I can’t help but think of that saying “the market can stay irrational longer than you can stay solvent.” Yes, prices in many markets are very high and appreciating at a rapid clip, but if there are buyers, competition, and houses are continuing to move quickly, then it’s a bold statement to say they are overvalued and that we should predict a significant decline.
> if there are buyers, competition, and houses are continuing to move quickly, then it’s a bold statement to say they are overvalued and that we should predict a significant decline.
No, for the simple reason that (most) people buy homes with mortgages. Take a look at the 30 year mortgage interest rate over the past few months.
The total cost to own a newly purchased home is what matters, not the actual sale price. That's mostly paid by the bank.
Even if buyers are prepared to absorb the massive increase in total cost of ownership necessary to keep prices moving upward, it probably doesn't matter because many prospective buyers will no longer even satisfy the mortgage DTI qualification at current prices.
You may object that some are buying with cash. While that's true, it's not enough of the market to sustain prices.
So this is not entirely correct. If I am not mistaken 30% of buyers are cash buyers, hence they do not care about the mortgage rate.
Second, the big issues is with houses supply. The high rate basically lock most current sellers which have very low mortgage rate (compared to 5%), hence reducing the supply more.
> If I am not mistaken 30% of buyers are cash buyers, hence they do not care about the mortgage rate.
Not necessarily. For anyone who's been working at FAANG and amassed certain amount of financial independence, the advice generally ran along the following scenario:
1) Secure a pledged-asset loan against your stock portfolio. That reduces the need to sell anything and trigger capital gains.
2) Shop around for real estate and submit a cash based offer to signal that you can close quickly.
3) Finalize the transaction.
4) Shop around cashout refi loans with fixed rates. Refi. Cashout. Repay the asset-backed loan.
Many of the cash buyers are either proxies (Ribbon, etc) or turn right around and get a mortgage. One of the touted benefits of real estate is enhanced leverage with equity as the collateral. "Cash" on an offer is more of a waiver of financing contingency, it does sound cool though.
Too many people seem to think 'cash deals' in real estate equate to a guy showing up with a louis vutton bag full of 100s that's been collecting dust in their shoe closet
It's just an indication of a lack of nuance in the deal-making, lack of contingencies (i.e. I'll give you $XYZ for your house as soon as I get $ABC for my house - agreed?!)
"Cash buyers" may very well have a mortgage, but they have enough assets/collateral that the bank is willing to give them carte blanche (ie the bank will waive inspection, because if there is a major flaw that makes the house uninhabitable, they'll just collect some other asset of yours).
I disagree. Until now there might have been 30% buyers with cash, but with rising interest rates that will stop being the case if house prices stay up.
People with large sums of spare money always look for ways to park their money. Interest based products (term deposits, bonds etc.) will now become more attractive, diverting some cash flows away from housing.
Alternatively with interest rates higher, buyers might think they can't get a higher return than the interest rate on the mortgage, thus lowering the opportunity cost of paying all in cash.
The interest on most interest based products will not rise as fast as inflation and so I'm not sure they will be "more attractive" (at least compared to real assets).
Why would anyone pay cash for a house when even a horrendous mortgage rate is still only 6%? That cash is earning 10% easily with zero effort. Put 15 minutes of effort in and open a Betterment account and you’re likely getting closer to 20%. Cash buyers make no sense to me.
"Just get 20% returns easily" LOL! The fact that you would not only think that type of return is consistent and "easy", but literally think that you should go into debt betting on that, is laughable. If it was guaranteed money, everyone would be doing it.
What are you getting? Are you looking at time weighted or money weighted? I just checked and I’m getting an average of 21.6% across 7 different portfolios on betterment (annualized, not cumulative).
I'd reference the Nikkei 225 circa 1990 [1]. That graph is not inflation adjusted. Up to 1990 everybody thought Japan was well on its way to becoming the world's largest economy on an exponential and unstoppable economic acceleration. And it was unstoppable. Then it stopped.
I am not saying this will be the case, but rather that we're at what is likely the largest inflection point in modern history, and trying to predict where the world will be at in 10 years has become effectively impossible.
I doubt the 10%+ year over year increases will be sustained with increased mortagage rates.
That's a long way away from predicting a crash or even a significant decline in prices, though. That would require a lot more inventory, and all those folks with 3% mortgages are going to be in no hurry to sell, and the stats on their mortgage amounts vs incomes looks WAY better than it did in 2007.
The problem is that supposedly, since 2020, the Fed has printed somewhere between 40-80% of all dollars in existence (The M1).
So my question is, if there is twice as much money in the system, but the same number of assets, why would it be shocking that housing continues to inflate?
M1 is a useful tool to understand why the prices of consumer goods have increased but not at all useful to understand home buying power.
People regularly sell stocks, bonds, and other homes in order to produce the down payment for a mortgage and have done so since long before 2020. M1 does not measure any of these.
The set of homebuyers and the set of stimulus recipients in a lot of these markets are non-overlapping, too.
Crypto, on the other hand, is something I know was sold for a downpayment by several of my acquaintances, which is acting as its own form of "money supply increase" since they spent orders of magnitude less to acquire it. The anti-inflation tool creates its own inflation by turning into "new money." :)
Well in this case it’s more like the market can stay irrational longer than you can stay homeless. Secure shelter is something that everyone needs to live, and in our economy you further need to find one close enough to your workplace. Thus, even if you think prices are crazy, you still must pay them.
In situations like this, where demand is for a vital good and supply constrained, the government should be carful about managing the market. From what I can see, US politicians do care about the housing problem but their solutions thus far just exacerbate it by injecting guaranteed loan money and driving up prices.
> but if there are buyers, competition, and houses are continuing to move quickly,
They’re not though. Thats the whole problem.
Asset bubbles can inflate the paper value and there might still be some trading activity. But if nobody can actually buy the asset, it’s pretty much useless.
People are buying them though. I think the problem is people think they’re richer than they are and don’t want to live in the places their income and wealth suggest they should. Previous generations handled this better.
People are very opposed to the idea that they can’t buy a house where they grew up, or in an area they feel is comparable. Which I suppose I can understand.
But to your point — things change, you aren’t rich enough, it sucks, get over it.
But so much of the new age groups is sold the dream HARD by social media ala Instagram. Aspirationalism is far worse than it was with previous generations.
That is what they are saying though - people are actually buying the assets? All anecdotes I have seen recently say that houses go off market very quickly.
They may be going off the the market very quickly now. That’s exactly how asset inflation works. People living in their homes that are suddenly worth millions of dollars aren't going to sell their homes now necessarily. When they do get around to selling it the market might not be the same.
The thing is I don't think it is bold at all. Housing being overvalued seems perfectly obvious consequence of negative or near-zero interest rates. One side effect of those policies is that the mortgage rates were artificially lowered.
A lot of people buying houses unfortunately don't really look at aggregate home ownership cost and focus (incorrectly) on monthly payments. So, because they can afford the monthly payment, they think they can afford the house. This of course works works until the music stops.
Housing is a notoriously illiquid asset with high transaction costs. In addition, the percent that turns over each year is an incredibly small percent of all homes (and homes aren’t fungible, each one is unique, so comparables are imperfect).
That makes price discovery harder and means that the market price can lag what is a sustainable long-term price.
If someone buys an asset for $100B that yields one penny per year with no growth - it is safe to say it's overvalued / a speculative investment. It does not mean that someone won't buy it for $200B tomorrow.
I would agree. I think the fact that mortgage rates have essentially doubled in the last 3 months, but housing prices continue to climb tells you we’re not even close to the ceiling.
