Many office buildings may become irrelevant, many malls already have. What does the future hold for once-flourishing buildings? Housing is a pain point for many people. Now we face higher interest rates and high inflation. With Todd Miller on his channel for building & remodeling, Construction Disruption.
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In housing bubble 1, the bubble burst due to defaults. Will HB2 burst when people are forced to return back to their original job locations?
Raise in mortgage rates is likely. If we get close to 5% rates that will have a moderate impact on home prices. But what will cause a “must sell” dash to the exits?
no if we get close to 5% rates it will have an enormous effect on home prices, not a moderate one. let’s say you have $2,500 per month for a mortgage payment. at 3% rates, that lets you get a $520,000 loan. at 5% rates, the same monthly payment means a $408,000 loan. that’s over a 20% drop, which accounts for nearly all of the gains in the past year. the price increase in the past year is nearly 100% due to interest rate suppression, regardless of what the idiotic talking heads at the realtor associations and cnn say. there was an article on cnn today about how the housing market is tight because of “low inventory” and “pent up demand from millennials.” it’s all crap. they’re either lying or stupid.
It’s easy to assume a moderate impact on housing prices from rising mortgage rates if anyone concurrently ignores that most people are actually broke.
The difference between now and pre-March 2020 is restarting QE and a torrent of government spending.
No, the economy is not actually fantastic or even good organically.
The impact of broke people on housing price is little since those people are not in the market for buying a house. They rent.
Interest rates going to 5%, sure has a downward impact but what really matter is that interest rates match or surpass inflation.
Inflation is 7% or 15% if we use the CPI of 1981. 5% interest rates on the deductable mortgage is a no brainer.
Problem however is that banks will only advertise that they lend but with all kind of qualification road blocks will make it very hard to actually land a mortgage.
It just boils down to the ability to offload the loan to fanny and fred.
So the market will contain more and more people that buy outright and with stock market getting into uncertain territory, more will be moving into real estate which will drive prices up. That has happened last year and good chance it will continue.
Ability to get a loan will be just the cherry on top but real estate investors will just buy something lower and still drive the overall prices up. and I include under real estate investors those that buy a home , go live in it so they get the 500k deductable cap gains)
So what exactly will happen , as always things can go different.
But house prices going down if interest rates go up and still below inflation, not so certain about that…
There is absolutely no way the FED is going to allow mortgage rates to rise to 5%.
I agree.
the only way they can stop it is if they continue buying bonds forever.
5% historically is a low rate. Keeping it lower is a confessional to blatant intentional debasement of the dollar through purchasing of US Bonds, which is a Capital Offense.
A 3/2 SFH built in 1964 in SoCal was worth $100k in 1980 when interest rates were 17%, and now the same tired hovel is worth $800k with interest rates near nadir.
5% is historically a very good interest rate. LOL
But I agree. The FED needs to keep interest rates low because of the the debt the government and corporations have accumulated the past 10 years. They need to slowly unwind some of that debt with slow interest rate increases.
Like weaning an addict off of drugs. It cannot happen fast.
ru82, our politicians will use the low rates as an excuse to run up even more debt. the debt will grow faster than it will ever be repaid doing that. it’d be like trying to empty out the ocean with a cup.
Jay.
So you identify this as an arrangement, not based on economic realities, but on the desires of an unelected cabal known as the Federal Reserve.
Last time we had inflation near (but below) this current level, 30 yr mortgage was 6%. (1999 and 2006) Now, 3.1%…..courtesy of the Fed buying MBSs. Why are they doing that? Why would they lend money out to the mortgage industry 4% below inflation for up toe30 yrs?
The Fed is doing uneconomic things, and forcing others to do the same. But the Fed can bail themselves out, the “others” can NOT. Destructive and unrealistic….that is the Fed.
RU82
“The FED needs to keep interest rates low because of the the debt the government and corporations have accumulated the past 10 years. ”
WHAT??!
The Fed needs to protect those who have recklessly created debt?
Rates must rise, and rise a lot.
To keep rates below the inflation rate is to subsidize debt creation…and that is what got us into this mess.
Therefore, the SOLUTION can not also be the CURE.
For 70 years, Fed Funds equaled or exceeded inflation. That is, without debate, the historical norm.
National debt was $9 Trillion in 2009. We added 20 Trillion over the last 12 years due to this ABNORMAL rate policy allowing this debt balloon.
BTW, if rates go up, it only increases the debt service on the NEW DEBT. The coupons dont change on the bonds outstanding (unless tied to a variable, most are not)
@historicus I am not saying it is morally correct to protect those who recklessly created the debt. But the FED left interest rates low for so long, corporations will do what is best for their bottom lines and investors and they borrowed to buy back stock and do M&A.
The FED is now stuck. Raise rates and create a stock market crash and a recession….or try to slowly raise rates, slow down liquidity, and try to inflate the debt away. But maybe it will not be so bad. I read corporation are sitting on a lot of cash too?
Point well taken Jake W. I guess I should have qualified my statement by saying any decrease in home prices < 20% I would consider moderate. Lenders know an event greater than 20% is statistically unlikely (but possible, see GFC lol). That's the reason why they require 20 percent down.
I am saying that a scenario where we have mortgage rates extremely high (more than 6-8%?) resulting in a collapse in prices (greater than 30% down) is unlikely just by interest rate changes alone.
…or is it?
That's the question I am trying to pose.
Is interest rate risk and the potential for it to increase astronomically enough for home owners to gain momentum in flight to cash in order to create a sell off and a collapse in prices?
Which is also the reason why the Fed is limited in how much they can raise rates. They will destroy the collateral values and flip everyone upside down in the LTVs of their homes.
Real estate is highly sensitive to mortgage rate aka monthly payments. Only time would tell how would rising rates impact real estate prices.
From my perspective, FED won’t let the mortgage rates go up a lot.
Mortgage rates extremely high 6-8%. LOL, were you born yesterday? The problem is the risk has been taken away by the Feds actions. Return reality back bonds and borrowing, and you will find 5% is a good deal.
peanut gallery, and if they don’t do that, hyperinflation will destroy the currency. there is no magical way out.
There is a low inventory and theoretically I see no reason why millennials aren’t contributing to the strain but usually demographics don’t have this level of impact. And this instance isn’t explained by a demographic shift nor low inventory. Low inventory is directly caused by low interest rates and speculation.
But beyond that, take my case for example. I’m technically in the market for a home. I left my old town/region because wages were so depressed that it didn’t matter I was working on the side, working a 40 hour job, and still living marginally. I had one job where I worked 12-16 hour days 6 days a week and still couldn’t make ends meet and I’m not financially irresponsible. Wages were just not there. Now I’m making 55-60k a year in a medium cost of living area. 1br apartments and studio apartments start on a year long waiting list for 1200-1500/month. Housing is simply out of reach. Single wide 2 hours from town are 300-400k. Back home the situation is the same just smaller numbers all around.
I often wonder why I work hard manual labor frequently and 12-14 hour days constantly just to have shit to show for it but number in a bank account that mean less with each passing day of inflation. I’m growing more and more fond of the idea of just getting a nicer car than what I have and living out of it and getting some bullshit make work job where I don’t destroy my body.
I’m beginning to understand this whole anti work deal. I’ve got a really good job considering all things aside from how back breaking and often dangerous the work is. But at the end of the day, why put so much skin in the game if you get nothing out of it in return.
I saved this year on average 60% or so of my take home pay. It’s not the near 90% when I lived on the road but I make more now as well and am not living out of a closet. But even with saving like that, it doesn’t matter.
I understand how you feel, looking at home prices/inflation some times make me feel why even work. I would say have hope and keep working/saving, there will be an opportunity and when it arrives your job/saving will help you grab it.
Good post.
Low interest rates and the GSEs backing all loans and bundled MBS has made investors have no fear in buying up these loans/MBS. It gives Wall Street lots of money to buy houses. I just read where Cerebrus has bought 300 houses in a low income/high crime area near were I live. I own some rental but would have never thought about buying in that area. Now they own the majority of the houses. They raise the rents and make it to costly for low income to live their and they have to move move to another area.
Next you have boomers, and I know several, who are diversifying some of their great stock market gains and are buying homes to turn into AirBNBs. Seriously, they now own 1 to 4 AIRBNB houses as a diversified income flow and I know several more friends thinking about doing the same thing.
I also read plenty of stories on Millennials also buying several properties to turn into rentals. I also know several who own a couple of homes now.
I read a report recently, the medium family is $67k. Only 17% of families below the medium own a home. This will be the new normal now that Wall Street has many tax advantages a home owner does not have. when owning a single family home. They can write off repairs, taxes, etc. and they can borrow money at lower interest rates.
The new normal is that people who make less than medium income will be renters or have to buy small condos. The single family home will no longer be an option.
When I see that home ownership is 65%, I wonder if they know when someone who is a small mom and pop landlord who owns 2 or 3 homes and counts all of these homes as owner occupied?
I recently had a trip to the e.r. which turned into a week’s stay. I’m insured, but my part is going to end up being several thousand dollars. Nothing like several days lying on your back with nothing to do but think to help you reevaluate what you’re working for. Why DO I work so hard when all it takes is one health issue to erase all my gains for a year or more? I’m not anti-work by nature, but everything about this culture feels like marching up a steep hill in soft sand while something sinister throws rocks at you.
@Jake – Your right with your calculations. A rise in interest rates the amount of house you can afford drops. This does not necessarily mean that house price will fall. It means a person who can afford a $2500 month payment will look for a smaller house in the $408k range. The demand is still there if there is liquidity.
One would think higher interest rates result in a drop in housing prices. But if you look back at the late 70s and early 80s, house prices increased as interest rates rose from 7% to 18%.
It is all about liquidity IMHO.
I think HB1 was caused by the end of easy liquidity and overbuilding and not so much rising interest rates.
Low inventory is because of several reasons. Millennials are only a small part of low inventory. Wall Street was never been a competitor in the past for buying homes and now they are big time. I think I read at least 1 of 5 homes are bought by investors…that being wall street and a bunch of small time investor groups. You also have boomers diversifying and buying rental homes for cash flow. millennials are also buying up homes to become landlords. Finally you have new homes builders only wanting to build McMansions that require a $100k plus salary to afford. So homes under $250k (3x medium family income) are almost impossible to find anymore in a good neighborhood. In reality, homes under $300k are hard to find too.
Ru,
The definition of a good neighborhood is about to change in Texas.
Watched a small real estate investor/commenter talk about the new communities being built there which are homes with a local school within the community gates. Only kids living in the community can attend the school, no outsiders. Every community becomes a “good” neighborhood where the kids can walk to school and the parent/owners control the school.
I don’t know how these captured schools are going to work out, but it was interesting to see a minority investor pushing this for their own children. All I know is, the taxes will be very high.
but let’s look at this. where will the liquidity come from? wall street won’t have that money if they can’t borrow money at 0%. the boomers diversifying are very rarely using actual stock gains to buy. they’re using the “wealth effect” of their unrealized gains to use cash or borrow money to buy houses. if interest rates go up, all assets drops, and the wealth effect disappears. higher rates will have systemic effects, not just effects on the homebuyer trying to buy a $500k house.
For laughs, I just looked up the current price (value?) estimate on Zillow of the home I bought in 1981 in Thousand Oaks, CA when I moved there from Connecticut. It was a job transfer and I was making about $60 K at that time. My wife didn’t work as we had 2 and 4 year old little ones.
Since our house in CT was worth $95 K at that time (colonial on three acres), with company mortgage help (financial), we were able to qualify on that T.O. home (2,000 sq, ft., 3 bedrooms, 2 baths, NO POOL) small yard, with $40 K down and he sales price was $205,000 (freaked me out on that price). A no frills basic tract home for starting families. We ended up with an 18% mortgage from B of A.
Scary stuff for an engineer with a wife and two toddlers.
Well, the estimate I just looked up shows the house at $1,100,000 !! Over 5 times increase in price for a cheap tract home with no frills.
Who can afford this stuff?
(Now it’s Ca valuations… and here in Texas that home would cost about $300,000 in the same kind of neighborhood.)
Let’s be sure we understand this….
to say rates must stay low for the debt service, is misleading.
NEW debt gets the new rate.
To keep rates down PROTECTS THOSE WHO PLACED THE BET that rates would not rise and own the outstanding debt.
And why should that happen? Why should the prudent bail out the imprudent?
@Jake Right now the government via the GSEs are buying and guaranteeing 98% of all residential mortgages. Better yet, the GSE are also guaranteeing MBS.
These guaranteed residential loans are almost a risk free investment.
Wall Street should be buying all the homes they can right now. A great gig if you can do it. You buy single family homes with loans that are guaranteed. Charge services fees for servicing the loans and bundling them into MBS. No you are a service company for finding servicing the renters.
So at end of the day if the renters quick paying rent….Wall Street has no skin in the game. The investors will be okay because the loans will be backed 100% even though nobody is making payments. LOL
There is a land grab going on right now under your feet . That is why there is low inventory. I have two rental homes and I get 3 letters or postcards a week with offers to buy my homes. I also get 2 or 3 text messages. I also get at least one voicemail. I also get calls for call centers in India asking to buy my rentals. Why….because they are paid off.
I have never seen such a frenzy to buy homes.
So….the government will finally have to step in because under the current conditions there will not be any affordable housing when home owners have to compete against a Wall Street firm that has not risk in its home buying spending spree.
Jake
as long as the Fed has mortgage rates 4% below inflation, people / speculators will buy all they can to get out of cash….which evaporates at 7% a year….thank you Jay Powell
But, people who borrowed low to buy high took a risk….it is not up to the American people to have their currency devalued to save them.
And for those who think SPIKED PRICES must be defended……
take a flyin truck
That goes for the stock market and real estate (I own both BTW)
The INFLATION must be stopped, the balance sheet must drop by 50% at least, and those who played big must deal with the risk, and not rely on the FED to bail out all their speculations.
It’s their speculations
OR the value of the dollar….
I’ve got my choice.
So why would the FED CONTINUE TO BUY MBSs?
What entity other than the Fed would lend money out at 4% below inflation for 30yrs?
Cui Bono? And I think it is obvious to first ask who is in the Fed’s tent with a big real estate bet.
Who did the Fed reach out for help in March of 2020? (for the first time ever?)
Jake, you’re just plain misinformed here. All you gotta do is superimpose a line graph of housing inventory over the last several years (or longer) and you will see that low inventory of homes means higher prices, and vice-versa. It’s called “Supply/Demand”, and it regularly outperforms interest rates as a housing price indicator.
dave, with all due respect, this is plain nonsense. there’s no such thing as “low inventory” divorced from demand. best buy today can be stocked with $1,000 tvs, but if the government suddenly hands out $950 vouchers that can only be used on tvs, then all of a sudden, you will have “low inventory” of these tvs, as you have lowered the effective price down to $50.
same thing here. you allow people to borrow money for 30 years at 3%, you push all of the risk onto taxpayers, and you allow investors and corporate buyers to lever up and buy houses as tokens, you are going to have “low inventory.”
the population hasn’t increased enough since 2010, when there was a huge glut of houses from foreclosures and other factors, to account for the supposed low inventory, nor is there any real evidence that it’s millennials suddenly deciding they want to live in the suburbs. it’s all artificially high demand created by government policy. period.
The cause of a housing price crash is the fact that a speculative bubble developed to begin with. I don’t know who in their right mind would think 12x yearly gross household income is even remotely sustainable. Historically, houses were 2x gross household income. The cause is always the bubble, not the excuse as to why it popped.
DC, all of your comments are from your own subjective / personal perspective.
Just recognize the fact that some people want to talk about the macro picture of what they believe IS happening or what is likely to happen – not what should happen or what is best for themselves personally.
Not a criticism or an attack on you, but just a friendly reminder that there are many perspectives. And just because you talk about one perspective doesn’t mean you own or espouse it.
My comments have to do with facts. Facts are not opinions. Current house prices are not supported by incomes, they’re in a speculative bubble. All speculative bubbles pop. You may not like that fact, but it’s a fact.
How about this idea. People who have earned large salaries in one area, then start WFH in another area, have their salaries adjusted to their new locale? Whole communities have been blown up due to WFH.
DC
Yep, When I got my first home I was told not to borrow more than 2X my annual income. I bought an 82K home, put 20K down and got a 60K mortgage. Earned 30K/yr at the time. I thought I was really going into debt at the time. Look what is going on today. The numbers are frightening. An 800K mortgage is nothing today. And to top it off, you can’t get all the tax breaks that I got back then, as you are limited due to the cap on the SALT deduction, and other personal tax breaks that were eliminated.
I just pulled up some listings today. I don’t look at for sale houses often, because I’m not interested in buying a house right now. But the prices are laugh out loud ridiculous. $150k stucco sh!tboxes on 1/4 acre, with plastic snap-together flooring, which are listed at $750k up to almost a million. In these areas, that used to get you a mansion.
Showerthought:
Since Cronos is the Titan demigod son of Uranus, father of Zeus, is saying OmiCron the same in text speak as saying “Oh, my God!?”
As long as it scares the bejeezus out of the maximum amount of people possible, then sure. That’s all this is at this point, a massive fear campaign – psychological warfare – to try to scare people into submission and control them.
“My comments have to do with facts”
I don’t think people will be forced to move back to job locations. There are so many opportunities that most can just get a new job that allows Work from Home. One of my friends is doing that. Employees currently have the upper hand…for now.
Wow an hour long love it tuning in now.
*Brookfield is currently purchasing a industrial site in the outer boroughs of NYC.
*A decades worth of rezoning has displaced so much industrial real estate that the fulfillment centers under development are multi level permitting 53ft trailers to go up each floor.
The consolidation is not just in retail, it’s also occurring within industrial companies. Wall street is buying everyone out.
The cement plant, the demolition company, the private gas and electric contractors that exclusively done work for public utility companies.
I went from observing wall street purchasing the best buildings to now buying the companies that occupy them too….
The logical conclusion is that if some one has access to printing money out of thin air, in a very short period they will own the whole world.
I’d like to see some of these zombee malls bulldozed and turned into wildlife refuges. Who needs these malls. I haven’t been to a mall in the last 8 years. They have become havens for losers.
Make a run to the mall today and witness decades of materialism being pounded into peoples heads. Buying merchandise is now the equivalent of buying groceries IMO.
I already go hunting for cougars @ the mall in the Wild Pair, their lair.
Safety has become another issue for the big banksters too returning to offices as well.
Staff being advised to come in dressed down attire.
I personally like going to my office its like the studio to the artist. My house is my home. Despite the negative daily experience of dealing with rush to the red light madness.
Such great points made regarding “time gaps”.
Wait until the banks go bust this time on the merry go around in the the next few years. Time gaps+
The FED won’t allow the banks to go bust. That was too scary last time they got close (the GFC). If anybody goes bust, it will be retirees living on fixed incomes with little or no flexibility. Inflation will raise wages for those working stiffs and they will be OK.
Most Americans are destined to become poorer or a lot poorer in the future. This includes most “working stiffs”. They may be ok but it’s going to be at lower living standards versus today and the recent past.
The asset mania and the lax credit standards that go with it have a lot to do with rising living standards over the last few decades.
“They may be ok but it’s going to be at lower living standards versus today and the recent past.”
I agree, and did not mention that above. One thing I am doing as a responsible parent is helping my adult children understand what is facing them going forward as a result of these government policies and actions.
AA
Did you advise your adult children what is facing them as a result of CORPORATE policies and actions as well ?
OTB: as a matter of fact I did. I worked for Big Oil in my early career years and part of that in Corporate. When that blew up in 1986, I went out on my own and ran my business successfully for over 25 years. No pension, no debt, just SS and what we saved.
My daughter is self employed and her husband works for a Fortune 500 firm and he has been advised by me to keep his options open as you can’t trust those bastards.
Augustus
Powell says he wants to help those unemployed, as those same people fail to respond to “Hiring” signs, record job openings.
Powell says keeping rates at unrealistic lows is his tool to cure the unemployment.
But, that policy has fueled the 40 high inflation which rips and slaughters the efforts of the working people of this nation, those who turn the lights on and fill the shelves.
Thus the net effect of Powell is…
No effect on those who choose to remain idle.
A Great negative effect on those who work /save/earn.
Powell is hurting those who work, get up and go each morning, and pretending he is helping the unemployed, those who CHOOSE to be idle.
Idiocy.
@historicus
This is what we get when we ask monetary policy to do the job of fiscal policy. As Dr. Johnson is reputed to have quipped about women preaching, it’s like a dog walking on its hind legs: “It is not done well; but you are surprised to find it done at all.”
This time I don’t beleive we will have bailouts. Bail ins will be the theme.
My money is on
2022/2023 melt up crypto everything bubble. Options trading will outway the actual market. Inflation followed up by a deflationary period long drawn out over the decade.
Time gaps producing- greater depression 2.0
Bail-ins do make sense in that they don’t exacerbate the same problems that repeated bouts of QE have caused. They’re also not really on anyone’s radar, here in the US, at least not to my knowledge. Maybe there are reasons that they can’t or won’t be used here?
Money printing is a ‘bail-in’. They are reducing your purchasing power as we speak and nobody says a word. If they did a bail-in all hell would break loose. Which method do you think they prefer?
bail in from whom to whom?
From you to the banksters, with love and gratitude for all that they have done to you and for all of us. LOL.
Sorry. Read “If You Have Money in a US Bank Account Be Aware!” in Kitco. However, before you go off and buy precious metals, etc., read about FDR’s Executive Order 6102. I would not even be surprised if a way was found to similarly confiscate the digital coins if most governments arrived at an agreement, as an alternative to taxing the ultra-rich, who own most politicians, like Bitcoin. Never say never, regardless of the technology.
Do you have high blood pressure? If not, do you want to get it in one hour?
If so, just read “2017 Tax Cuts Helped Super-rich Pay Lower Rate Than Bottom 50 Percent: Economists” in Newsweek or “2017 Tax Law Tilted Toward Wealthy and Corporations” in Center on Budget and Policy Priorities. Drink some wine before you read how those parasites who already paid little in taxes managed to change the laws to pay even less than what ordinary Americans pay.
I think 4 or higher on mortgages will be enough to stop appreciation.
Forget 5. That would lead to decreases.
I agree with your %. And as I said above, the FED will do everything they can to keep rates from hitting 5%, including restarting to purchase MBS even if inflation remains stubbornly high, above 4-5% 18 months from now.
assuming that the political pressure doesn’t force their hand.
Just wondering. What political pressure? By this spring, my house in Woodstock GA will have doubled in value in four short years. That’s insane. Who doesn’t like low mortgage rates? Housing prices have easily escalated enough in the past two year that, under normal circumstances, there would be huge public outcry. I hear no true public outcry. I read over the summer from the St Louis FED that 44% of all 1st mortgage debt had been assumed in the prior 12 months. That’s just staggering. Unless something comes out of nowhere and causes the house of cards to fall, the government, the FED, Realtors, owners, everyone except those buying a house clearly want this thing to keep going up and up. Will it slow down. Sure! When 2023 maybe? And what exactly does slow down mean? 8% annual appreciation which is still double the long-term average. I can’t help but think that we’re DeJa’Vu, circa 2007. But every analyst keep saying. “This time is different.”
the “except everyone buying a house” is a much larger group than you think. not to mention it includes everyone younger.
to add to it, there is a public outcry, the media just doesn’t report on it. trucker guy’s story up above is being repeated by many millions of people.
1) Landlords raised rent due to inflation.
2) Landlords raised for the second time after remodeling.
3) When the shadow bank will become zombie banks, in the next recession, the mini landlords will pay the price..
4) The estate lawyers will confiscate landlords last payments and assets.
5) The medium size whales will buy from the estate for 50 cents/ dollar.
6) When the real inflation start, the giant whales will raise mega rent.
7) The gov will not be able to help tenant, because their printing machine is out of ink….
Is that a cut and paste from the story of Joseph? I think it was right after the dream about the fat cows eating the skinny cows.
OMG I need to get off Wolf Street! I totally followed what ME just posted.
The current economic madness is in someone’s best interests. That is why it is happening.
Wolf has discovered everyone has an opinion. I wonder where he learned that? 😁
I believe Manchin and I will “get something done”, after the DOW
will be down.
Meanwhile we will put shame on him
1) The current economic madness is in the best interest of the value
investment.
2) When price revert to the mean they will wright a check to the banks.
“2) When price revert to the mean they will ‘wright’ a check to the banks.”
I see what you did there! 🤣
1) RIP Chinese economy.
2) RIP Chinese global co.
3) In 2007 four out of 10 largest co in the world were Chinese.
4) in 2020 two : Tencent and Baba.
5) In 2021 ==> none !
ShiShi Ping chewed them up.
Coming to a country I live in
In the late 1980’s they overbuilt commercial real estate. Small banks had loaned money for the purchase, or construction of these properties. As the borrowers defaulted, the banks took back the properties. There was a glut of commercial property and not enough tenants. The banks’ savings and checking accounts were guaranteed by the FDIC. The government took the failed banks’ assets and formed the Resolution Trust Corporation to manage the foreclosed properties until they could be gradually sold.
There is a desire by some leading corporations to return their employees to their office buildings, then omicron hit. It is overwhelming hospitals as their staff called in sick. In South Africa omicron affected children and adults, but less severe than the delta variant with a much lower hospitalization rate and shorter hospital stays.
So often, people say if the FED raises rates, home prices will drop. Actually, that is not a true statement. What matters is the spread between CPI and interest rates.
For example, if the FED raises rates and MTG rates jump to 8% while CPI rises to 15%, homes will soar in value. This is true since wages will rise to cover the bigger MTG payment.
But, if the FED cuts rates and MTG rates drop to 0% while CPI drops to -3%, then home values will drop. In this case, wages will stall or even drop.
What matters is the spread between MTG rates and CPI.
I mean, you’re right. So then what do you think is going to happen next year?
3 interest rate hikes. Let’s say they are either 25 or 50 bps hikes. Suppose at the end of 2022 interest rates are 1 percent higher across the board. Mortgage rates are 4.x%. CPI is…. some percent between oh I don’t know… 4 and 9?
We are still in a situation where the rate environment is highly accommodative?
…unless the Fed does something completely unexpected
Home should rise > 15% in order to justify buying them and cont to rise above the CPI in the future. But if prices will rise only 6%, in real terms prices will decline 9%.
So your calculations are basically saying that you believe real inflation is somewhere around 15%?
we’re so heavily levered and teetering on the edge that any rise in rates is going to cause a massive decrease in demand on all levels, meaning that cpi drops. this means that housing prices drop, as the delta between cpi and rates drops.
wages are not going up even close to enough for people to be able to afford the increase in prices.
Jake
Do you think maybe the problems you note are exactly why there is a STABLE PRICES mandate of the Fed and they are NOT supposed to promote inflation?
But they did, didnt they?
yes. they’re not supposed to promote inflation or blow bubbles because it leaves a situation with no good options. it’s almost like the fed is trying to keep kicking the can down the road hoping some magical door #3 appears. it won’t.
More BS from my pal Jim. Wages do not necessarily rise the way you state. It’s amazing the way you spew out trash like this. In any event, underlying mechanisms don’t matter once a bubble forms… it’s all psychology at that point. Professor Shiller has written about this. The mechanisms can (and do) fuel the formation of the bubble, but that’s all they do. People love to point to their favorite statistics. They don’t matter insofar as preserving the bubble. The only thing that matters in that regard is the collective psychology of the market. If that can somehow be preserved, the bubble can remain inflated, I suppose, but any reversion, even partially, toward common sense will deflate the bubble.
Historically, wage changes and CPI changes have been correlated.
EVERY Union in the country is going on strike in 2022, IMO
Spiral
The Fed has NO BUSINESS in promoting ANY inflation, and the people who wrote the Federal Reserve Act made that clear.
FYI … here is a link that shows the relationship between wages and inflation.
stlouisfed.org/on-the-economy/2015/november/relationship-between-wage-growth-inflation
SoCalJim and SoCalJohn, this can be solved somewhat elegantly as it relates to housing by answering the basic question:
What are DTIs right now?
I bet you they are nothing like they were in 2004-2007
societal dti is much much higher than it was. much of the “wealth” people are relying on to make these purchases consists of unrealized gains from assets that would easily lose 50% of their value or more if and when interest rates are normalized.
Wages will not rise to cover the difference. They never have. Mortgage rates should be 10%. House prices should decline 50%. CPI is really about 15%. We’re still toast. Inflation is real and accellarating.
I don’t want to start a generational war or something but the current generation has a very low attention span and the older ones do not have a lot of time either. Any videos longer than 10 minutes will be downgraded by the YouTube algorithm. I heard the famous ticktock videos are only 10- 20 seconds or so. As with any articles, I am confident only one or two viewed the whole video. I downloaded it and will hear it tomorrow.
I don’t believe the current generation has a low attention span. For example movies and series on Netflix and the like get a lot of viewers. Many videos on youtube and the like are over an hour long.
All that does is just create opportunity for others ;)
While I agree with all the fed sentiments in here, I continue to wonder why there isn’t more attention put on the student loan payment delay program. 1.7t in debt hasn’t required a single payment. That is a lot of extra cash in bank accounts going directly into stocks, houses, cars, boats, and every other product that can be bought. Sure maybe some are paying it down or saving it but that’s not the American way. Stopping that program will drive more people back into those restaurant/retail jobs and slow the demand that is one factor behind inflation.
My 2 cents.
Apparently a defacto forgiveness, per their wishes.
Where are the market signals on the office market? CMBSs backed by office towers in major metros are down, but nowhere near as much as they should be. Are people simply assuming a Fed/Treasury bailout?
of course. someone will parade in front of congress talking about how the poor pension funds that invested in cmbs are going to go insolvent. just think of the teachers who slaved for low pay to teach your children and the cops and firefighters who put their lives on the line every single day for you! /s
but that will be the argument.
The boomers were known for getting married later in life than normal. But they didn’t delay buying homes. So we ended up with a lot of single home owners. Later on when they got married there was the matter of getting rid of that extra home. I see a potential boom/bust cycle with that pattern. This probably led to abnormally low prices because of high supply. Maybe some of the price increases in my adult life is justified based on the market exhausting that high supply over the years.
But now the boomers are approaching life expectancy and a mass dumping of their homes by their heirs leading to a new round of high supply. It’s not going to happen overnight but more likely over the course of a couple of decades.
In a strange way low mortgage rates are probably combating this new high supply. We’ll have to wait and see if low mortgage rates or high supply is the dominant force. If it’s high supply that will be the time to buy homes.
Mitigating against this process is the ongoing decline in family size and the increase in the numbers of individuals living alone — social forces have changed/are changing housing demand relative to population size.
I think the availability of WFH is greatly overstated. Many employers want to get back into the office – even if the employees would rather WFH.
– this may result in a disruption for vacation markets, especially if people can’t make as much on Airbnbing their properties because of the increased competition.
The housing market will continue to be propped up by investor money. Huge amounts of capital are being deployed to snap up rental properties. Things might change once Americans aren’t being propped up by stimulus money (child tax credit is a big one). Keep an eye on vacancy rates.
Lastly I’m keeping an eye on the high end market in my area – investors keep swiping up properties in the $1.5-$2 million range and attempting to rent these unfixed up properties for $7.5k/month when the highest I’ve seen a completely remodeled rental in the area go for is $5.5k/mo. Realistically they can get in the $4.2-$4.8k/ mo range. These rentals are just sitting on the market for months. It’s a weird trend that I’m keeping an eye on, I’m not entirely sure the long term ramifications yet.
i agree regarding work from home. i think a hybrid arrangement is what will realistically happen, so people won’t be able to live in the middle of nowhere. that said, if you only have to commute 2-3 days a week instead of 5, it opens up a lot of “exurbs” that wouldn’t have been feasible before.
i have seen the same thing where i live. people buy properties at inflated prices and then list them for rent a week or two later. but they’re not moving. anyone who can afford to pay $8k/month is going to want to have their own house. i honestly can’t think of a worse long term investment than a single family home. the rental market, outside of crazy mania like now, just isn’t there.
May be time to turn retail into houses