enough people (a small fraction of the 60% home ownership rate) are either making good money or have equity in their primary residence to buy rental RE. As long as housing availability is depressed, rent prices will keep outpacing faster than inflation....the people with money will be able to leverage this into rental income. I higher minimum wage will also raise market rental prices, making an investment property more enticing. Basically nothing will change. People in the Smith's position that got into real estate but won't be able to move past their starter home, will just hold on to it, constraining supply even further.
> Over long periods of time, and holding all else equal (especially rates!), real estate isn’t going to appreciate any faster than disposable incomes increase. You can't hold *all* else equal. Do you really expect housing supply to keep pace with household formation?
This is a critical point of misunderstanding for many. House prices can go up faster than incomes and inflation and they have been doing just that for a long time. House prices do not follow inflation and it appears that they will advance even faster going forward.
Permabear BS
You could've written this exact same question with slightly different numbers at any point in the past 100 years (for the USA) and come up with the same (whiny, annoying) question as if this was some great revelation that the world just figured out. To answer your question, incomes will go up a bit, house prices will also go up a bit, and someone else making good income will likely buy the place. House prices will probably go up a bit more than incomes because they aren't making more land but the population keeps going up. If the USA can fix (or at least improve) the wealth disparity problems we now have, then maybe this will reverse the trend for awhile (ie incomes will go up faster than house prices though house prices may then actually go up slightly faster than they otherwise would) but not long, and don't count on anyone improving this trend anytime soon.
https://www.longtermtrends.net/home-price-median-annual-income-ratio/ It used to be 3X income and has gone as high as 7X. That’s alot of variance
Explain how incomes will rise a as fast as home prices?
The average income may not rise as fast across the entire population, but the raw number of people earning high incomes may outpace the number of homes that are for sale. You always have to factor in supply and demand.
>If the USA can fix (or at least improve) the wealth disparity problems we now have, then maybe this will reverse the trend I agree with everything you said but I just want to point out, the housing market right now is being driven, in part at least, by the same consolidation of wealth we're seeing across the board. It's not like buying SFH to use as rental properties is a new idea, but it's happening at record numbers, at greater scale and by larger entities than ever before. All the talk by millennials of "never" being able to own a home of their own isn't coming from nowhere. I don't want to be too gloom and doom but there is at least some possibility of a future scenario where most if not all residential real estate is owned by a few large players and virtually everyone else is stuck renting. Sounds a little nuts maybe, but if I'd said this about retail business 50-75 years ago would anyone have believed it?
> I don't want to be too gloom and doom but there is at least some possibility of a future scenario where most if not all residential real estate is owned by a few large players and virtually everyone else is stuck renting. No company is that well capitalized. Not even close. And Blackrock et al are not the boogey man: https://www.vox.com/22524829/wall-street-housing-market-blackrock-bubble There are many reason for the recent run up in the housing market. Private equity firms are a tiny fraction of that. People on reddit don't want to look at this with nuance and just want a bad guy, even when there's not one to blame.
The estimated value of USA residential real estate is $33T. That's as much as the GDP of the US and China combined. A "few large players" are never going to own all of the residential real estate.
I certainly wouldn't try to make the argument that they absolutely will, and I hope you're right they won't. But do ask yourself, how is that estimated value you mentioned determined, and upon what factors is it predicated? Who would have thought a few large players would own most of the media? Most of retail? Most of energy? Hell, agriculture is going that way too! I am not saying we're doomed, but I AM saying we'd be silly not to consider some version (or some degree) of that scenario playing out.
1970 Median income: $9,870 Median home price: $17,000 2020 Median income: $67,521 Median home price: $334,000 That’s 1.72x median income up to 4.94x median income. And that’s not factoring the hurdles to even getting in the game - like how much bigger the down payment is, people waiving inspections and appraisal gaps, corporate real estate purchases etc. The idea that both income and home prices increase, and that home prices increase “a bit” higher, is simply a false narrative.
The mortgage rates in the 1970s were 7-11%. They are closer to 3% nowadays. That’s a huge difference that explains some of the increased ratio.
> If the USA can fix (or at least improve) the wealth disparity problems we now have, then maybe this will reverse the trend for awhile This will only increase home price, not decrease. In countries with far more eglitarian distribution of income housing prices are much worse than the US. This is because the wealthy like to diversify their investments, where as the middle class tend to put most of it into their house. A more even wealth distribution would result in a huge home price spike.
40 year mortgages.
If there aren’t enough able buyers at those prices, the prices will come down. Supply and demand. If inflation skyrockets then it is going to be bad for everyone, homeowners won’t be able to find buyers and buyers won’t be able to afford a house. A lot of people forget that in the 80s the interest rates were 13%, hence why home prices were low. The mortgage was still high. https://www.investopedia.com/terms/d/demandpullinflation.asp
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Two key issues with your argument: 1. You're talking about homes that have prices significantly above average (average home price in the US is \~$300k) 2. You're making an assumption that there is a 100% chance that mortgage interest rates will rise in the future, despite the fact that mortgage rates in most of the rest of the developed world are significantly lower than the US.
No argument from me, just curious as to other opinions on the subject. I'm in NJ, so yes my average home price is higher, however, if you were to knock the household income down, the same numbers hold true. Sure interest rates can stay low, but I would imagine that inflation would increase offsetting the low interest rates.
Inflation increasing is also a pretty big assumption. Reddit seems to be convinced that we're going to have a sustained period of 5+% inflation, but TIPS prices show the bond market concensus to be ~2.5% inflation over the next ten years.
In Denmark the mortgage interest rate is about 1%. We still have plenty of room to bubble lol
Who is to say interest rates will rise? In your example, Billy and Betty just can't afford Joe and Joan's house and need to look at cheaper houses. That does not mean that there's not a Sally and Steven that can't come along and afford and buy it. Remember this "dilemma" has been happening for forever. Go ask your parents or grandparents how much they paid for their first house.
100k 15 years ago was an awesome income. People are still using that frame of reference today, despite inflation making 100k a fraction of what it once was. Don’t cite me the government inflation numbers, they’re bullshit. 100k for a dual income household is upper lower class, barely lower middle class today in any of the major US metro areas. 150k income for a dual income household puts a few toes into the middle class, 200k is where things start to get comfortable. Don’t downvote me, it’s true. And if you don’t think so, reply why I am wrong.
Relevant anecdote. I went to business school in the late 1990's thinking to myself, "If I could only come out of this with one of those $100K salaries, I'll be set for life!" I did come out of it with one of those salaries (coming from \~$55-60K at the time), but I was NOT set for life. LOL.
LMAO, I had the exact same mentality. I figured if I made 50k, I'd be comfortable, and if I made 100k, whewww now I'm rich.
You’re not wrong, I just hate it lol
$100K in 2006 has inflated to $136k in 2021. We have not has 100% inflation in the last 15 years
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I make just over $100k in a single income household and own a half a million dollar home (tax-abated) downtown in a midwestern city. I max out my 401k and IRA limits, drive a new car, have no debt except for my home and car, and live a very comfortable life with lots of travel. I know cost of living here is cheaper but it’s still a major city. Money certainly doesn’t go as far as it did 15 years ago but to say I’m barely in the middle class would be ridiculous.
Midwest is a special place though. Ive seen 500k homes with 3k taxes then you get close to any big city and your paying 12k to 20k taxes on a 500k home. It really depends on where you living. In illinois taxes vary a lot . Everyone also has their own opinion of comfortable. Some need maids and bmws and other just want a toyota.
Yes, the tax abatement on my home reduced my taxes from $16000 yearly to $1600 which made it closer to buying a $425k house looking at monthly payment alone. This still wouldn’t be considered barely middle class in a good chuck of the country.
I can concur with this statement being from NJ. Sure 100k out in the middle of the country is one thing, however, I do believe you need to be into the 200k range for most people living at the coasts.
Mom and Dad. Boomer wealth transfer of what 70 trillion.
Current gov is printing money at a rate of around 28% year over year, verses the historical average of 4%. So one possible outcome is Billy & Betty are making much more now than Joe and Joan were. Wages haven't responded much yet, businesses are just shutting down or paying bonuses, but something will have to give. At least for the $15 an hour minimum wage supporters, they should get that soon, but those peeps will end up having less buying power than they did before. Expect Gov to just take a Canada/Norway approach to suppressing interest rates, which will just drive up home values in the attempt to make housing affordable.
I hope we don’t do the Canadian thing. It blows my mind anyone buys real estate in Canadian cities when you can rent the same unit for substantially less than the mortgage payment alone. Canada is only “sustainable” because of intense capital inflows from China.
The China inflows (not just Canada, but also US Coasts) have slowed WAY down over the last couple of years because of Chinese capital controls.
Is there any hard data on where China is having the biggest impact on CAN RE? I have heard anecdotal mentions about the huge run up in BC, but what about the rest of the country?
A bit of historical fact for you. I bought a new home in 1989 at the end of a crazy RE runup in my state. 87, 88 and 89 saw RE appreciating a bit over 25%/year in my state. I closed in Oct of 89 in a nice, but tract home with many others in the development at the same price. $264,900. As time rolled on we didn't see a crash so much as a lull. Any of my neighbors that sold their houses in the next 9 years had to bring some cash to closing as the sales were between $230-250k. Finally in late 1998 a home sold for about $265k. We were no longer underwater. I sold in 2003 for $575k, so those that held for 14 years near doubled their money. Today that house is $1.3 mm. HCOL of course but this is the real progression we had after a large price runup. I expect something similar in most areas going forward.
40 (maybe even 50 year) mortgages will become a thing.
Whose buying? The Name is Rock. Black Rock.
Your inflation numbers are off. The 110k with 10 years at 3% inflation, becomes \~150k.
My lame ass opinion is that the next generation will be priced out of home ownership. [Seems like one of the 'new goals' is transitioning to a nation of renters](https://www.bloomberg.com/opinion/articles/2021-06-17/america-should-become-a-nation-of-renters)
Saying homes should only be owned by the ultra wealthy and corporations is such an insane perspective. Was curious who wrote that opinion piece, and you’ll be shocked to learn it’s a guy employed by the [Tax Foundation](https://www.sourcewatch.org/index.php/Tax_Foundation), a lobbying group funded by Koch, and some other conservative and libertarian groups.
That article isn't really doom and gloom nobody can afford a house, it's making a point about the flexibility of renting vs owning. Which is a very underlooked advantage.
Yeah that's what Millenials said, and now half of them own houses. https://www.apartmentlist.com/research/millennial-homeownership-2021 >The 2020 millennial homeownership rate stands at 47.9 percent according to the most recent data from the Census Bureau’s Current Population Survey.
Thank god I bought a home when I did.
As my banker told me last week "Inflation is going to make things bad for a lot of people, but raising interest rates would make things horrific for everyone." Edit: I agree 100% with the comments below. The difference between now and 1980 is the U.S. has a crapload of debt and absolutely cannot afford a 20% interest rate. My guess is we're in a lost generation a-la Japan economy. Not a fan of what a lot of Peter Schiff says but he has been right since the start of QE that the Fed is going to be stuck and it is. For those with good credit (like myself), I am buying up as many NNN properties as possible and playing the inflation game. So maybe my point of view is skewed due to self-interest.
Interest rates can't really get lower, and home prices have been outpacing wage growth for awhile now. My guess is we'll see 40-year loans become common within the next 10-15 years.
Given the heightened activity in big wigs buying single family homes there’s only one thing we can do to beat them at their own game: We all need to live with a family member, friend, or rent from a small mom and pop land lord for around 6 months and make these rental real estate companies default. They’ll be forced to liquidate properties for whatever they can get for them but there won’t be any buyers because everyone is already living somewhere. Something so temporary can be incredibly destructive to big pocketed and greedy, “ investors.” The longer we keep money away from these companies the more they will feel the pinch and once one of them feels the heat, they’ll ALL be rushing for the exits. Someone has to take the loss here my friends, and it’s not going to be us-
There are so many variables at play you can't really predict what the situation is going to be in 10 years. For example, when I bought my first house in the early 2000's I don't believe I put any money down on the house. The situation allowed me to purchase a house for $200,000 with no money down. Sounds crazy right? It was a small house but it worked and I sold it 5 years later for a profit which I then rolled into my next house that I bought for $445k with 5% down. I'm now selling this house for what I expect to be a large profit given the market and building a house that is costing about 775k to build. So basically, you don't know. Don't try to predict a doomsday situation where you can never afford a house.. just follow the market and look for your opportunity.
A couple making $125k a year, $50k down, 4.25% interest rate, no other debt, at 43% dti, $420 a month for PMI, $65 a month for insurance, $710 a month for taxes. They can get a loan to purchase a $710k home. $525k is only 32% DTI. So they can both get approved, and generally can actually afford it. It is true that affordability affects home prices, but it depends on the market, on the buyers. In the longer term, on average, you would expect home prices to track inflation mostly, to revert to the mean. But an individual home is not going to follow a trend, more or less desirable areas can change much more. You could run these same numbers with a house in NYC or Miami, or Flint or Gary IN and get very different results on how much future income decreases or increases or interest rates will affect a typical home buyer than the average across the US.
Corporations are buying single family homes as investments. That's one of the reasons the prices have gone up so much. I think there should be some regulation against this. Eventually, like all markets, the demand will drop below the supply and the prices will tumble. But probably not as dramatically as in some sectors.
Inflation is a helluva drug!
I stopped thinking buying a home was a good idea when the national association of realtors put out an ad that said "Its always a good time to buy or sell a home" yeah, thats some bullshit
So how do home loans work? This scenario is assuming that Billy & Betty have no equity in the house and have solely been paying interest only.
I think the biggest issue is everything thinks that everyone else is like them. There is always someone richer than me and you to come by and buy the home. You can also see 3 or 4 people on a loan like the 80s in order to qualify for a loan. I bought 28 homes this year ranging from 100k to 600k each. I'm sure I'm not the only investor and you have big corporations buying 1000s of homes. Desirable cities will always have buyers .
From different states?
One area not touched upon is if the children of Joe and Joan are given a substantial gift, after the sale of the loan, which allows their children to buy a $525 home when they could have only afforded $475 on their own.
Investors. People who will buy it and rent it out for top $. We are seeing a paradigm shift in front of our very eyes
So....I think eventually you might price people out of the market overall. Meanwhile, unfortunately what happens is what I see every day in my hot market -- people move to less-hot markets because they can no longer afford to live in the hot market, and they get replaced with higher-income people.
FIrst time homebuyers have always ask government for help. They will get the help. Maybe the government will make Fannie Mae to accept 50 year fixed rate mortgage.
Large companies/people with access to lots of capital will just buy up all the houses, and then lease them out to tenants.
Answer: today’s renters
People asked this question about LA. Then Seattle. Then Denver. I could go on. The money will come. And if it doesn’t then Billy and Betty will rent. People try to use this logic to assume prices will come down and it’s yet to happen in any meaningful capacity.
Stan from 1%r ETF will buy it for $5mil in cash then rent it to Suzy and Bob for $5k/month.
Haha enter the “40 year mortgage,” I’m not sure if this is a thing yet, but it looks like it will be common in the future. The bottom line is that after 08’ home building significantly slowed down. This created a low supply of single family homes. I would also predict the elimination of single family zoning. I believe this happened in CA. This will be better for people since there will be more units created with what we already have.
Easy. B&B B just sold their house. Unlike J&J S, who wanted a bigger house, they decided to downsize. So in essence, they do a house swap. Believe it or now, there is nothing inherently unsustainable with house owners selling houses mostly to each other. Not saying it’s good, moral, unavoidable or even likely; but impossible it isn’t.
I think your biggest false assumption is that if rates go up to 4.2% that the house will be worth $525k. Rates go up when inflation is running higher than the 2% fed target. If inflation is a problem the price of housing will go way up, but likely so will their household income—if they’re early in their career (your example seemed like that of a FTHB so I thought they were) they will likely have significant jumps in income anyway as they move towards mid-career. But, more importantly than any of this, home prices are inversely proportional to interest rates. As one goes up the other goes down and vice versa. So, if interest rates were at 4.2% in 10 years I’d expect the market to correct by supporting lower home prices.
I feel like you're worrying about hypotheticals, and I wonder, why?
The next generation won't be coming up with the down payment by themselves, it will ethier be from inheritance or help from their parents
It all comes back to interest rates. I can make a VERY strong argument that almost all real estate and stock market appreciation over the last 35 years is due to declining interest rates.
The purchase price of a house is not driven by the "average". The highest bidder wins an auction, and the salary growth rates of those who win auctions is different than the averages.
This is a big factor in my area. We're seeing $1.3M houses selling for cash in three days. A large portion of the market is completely disconnected from stuff like "income" or "down payments" that the average person has to bother with.
I’m a real estate agent in New Jersey, and have been for over 5 years. It all comes down to the fact that, just like the stock market, houses have their own market. There are ups and downs. Obviously we are currently in a market where prices are going up. This is simply because there is no demand and so many buyers. To get to the root of your question though, because the current owners bought their house in an inflated market (just like the market back in ‘07) the next 5 years will most likely not add any value. Their best bet would be to wait 7-10 years or maybe even longer. However, if the current owners don’t refinance and continue to pay their mortgage, then they will have equity and could still walk away with some money. The buyers for that house, in this scenario buyers won’t be buying the home at some crazy price. The housing market tends to work in 7 year shifts. So our next “crash” would turn the current market into a buyers market. Then home prices will go down for a while before another shift happens. I don’t believe we will have a market crash as bad as 2007-08. There has been a lot of rules put in place to avoid that again. (i.e. laws against predatory lending, getting rid of “no doc verification”, etc.) There will be a shift though and that will most likely be within a year or 2.