Fascinating: “Prices that families pay” when they buy homes “can affect their overall well-being.”
By Wolf Richter for WOLF STREET.
The housing sector – rental market and purchase market – is one of the most interest rate-sensitive sectors of the economy and “an important channel of monetary policy transmission,” Fed Vice Chair Philip Jefferson said today at the Mortgage Bankers Association conference. In plaintext, as we’ll see in a moment: The Fed is counting on its higher policy rates to do their thing to the housing market (rental and purchase), with the ultimate goal of lowering demand by households in the broad economy.
It’s good for the Fed Vice Chair to spell that out because the housing industry with its incessant hype and hoopla wants everyone to believe otherwise.
The recalcitrant rents?
With its monetary policy of 5.25% to 5.5% rates and $1.6 trillion in QT so far, the Fed has been trying to push down demand to remove some fuel from inflation, and that has worked to some extent. Inflation has come down a lot, but then reversed course, with the hugely important measures of housing inflation – Rent and Owner’s Equivalent of Rent – having remained stubbornly high at 5%-plus in recent months. Against all expectations. And that has turned out to be a bummer.
Jefferson explained away the persistently high rent inflation by pointing at the theory of the “lag effects,” where asking rents take their goodly time before becoming actual rents (the inflation index Rent measures actual rents that current tenants pay, not asking rents which are advertised rents), a theory that we have had to listen to for about 14 months, without seeing a lot of results as rent inflation has remained persistently high.
7% mortgages slowly crimp consumer spending to bring down inflation?
“The current restrictive stance of monetary policy has weighed on the housing market” by bringing “supply and demand into better balance” – thereby ending the crazy price spike that had occurred during the pandemic – and putting “downward pressure on inflation,” Jefferson said in the speech, but it hasn’t been enough yet.
One reason why higher policy rates have not been fully transmitted into the economy is the very common 30-year fixed rate mortgage where neither the mortgage rate nor the payments change for the life of the mortgage. “It is often argued that this loan structure dampens the effect of monetary policy,” Jefferson said.
While the average current 30-year fixed-rate mortgage interest rate is at around 7%, the average rate on all mortgages outstanding is below 4% as households refinanced into lower mortgage rates during the pandemic, and are now slow to sell or refinance the home to get a more expensive mortgage.
There is a delay between when mortgage rates rise in response to higher policy rates, and when the total amount in mortgage payments in aggregate rises as more mortgages with 7% rates make it into the averages.
So “households in the U.S. borrowed over $1.5 trillion in new mortgage loans in 2023. These borrowers include first-time homebuyers, existing homeowners moving between homes, and homeowners obtaining cash-out refinances,” he said.
These households that got 7% mortgages recently will be spending a much larger share of their income on mortgage payments, than households with a 3% mortgage of yore. And as those households with the 7% mortgages will have less money left over to spend on other stuff, “their consumption may be correspondingly lower,” he said.
This is the way higher policy rates work their way into demand for consumer goods and services, by forcing households with 7% mortgages to cut back on buying other consumer goods and services, which reduces consumption, and thereby demand. But it’s a slow process.
“The cumulative effect of a higher interest rate on aggregate mortgage payments grows over time as more new loans are originated at the higher rate,” Jefferson said.
Home “prices” too high?
“The housing sector is where many households have made, or will make, their largest investment. Therefore, the prices that families pay for that housing can affect their overall well-being,” Jefferson said without elaborating further.
This is fascinating. The “prices that families pay” when they buy the home – not the prices they get when they sell the home – “can affect their overall well-being.” Purchase prices that are high can mess up a family’s “overall well-being?” Is it finally sinking in? After years of purposefully inflating said home prices?
The conclusion seems to confirm that: “The housing sector is also a key part of the transmission mechanism of monetary policy” – that is trying to bring inflation down. “That is one reason why policymakers will continue to pay close attention to this vital sector,” Jefferson said.
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Howdy Folks. No money down loans, No income verification loans, No Red Lining, Community Reinvestment Act, and lets go ZIRPing too and see what happens……
Free beer and a housing crash tomorrow.
This article was neither about “free beer,” nor about a “housing crash.”
T’was about “inflation.”
“Transitory” according to some old goat.
But then, I guess, we’re transitory too.
Keynes/DC – “In the long run we – and by we, I mean I, – are all dead…so eff the debt and the future”.
Modest house in Lawrence KS I looked at today went from tax appraisal of $238K 2020 to $409K 2024…
Federal reserve destroyed the housing market in the short term with sub 3% 30yr mortgages and 2%+ 15 year notes…
Also an example of why people don’t trust inflation numbers, housing inflation has been ridiculous…
Houses are assets and are part of asset price inflation, not consumer price inflation. Consumer price inflation covers consumption items, goods and services that consumers consume. Asset prices go up and down, and they can go down a lot. Consumers prices in the US overall almost never go down. Big difference. That’s why they’re tracked separately.
Unfortunately when the one item you really want to purchase for yourself or your family is a house, which is not in the CPI basket (at least not directly), then the CPI figures have very little meaning to you.
I have a feeling that with the 30-yr mortgage lock-in effects, they’ll have to keep rates high (or even higher) for even longer than they’re thinking just to undo those effects to bring inflation down*. And that’s just the rate of increase, we’re all still screwed on the price levels.
*OR they’ll just switch up the inflation formulas, and… presto! Wow, now we’re magically at 2.0% inflation, would you look at that!
Bailouts4Billionaires
“Unfortunately when the one item you really want to purchase for yourself or your family is a house, which is not in the CPI basket (at least not directly), then the CPI figures have very little meaning to you.”
Jeeeeesus.
House price inflation is in other indexes that we cover here. Maybe you people never ready anything here so you don’t know it???
To find food inflation or used-car inflation, or services inflation, you go to our articles about CPI.
To find house prices inflation, you go to our many articles about house price inflation. AND READ THEM.
Wolf,
People don’t care if they are getting screwed by “consumer” or “asset” inflation (note, one person’s asset tends to be somebody *else’s* liability vis a vis housing rental) they just know that their total gross costs are going up…with zero improvement in value.
And, as you correctly point out, asset valuations are volatile (largely driven by erratic/incompetent gvt decision making, operationalized via interest rate changes) so even the putative “beneficiaries” of allegedly benign “asset inflation” are continually under threat of reversal/collapse (especially late buyers vs early buyers).
The only entity that really profits from this print-driven casino-fication of the macro economy is the Printer in Chief/Master Forger his-own-self, the G – who’s habitual deficit spending is financed by the Fed’s printed money (and the parallel, unvoted expropriation of dollar savers).
The government = taxpayers ultimately. So if the government is “the only entity that really profits from this print-driven casino-fication,” then it’s actually the taxpayer that benefits, is that what you’re trying to say?
Didn’t mean to rile you up, and I’m still not quite sure what the disconnect is. Cas127 captured my thoughts nicely. The larger point is that the fed doesn’t seem to care that millions of people have been priced out of buying a home and more and more people also become homeless (or “unhoused” whatever the term is) as a result. Yes there are other inflation indices and very well covered here (and appreciated!), but if the fed doesn’t care and lowers rates anyways (and slows down QT, per their dot plot and public statements, also seemingly taking rate hikes off the table), we’re stuck with the inflation and the asset holders get bailed out again and again.
I think when Cas127 refers to “government” he’s referring to the political class just looking to get themselves re-elected and take as much from the system as they can. Handing out tax breaks to their special interests like candy and running up the debt without a care for future generations. (Just my interpretation).
Let’s say wages go up 5%/year and housing prices go up 3%/year, on average, over the next 14 years. That would bring the inflation adjusted cost of housing down from 8x income, to a mere 6x income. So, that addresses the price side of shelter costs. Now, let’s talk mortgage interest expense, and the yearly inflation of taxes, insurance, and maintenance….
So lets say wages go up 4% a year and houses go down 4% a year. It doesn’t take that long. You’re hung up on house prices always going up. They’re not. Prices of existing homes stopped going up in June 2022 on a nationwide basis. And prices of new houses have dropped a bunch already.
To see what can happen with real estate, look at CRE which has been blowing up just fine for the past two years. And massively so. Investors and banks are taking huge losses. Developers are having the hardest time getting funding for anything. Refinancing many maturing loans is nearly impossible because lenders refuse to do it at the amounts needed to pay off existing loans. This is a HUGE mess, and we’ve been talking about it here for two years. But you can’t lose money in real estate?
The ideal scenario would be wages going up 0% per year and housing prices going down 10% per year for 4-5 years. That would fix a lot of problems in the US economy.
There’s something called “money illusion”. There should be a “real estate price illusion” added to the pantheon of human fixation. AKA: cognitive bias.
If inflation gets to 6% or 7%, the 3% house price inflation means prices are going down 3% or 4% a year. I think we are on the same page, but in an inflationary reference frame.
But I hear you though. Prices fell markedly for years in 2008 and it is likely to happen again.
@HowNow,
I assure you that over the 14 year time frame I outlined, home prices will go up averaged over that time frame, yes, even from current nosebleed levels.
The more relevant things are that:
1. While it is true that NOMINAL house prices have gone down maybe 4 years in the last hundred years, INFLATION-ADJUSTED house prices go down maybe four or five years in twenty. Think 2008-2012.
2. When you figure REAL interest rates, rather than nominal rates, you can see that there is a rather large affordability cycle.
I expect inflation to stay around 6% for the next 2-5 years, because I do not expect the federal deficit to drop much below $1T per year any time soon.
The Fed has an ugly choice: Juice the economy by holding nominal interest rates below inflation, or try to bring real inflation up to 2% while risking some ugly unemployment numbers.
Decisions . . . Decisions
Fat fingers:
I meant to say “bring real interest rates up to 2%”.
Free Bear was a San Francisco punk band.
Holy random references, yeah i remember that band. Tommy Guerrero played bass I think. Check out his solo stuff on guitar, pretty cool. Met him once back in the bones brigade days after he won a contest, guy exudes cool.
haha by this definition, I guess every household that bought in SoCal in the last 3 years must be insane or close to one layoff away from slaughtering each other. I know thinking about housing price and having to pay insane money for very little makes me depress everytime..
“Fascinating: “Prices that families pay” when they buy homes “can affect their overall well-being.”
Sorry for this comments but even my dog understand this:
“Fascinating: “Prices that families pay” when they buy homes “can affect their overall well-being.”
Yes, high prices mess up people’s well-being. The Fed finally gets it. Even my dog understands that.
Since 88% of all mortgages are agency backed, all the FHFA has to do is roll back the conforming loan limit to 2019 levels, and then let market forces bring down prices. There truly are easy fixes to this problem, but bottom line, those people holding appreciating assets aren’t willing to give up their gains. No one thinks out the long term consequences of their actions anymore. Showing egegious disrespect for the under 40 cohort won’t end well under any scenario.
“Showing egegious disrespect for the under 40 cohort won’t end well under any scenario.”
LOL, the BS and lies people are trying to post here and elsewhere about boomers is often outright bigotry. I now delete nearly all of it, just like I delete antisemitic posts. This BS has gone waaaay toooo far.
Typo — the under 40 age cohort, not 49. And I’m not talking about the upper 20%, but rather the lower 80%. You know… the overwhelming majority.
I bought a junkie rancher in Northridge, Ca for over $730,000 3 years ago and am trying to get over it, I understand how high prices can negatively affect your well being. It’s now worth $850,000. Go figure.
Why does this article bring out the silliest comments??? There are already a whole slew of them here, and we just got started. Also see below, LOL
Because your articles are controversial but interesting and most people are not finance and economics experts. So they write dumb comments to be funny or insulting. I see this on every financial article I read. Play stupid games, win stupid prices. Most readers are clueless to reality in financial markets. Linked in and SA authors get the same… let it go.
Most people only want to talk about their gains(wins)….not their losses(mistakes). Nature of the beast.
I have had a rental for 18 years. Low income rental neighborhood. Very little margin.
I bought it in 2002 for $58k. During the HB1 it rose to $78k. I should have sold. There were lots of subprime foreclosures in this neighborhood from 2010 to 2014 in this neighborhood. You could buy the houses for $40k but they would take $30k to renovate and still only be worth $50k. So price went nowhere for years. Wife wanted me to sell. I said….for what…$40k. I told her this was rock bottom. Luckily, rent never really dropped even though price dropped 30%. Afterall, where else could you rent a 3 bedroom, 1 car garage on a big log for $600 or less. But if you wanted to buy a house here on a 30 year loan, you were looking at $350/month house payment. LOL
Anyway, prices got back up to $60k by 2018. Thus, it took 16 years for $k of price appreciation. Thanks to the pandemic, it is probably worth $140k now. But I had a tenant trash it 4 years ago and it cost $40k to rehab. So after 22 years of owning this rental, I have a net operating loss of $20k because of crappy tenants.
Tenants over the years have paid off the mortgage so that is a plus. But from a cash flow perspective, this has been a negative asset and looking back….a waste of time. I will make a little profit when I sell but I am holding on as I still think this house goes to $180k which would put it at 3x local median income.
Needless to say, there are still some regional bargains. I get calls and letters weekly from investors to buy this house.
What it’s worth is an objective discussion. Sounds awful, I’ll give you 350.
An asset is only worth what a buyer agrees its worth with the seller. It is the buyer that brings money to the contract and Money buys a lot of options for the seller in how they will spend it.
You won’t believe this but the ask price for real-estate has the Agents fee built into to it. This knowledge is a pry bar when in negotiations, along with faults and defect of a building inspection.
In 992I brought a new, never occupied display home off the bank for the cost of the asking price of the block of land across the street. I was unconditional no finance.
“worth $850,000”
Actually, it ain’t worth 850k until you actually sell it…no matter what the Zillow Zoomcaster (or whatever it may be called) says.
Just ask those pyramided housing “millionaires” of 2007 who had 3 homes foreclosed on by 2011.
Good (important) point. Maybe this will keep Phoenix_Ikki’s and Lily Von Shtupp’s shirt on. If they weren’t paying attention when a few of the several housing busts took place, maybe they’ll trust your observation.
Another variable is wage growth vs a fixed rate loan.
One third of your revenue becomes 1/5 after 10 year if you get a 4% wage increase each year.
Applicable either to old or new loans, if sustained inflation is a boon to fixed rate indebted working homeowners.
Edit :
One third of your revenue as mortgage payment becomes 1/5 after 10 year if you get a 4% wage increase each year.
Let’s see – 46% of homeowners live in the same home for 6-10 years and 35% for 10-15 years. It’s going to be quite a while before high rates meaningfully impact the housing market.
The fed’s policy clearly forgot to look at some basics facts in the real estate industry. They also failed to engage their brains by thinking folks are dumb enough to trade a 3% mortgage for a 7% mortgage.
Because of low mortgage rates the payback from refinancing and moving will be much slower. I wouldn’t be surprised to see the average mortgage duration increase to over 15 years for those folks with 3% mortgages.
It is important to remember that about 4 in 10 owner occupied homes across the country don’t have a mortgage with about 6 in 10 homes owned by seniors owned free and clear. It will impact a few people but I don’t see many (e.g over 10% of homeowners) deciding on where to live based on the interest rate on their first mortgage. I don’t think that many “average” college educated families that bought a “median priced” home ten years ago for $200K in their early 30’s are going to focus in the ~$120K low rate debt they have on their home that is probably worth close to $450K today (couples in their 30’s tend to spend more than average to “keep up with the Jones’s” and a homes owned and improved by couples in their 30’s tend to appreciate above average (and WAY more than homes owned by people in their 70’s and 80’s since people in that age group rarely do a lot of improvements to their homes).
CCCB
Seems you forgot to read the article?
You said: “The fed’s policy clearly forgot to look at some basics facts in the real estate industry. They also failed to engage their brains by thinking folks are dumb enough to trade a 3% mortgage for a 7% mortgage.”
The Fed said in this article: So “households in the U.S. borrowed over $1.5 trillion in new mortgage loans in 2023. These borrowers include first-time homebuyers, existing homeowners moving between homes, and homeowners obtaining cash-out refinances,” Jefferson said.
Howdy CCCB YEP. Will the prisoners realize they are trapped? Hopefully some learn about HELOCs and uncuff themselves…..
“They also failed to engage their brains by thinking folks are dumb enough to trade a 3% mortgage for a 7% mortgage.”
Reading the article it seems they’re quite aware of that. It also seems they’re not aiming to convert 3% mortgages to 7%, not sure where you read that, they hope to raise the average with new mortgages from new buyers.
Seems like a very very slow process though and only new buyers doing all the lifting in bringing inflation down with reduced spending, I dunno how well that’s going to work out if 3% crowd keep spending as usual and maybe more if they’re getting raises and collecting interest on some investments as well.
I think you missed the point of the article. It wasn’t about how long it takes for high rates to impact the housing market (they already have), it was about how long it takes for these high rates to reduce aggregate demand and inflation (via the housing market).
The high rates have already had a huge impact on the housing market (see existing home sales and new home prices).
Are the higher rates included in the CPI statistics or simply mixed in with all the other ingredients. Like Prego Spaghetti sauce?
It’s kind of like the price of oil: If the price of oil goes up, then the price of everything goes up (in 3-4 months).
Same thing with the price of loans: If interest rates go up, then the price of everything goes up, after a few months.
“They also failed to engage their brains by thinking folks are dumb enough to trade a 3% mortgage for a 7% mortgage.”
Given the choice I agree that is a bad trade, but there’s lots of folks in the “must sell” category due to a variety of life circumstances.
It would seem so but I have known people, in need of cash, refinanced in the manner that assures their financial destruction, if they live long enough.
A bit lengthy: I was trying to remember what era it was when I heard of farmer/peasants who had to sell their children to pay their debts. I thought it was in the Middle Ages. But I was corrected by the AI system that Google is now employing to improve their searches. Here’s the reply:
“Neither was common. Sons and daughters of peasant farmers usually married sons and daughters of other peasant farmers. I assume you are asking about selling children into slavery to pay off one’s debts. That was more commonly the practice in the Ancient World, I.e. Mesopotamia, Greece, Rome.”
All this to say that creditors and debtors have been at it throughout our history.
You know you are getting a bad deal, because parents would only sell kids that are more trouble than they’re worth.
Germanic peoples sold their children to the Romans as slaves, because they were trapped outside the walls of Rome and starving to death. They were fleeing the horrors of the Huns. Unfortunately for the Romans, things did not work out so well. I guess they didn’t learn their lesson the last time they tried screwing the Germans. I think the story you might be thinking of started with Alaric and ended with the Vandal King, Gaiseric.
There are always some “involuntary” sales despite less than ideal interest rate conditions — the three D’s (death, divorce, diapers), plus factors like foreclosures or layoffs forcing relocation that increase in a slowing economy. Not everyone can choose to sit tight waiting for just the right combo of interest rates and prices.
What is today’s market value of the 3% Mortgage for the lender? If the same quantum Mortgage today demands 7% then someone has taken one H of a loss on the Net Present Value of the original loan.
The value of a “low coupon interest rate” mortgage depends on your assumptions about duration. If you think that the borrower will stay in the house for 7 years, then you would pay more for the mortgage than if you think they will stay in the house for 12 years.
I don’t have my HP12C handy :-( , but the lost interest would be $4000 per year on a $100k face value mortgage. So, you would ballpark it that a reduced propensity to refinance or move would turn a $28000 loss into a $48000 loss.
As always, your mileage may vary.
I should’ve never decided to pay off our degrees and cars. My thought was, it’s the responsible thing for my wife and I to do. But there went the down payment for the house. Now the market is so absurd I have no desire to even participate in it. I don’t want to over pay, deal with the taxes, insurance, and maintenance. Pretty sure we’ll be renting from here on out. This country is a mess. We make 250k a year and have been priced out of the market for years at this point, maybe permanently. Never thought I’d say this in my entire life. Depressing to say the least. Oh well.
Did the same thing, paid off loans after residency ended in 2020. I keep coming back to this website seeking news/ catharsis that I will have a place i own to put my family soon but nope. Wolf keeps telling it like it is. And it will be awhile or never that I will be able to. All my friends that I thought were frivolous and ignored the student loans and high price of housing made out like bandits and are laughing now. I spend a fair amount of time just reorienting myself and reminding myself that having a bunch of stuff doesn’t really make one happy. And that in the scheme of the universe… or humanity… or my life. Things are just fine. I gotta go do some living with my family instead of re-engaging my feeling of FOMO.
I feel ya, I watched the majority of my friends most of whom make about 50% less than me buy houses with 3% down at the max their lender would approve them for. They have student loans, car loans, credit card debt and don’t contribute much of anything to their 401Ks. It seemed so foolish at the time. Knowing what they make I’m not even totally sure how they afford their payments even at 3%. I paid off my student loan and have no car payment, contributed to my 401k a reasonable amount, waited until I had saved 20% down plus 3 months emergency savings, wanted to be at my new job for 6 months to ensure it was stable, etc all the “right choices”. I could buy right now, but it seems insane to buy something that run down and falling apart for $650K at 7%. So I may never own a home and I have to listen to everyone talking about how they made $100K and that they’re a real estate investing genius.
We now seem to be at a point where the markets reward financial illiteracy and/or excessive risk taking. My roommate who didn’t go to college, was pretty much permanently stoned, and supported himself by working part time for a grocery deliver service made a ton on meme stocks because he thought they were cool – no research, no financial analysis, he just bought whatever everyone else was buying because it was cool.
Yep. Momentum traders. Some get luckly. Most do not know when to stop.
Level 1 in trading is when you make some good/lucky trades and think your smart.
Level 2 is when you make a lot of money losing trades and you cannot believe just how good you are at losing money.
The trick is to not give up, learn from level 2 and try to move to level 3 if you still have any money left.
Level 2 is you make a lot of trades that lose money and you are amazed how good you are at losing money.
The government is bound and determined to turn the story of the Ant and the Grasshopper on it’s head. Financialization to the moon, baby!
correction: “made 100K on their house”
Your comments here reminds me we need a support group for people like us, the non-FOMOyers, then again maybe I am doing too much wishful thinking but in the back of my mind, I am always thinking of that analogy of when the tide goes out, you get to see who’s swimming naked, at least that won’t be us. If that time does come in another multi-verse perhaps..
There’s also another important point about lack of moral hazard in our current financial system and how that can wreak havoc to others that are prudent and trying to do the right thing…
“I am always thinking of that analogy of when the tide goes out, you get to see who’s swimming naked”
That happened in 2008 crisis. I pray it happens again. I too feel like a schmuck for having done the responsible things in life, paid off my student loans, paid off cars, etc. This country used to be about personal responsibility but has changed, and I’m not loking it one bit. The pendulum always swings to both extremes. I’m hoping it swings back to rewarding the responsible soon.
You are in a support group, PI.
Good lord, some of the comments on this site are just insufferable. Stop whining and move to a place where you can afford a better standard of living. If your residency is done and your loans are paid off, you can probably get a job anywhere you’d like. Either you live in an expensive city or you’re terrible at managing money (or both). But those conditions are correctable. Just move. I was hopelessly stuck in the L.A. area where I and my wife made decent money, but couldn’t comfortably afford a bombed out shack near terrible schools. So I got a job making the same money in Albuquerque. We live in a nice house on a 1/4 acre corner lot in a great neighborhood and we can comfortably afford it on just my one income. My wife is now free to focus on our son instead of working herself into insanity to pay daycareless workers to raise him. And his school is amazing. It’s leaps and bounds nicer than the dumps I went to as a kid. Moving was the best decision I’ve ever made for my family.
It’s been a little while since I’ve commented, but your pity party was just too much for me to resist. It’s that bad. Find a more affordable city that you like, pick up an abundant healthcare job in like 15 minutes, rent for a little while if you need to, and then buy a house that you like within your budget. Don’t get hung up on timing… As Mr. Munger once said, “The time to buy a house is when you need one.” Even if you overpay a little, don’t worry. The money printers never really stop, so whatever today’s price is won’t seem like a big deal 5-10 years down the road anyway. If the price goes up, great. If it doesn’t, then you still have an asset that you’ve paid down a bit. At least you won’t be waiting your life away. This ain’t rocket surgery. Geez.
Even Detroit is starting to get net in-migration (for the first time in 66 years or so) due to those dirt cheap houses. Houses too expensive where you live? Then look elsewhere.
Optionally, buy 2 houses in Oklahoma and rent them out while renting your place in LA or Brooklyn. The rent on the rentals can pay their mortgage while enjoying both the appreciation and a decent life in the big city.
“Good lord, some of the comments on this site are just insufferable. Stop whining and move to a place where you can afford a better standard of living.”
Took the words out of my mouth. If they can’t live in San Diego life is not worth living?
Heff,
Not only “in San Diego,” but it’s gotta be my “dream house in my dream neighborhood in San Diego.”
Lots of sour grapes in the comments.
I dunno – I sympathize with wanting a house, but I make 50k and managed to overpay for one in early 2021.
“I don’t want to over pay, deal with the taxes, insurance, and maintenance”
Ok: but you have to “deal” with those things no matter the price you pay. So do you really want to own? Renting sure is less work.
yes this is the way. worked for us also. a house is not an investment and prices going up are actually bad for the home owner as well. you have to live somewhere. All expensive housing does is raise taxes and insurance making a 100k on a house is the same as increasing your expenses so not actually a good thing.
I’ll take issue with: “Stop whining and move to a place where you can afford a better standard of living.”
For giggles, I looked at my hometown of BFE, Kansas versus the suburb I live in here in Texas. Price per square foot is identical and the lot sizes aren’t radically different; in fact, in many cases, they’re pretty much the same. My hometown, BFE, doesn’t have anything going for it in terms of high paying jobs and is mostly propped up by AG and service sector stuff that doesn’t pay much. (to wit: the median household income in ’22 was 55k)
But you mean to tell me that the house in town is 350k+? It seems scary to me when two places 500+ miles apart have the same housing prices and one has an actual reason for the pricing (demand, ostensibly) versus the other. It’s become unmoored from geographic location, amenities, taxes, and industry (in terms of jobs to support the pricing). I welcome the high interest rates and choose to sit it out while I watch the drunken sailors keep drinking. At this point it’s monkey see, monkey do in the markets and is purely cynical speculation.
AngryMilennial,
You might want to expand your search beyond two cities if you want affordable housing.
In fact, you might want to expand your search beyond cities in general. They’re usually overpriced – although the above commenter mentioned Detroit having cheap homes.
“Insufferable”, yes. Move. If being able to tell stories about celebrity sightings, tolerating insane levels of traffic, and paying for everything through your nostrils is worth indentured servitude for an “effin” house, then suffer.
There’s more to life than weather and living within ten miles of a celebrity or godforsaken influencer.
Appreciate the insight above. We have a great community of humans around us that would be difficult to replicate. So HCOL It is for us… for now. So yea truth in I wouldn’t feel the desire to process the new cost of things if I moved to a LCOL area. And whining accomplishes nothing so apologies to get ya worked up. I like my community and hope to make it better not just for me but the people we love in it that are having a difficult time making things work. Maybe we all just move to a commune together somewhere cheap and stop paying for clothes and run wild naked.
Howdy Forever Renter. WOW. 250 K a year? How long has that been going on? Save any of that or spend it all? SAVE SAVE SAVE or become Debt Free????
$250K and can’t afford a home? Seriously?
As a business acquaintance once said when we were discussing an expansion of his facility: “Man, you thinkin’ way too big”.
Most of us geezers played the property ladder game. First one wasn’t all that and a bag of donuts. Second one was a step up. Third one was the trophy…. and then the fourth one? In our case, it was smaller, fewer (but larger) rooms, and ambiance.
I doubt that many bought their dream “my homies are gonna be impressed” house right out of the box.
Howdy El Katz. YEP. Purchased my first POS house at age 20. Friends would not come by because it was a POS. No friends and 30 something houses later. Life is good. Did not move that many times but HELOCed my way to prosperity. Hear that 3% ers?????
$250k income is barely adequate to buy a home in many locations.
In Seattle suburbs, a plain home in a decent school district is at least $500-$600 per square foot. A 2000 sq/foot 3 bd/2 bth starter home goes for about $1.1M. If you want 3000 feet, it’ll cost around $1.6M or so.
That’s 4-9x gross income for something old and plain.
I think the best advice in these areas is to rent, not buy, otherwise you could lose several years’ pay if/when home prices decline. If you need or want to buy a house right now, I suggest moving to a more reasonably priced location to limit loss potential. The goal is to provide financial security for your family, not fund somebody else’s retirement.
Of course, opinions will vary on the direction of RE prices, particularly when the Fed insists on pursuing a soft landing via years and years of elevated inflation.
Decision-making has become difficult, if not arbitrary, as a result of monetary and fiscal policies that foster moral hazards.
Remember that the property ladder game is zero-sum. It’s like telling people that you beat everyone at Monopoly and so they should too.
“Monopoly”, the game, was invented by a socialist who wanted to show that as players became more greedy, they would ruin everyone else. Here’s an entry from Wikipedia:
Monopoly is derived from The Landlord’s Game, created in 1903 in the US by Lizzie Magie, as a way to demonstrate that an economy rewarding individuals is better than one where monopolies hold all the wealth.[1][5] It also served to promote the economic theories of Henry George.
I am a landlord and have helped many a resident buy their first home. Needless to say we don’t overcharge.
I always tell those who are looking for a first home to look at duplexes to four plexus because you can get conventional financing and let the resident pay some or all of the mortgage. Plus all the deductions you receive are really nice to reduce income taxes. Also, your first purchase is rarely your last and your rental property becomes part of your retirement. Think out side the box for crying out loud.
“That’s 4-9x gross income for something old and plain.”
@Bobber,
You’ve hit the nail on the head. Homes are 4x income for the top 10%, and 9x income for the lower 70%. Go back 50 years, and the housing situation wasn’t this bifurcated.
Most of the people here have never seen an environment with higher for longer interest rates. Every asset was a winner thanks to the Fed’s 40 years of declining interest rates. Almost anyone who bought or speculated was a genius. Now days you better take a good look at capital.
You have my sympathy and I am more or less in the same boat. Difference is, I am not priced out and have more than enough for down payment but simply doing this little thing call buyer strike (purely by choice) which apparently majority of people in SoCal can’t seem to wrap their head around as Wolf pointed out before and also as seen by many commenters here complaining about price and yet still try to outbid each other…
Plus part of me as depress as it can be at times, still can’t shutoff the logic part of my brain to accept the fact that you can do a half a mil down payment and still pay $8-9k a month (mortgage, property tax, insurance..etc) for 30 years for a run of the mill house, that’s a tough pill to swallow…call me stubborn.
That’s me as well. But it has gotten somewhat better now that I am at least collecting 5.5% risk free on that down payment. It has also made me less interested in buying a house.
Same here. I’d rather have my money earning 5.5% than to pay for some overpriced sht shack money pit.
The people who bought my 1300sqft home from me in 2019 are paying obout $1100/month right now in just property tax and HOA fees. Meanwhile, I’m paying $2300/month right now to rent 1000sqft, living 3 miles from the beach, in what is arguably the nicest place in the country. Who’s the sucker?
“Pretty sure we’ll be renting from here on out.”
I thought the same thing when I was in my 20s-30s. If you’re younger than 40, give it some time…as in a decade! A lot can and will happen. Too many young people wanting to buy homes RIGHT NOW sound like 25 year olds saying “I’ll never find a spouse!” Come on, check back in when you’re 35.
People I know aren’t impatient so much as nervous. We’ve been watching this bubble growing for like 15 years with no end in sight. The expectation that things will only trend upward is a lot more tenuous in our de-facto centrally managed economy.
I also know plenty of people who were afraid they’d never find a spouse in their 20s, and we’re now in our 30s and 40s without any luck. You see it in the birthrates. I don’t think the old rules apply anymore. There are all kinds of interesting theories as to why, and many whole books written about it. I think there are plenty of things that could be done about it but following the status quo isn’t one of them.
Don’t worry, you’ll be able to afford a 30 year mortgage just a few years before your income disappears?
Sounds like a sound decision. Debt becomes a master.
Why the doldrums? Quarter mil a year in income should position you quite handsomely in just about any market minus maybe Malibu, and it’s gross there anymore anyway.
$250k in a HCOL area is not that much when you consider taxes, sales taxes (like double taxation) retirement, savings and healthcare.
And rent prior to buying is high so savings isn’t much.
For those that don’t live in a HCOL area it can be hard to fathom.
And yeah, you can rent a dump in a dangerous area but why? For a chance for a house one day in a not so dumpy area.
OP should just rent something decent and not worry. Owning houses in HCOL areas often mean owning something with deferred maintenance as the original owner aged out.
I’ve moved/lived all over the US. HCOL to rustic little armpits in FOC. Living in Austin last 16 years — which is overpriced as hell but still…good. All to say, I think I have a pretty reasonable vantage.
$250K annually is solid remuneration for any jockey. Live beneath your means a few years & then gradually move into a more comfortable band. Money isn’t the problem here — it’s the markets that are the problem. Be patient and let the jackassery boil off a bit more. You’re doing damn’d well!
Don’t forget that you have to make that $250K for 30 years with zero lapse in employment
Exactly. I’ve been making that much for the last two years. My first thought was to pay the debt off while I knew 100 percent for sure it could be done, while stashing some cash on the side. So I did it. Three degrees and two cars between my wife and I cost a lot of money…. The cars are modest. I literally buy clothing from Walmart and Target.
Who wants that debt hanging over their head while maintaining an overpriced depreciating asset? Apparently a lot of people do from the sounds of it.
In regards to the move comments. No, I’m not going to move. Mainly due to the fact my skill set and occupation is heavily needed at my present location. Long term, this provides me with good employment opportunities should something unfortunate happen. Ask the WFH folks who moved away from Silicon Valley and bought homes how they feel after a layoff. Plus, lower cost of living just means lower pay. Home values are up across most of the country.
Yes, I will sound insufferable to some people. But at least I’m trying to be responsible, reasonable, hard working, and patient. So maybe the people (older folks in most cases?) who are griping about me complaining should be thankful some of us actually still try to behave responsibly for crying out loud. Btw, back to work. Thanks for the replies.
At age 25 I experienced 18% mortgage rates and also thought I would never own a home. 5 years later I bought my first home with a 10% mortgage, refinanced it twice and fully paid off the loan years before it’s maturity.
This has all happened before… An average person will experience 10 complete business cycles in their lifetime. Your frugality will be rewarded. You are doing the right thing
“Purchase prices that are high can mess up a family’s “overall well-being?””
(… fewer kids, having kids later in life, delayed household formation)
unless said family is in the FIRE sector.
“Purchase prices that are high can mess up a family’s “overall well-being?””
Most peeps are payment buyers. We never were. We might have “underbought” or bought an ugly ducking (as they call them “good bones”), but 100% of the time (good economy and bad) we came out at least financially alive.
High asset prices are the principle side effect of QE, the reality of MMT.
I think that Matt Taibbi described Stefany Kelton’s understanding of monetary authority as a chimera was insightful, not spiteful.
So…where was this ‘concern’ for the housing market during the decade plus the FED was unnecessarily (and illegally) loading up on MBS.
There have been more and more indications that the Fed is coming to grips with the issues caused by its prior monetary policies.
Tom Hoenig will have the last laugh.
Hoenig was seated at the Fed’s table for years. I heard him say the table discussions always focused on tackling immediate issues, with hope of tackling long-term issues later. It’s this continual procrastination that allowed moral hazards and financial instabilities to thrive. It’s no wonder stock and RE prices are at insane heights, relative to income/GDP, to the point where asset prices are stoking elevated consumer inflation.
They refused to accept a small recession earlier, so now they’ll have to deal with a bigger one at some point, unless they plan to inflate until the entire economic and political system buckles.
Wolf,
Other than more aggressive MBS QT, what options does the Fed have to force housing prices down?
The Fed cannot “force” anything. It can raise or lower its policy rates, and it can increase or decrease its balance sheet, and hope for market reactions.
@TulipMania I think that’s the wrong question. A better question would be “What options do the financial authorities have to stabilize the economy?”
The Biden people (Treasury Department) mainly want to have the voters stop noticing inflation long enough to get Joe re-elected. Congress is similar.
As Wolf points out, the Fed has control over short-term interest rates, and a modest amount of influence over 10-year rates. That’s it.
Right now, the fact that most major parameters in the financial and monetary system have a 3-18 month lag means that there is pretty much nothing they can do to fix this mess before November.
“The price you pay for your house is more important than the price you get for it when you sell.”
That is fascinating….I will be pondering that gem for awhile.
That’s not a quote from the article but from our own imagination.
Most wealthy person I know always says “you make money when you buy, not when you sell.”
And was always planning his exit in a buy even before buying. How long and difficult a safe may be for example.
I’ve heard the same “you make your money when you buy” tenet for decades. Both in real estate and the car biz. However, it’s the antithesis of the “what’smystrokes: mentality often displayed by the drunken sailors.
Read Hussman, this is his main thesis about any investment. The price you pay fixes your long term rate of return when you sell.
Search the phrase ”you make your money when you buy”… AKA “buy low sell high”.
A second verse
A home is different than a house. One cold and foreboding, the other warm in the glow of love.
My thoughts exactly!
I overheard just last night “I own 3 homes in that area.”
I questioned to myself: Are they homes or houses?
We have a LOT of “dark houses” in resort country.
Sometimes I wonder if getting an education means much. Either you have it or you don’t.
Decades ago a neighbors son who was an attorney told me that putting up a really nice looking fence around my backyard had reduced the value of my middle class home……..at the time I lived in an area where everybody had a fence.
This fed governor must have been drinking the same kool aid. By his numbers we just have to wait five to ten years for a good number of homes to be bought so folks will be paying 7% mortgages……. for monetary policy to work. Not much to do with the demand for housing…..and it’s price.
No wonder the governors seem to have a speech every day………there is no end to the crap they can create. Of course if I were getting paid 10 grand for a 30 minutes spiel I guess I’d come up with something too.
This is one factor why inflation will blow out in the coming years IMO.
Home prices aren’t going down anymore they’ve reversed losses in most markets and are now rising again
Wolfs chart above does show a double top but also shows a higher low setup.
Commodities are blowing out, bonds looking like they’ve bottomed or close to it, stocks blowing out (although with neg div)
Fed blew the soft landing last December with rate cut talks.
Throw in 33 trillion in debt, 3 terrible Presidential candidates, and a world on the brink of war
What could go wrong lol new ATHs baby🚀
As AI slowly takes hold over the coming decade or so, wealth will be further concentrated in fewer hands. Where is the money going to come from as the number of available high wage jobs drops year by year as home prices increase?
If no one makes any money, they cannot spend it, and so the wealthy will not get it. Simple as that.
A helicopter could crash?
“Fascinating: “Prices that families pay” when they buy homes “can affect their overall well-being.”
Indeed, but for the best, its the only way to keep up with inflation for most folks.
Zillow is showing that my home that I paid $770k in 2018 is now worth $1,355k that is $585k in my pocket, more money than I will ever save in my lifetime working as a forklift operator in this damned warehouse.
In lots of cities, home prices are down bigly already from the peak a couple of years ago, and in addition to the home losing purchasing power due to inflation, it then lost market value due to home price declines. Double whammy. People there said the same thing you just said. And then it happened. Home prices can sag and stagnate just fine for years and decades on a market by market basis.
Yes, a tiny sliver of metros are losing value, including the one you live in. So what? The fiscal dominance will drive housing prices higher almost everywhere. A $3+ Trillion/year forcing function cannot be overcome.
Look, do the math. Nationwide prices have been roughly down to unchanged since mid-2022. For prices to balance that way, the down-markets and the up-markets must be roughly in balance. Now Miami is starting to give. One by one.
Is it in your pocket?
Or just on a computer screen under net worth?
And if it is the only way you keep up with inflation how are the people that don’t own houses doing?
“$585k in my pocket, more money than I will ever save in my lifetime”
Try paying for gas or groceries with your theoretical dollars of home equity appreciation. Its not a gain until you sell.
The real investment of buying a home is that you don’t have to keep paying rent into retirement.
$770K house…gotta say, that is one helluva forklift gig.
If I had 585K in my pocket, I might have a touch of irrational exuberance and spend more like a drunken sailor.
In that case, the price I paid and the ethereal gain would affect my short term well-being.
Is it in your pocket? What about RE commissions and cap gains taxes?
Nevermore, there is NOTHING in your pocket until you sell.
Brilliant observation, if they make housing so expensive no one can afford eggs the price of eggs will drop and people will be happy again!
A simple law the Fed can lobby for to permanently end inflation: 99% of any income above current rent or mortgage payments must be delivered as a tip to one’s dedicated landlord or lender.
This should dramatically reduce consumer spending and finally get inflation into the 2% zone.
I see another nobel in economics coming their way.
You misunderstood. They’re NOT making housing more expensive. They’re making interest rates more expensive and houses cheaper.
Folks also manage their home purchases with smaller homes which is the trend we see. Also I imagine Gen Z are now buyers of homes as they form families as well just not as large as millenniums generation . Demand for homes is high in my opinion just not the larger homes . Builders are adjusting . The take I get from the Vice Chairman is higher for longer until housing too starts stabilizing. I think an area that could be influencing the trend for higher demand is the job creation from manufacturing, immigration , and migration of people from rural areas continues which increases demand for homes in the country where these populations are growing . Population growth is not even across the USA . Not even at a state level can one measure the demand . There are areas in Oklahoma that are in big demand yet the state probably is pretty flat on jobs creation .
“Folks also manage their home purchases with smaller homes which is the trend we see.”
Exactly why I bought a 960sqft ranch.
I grew up in a 900 square foot ranch…. 4 people and one bathroom, sadly with a tub only.
We survived. A house is a house. The people make it a home.
One bathroom can be tough at times. Fortunately the basement utility sink doubles as a urinal.
Urinals are in the eye of the beholder.
MM,
I actually put a urinal in a closet in my old house’s basement. It took a 3/4” plumbing line, but it was really sweet.
I intend to do that with my current house as well, but this one came with two utility sinks…
Wonder if more modest offerings and frugal strategies will be represented on the silly tv home shows before too long. No more granite countertops, 1.5 bathrooms, what a concept.
Population is growing in Florida but rent and house prices are dropping across the state.
There is a reference in the article about houses as an investment. They may be a speculation, they may even be a trading vehicle, but they are not an investment. they are a depreciating asset and they have the built in drag of mortgage costs, insurance costs, and tax cost as well as endless upkeep cost.
Even Warren Buffett has indicated he would have been money ahead had he rented all these years, and I would agree with him.
Do not agree. If you are a renter you are still paying for all of the above plus profit for the owner. The secret is to buy a home with a mortgage payment no higher than rent. That was my strategy 45 years ago and we have been mortgage free for the last 25 years. Plus, some extra property we own has a rental cottage that pays all taxes and insurance for that one, and also on our main home. Planning on buying another place as soon as it comes up for sale.
And the feeling of owning a home is quite wonderful in many many ways. It is a home, not just an asset.
At least someone here was smart enough to get a 20 year instead of a 30 year mortgage. Ten extra years of mainly interest payments stinks.
Get a 30 year, then pay extra principal to make it a 20. It gives you extra capital in the house you can HELOC if you need it, reduces the overall interest you pay over the years, and gives you the ability to drop your payment to contracted level if you have to.
Yes, it’s a home-and there is value to that.
It’s just not an investment. That’s all I am saying here. You are mortgage free, but your tax man has a superior position to you. Your insurance man and handyman are still lurking. Investments don’t have that kind of continuing burden.
Investments don’t keep the rain, wind, and cold out. Walls and a roof do that.
“ The secret is to buy a home with a mortgage payment no higher than rent”.
Great advice, but in May 2024, not possible.
Under normal markets the cost to rent vs buy are close.
At some point the market will adjust back toward long term averages. When??
“The secret is to buy a home with a mortgage payment no higher than rent.”
Keep watching Wolf’s awesome chart of OER vs house prices. They intersected from 2011-2012.
When it happens again, it is time to buy.
There’s still a 40% difference today. House prices need to fall 20% and rents need to increase 20%.
The crazy thing is this…in the grinding bottom from 2010/11/12/13 when it actually made sense to buy a SFR with 20% down and the rent would cover the payment …it was almost impossible to get a buyer to buy. First and only time I’ve seen that happen in Hawaii, that rent would cover the mortgage.
Blood in the streets and all that…
Yes. After 4 years of plummeting home prices from 2008-2012, Fear Of Jumping In (FOJI) dominated homebuyer thoughts and actions even though it made financial sense to buy. Who would want to buy a house when prior years dropped 10% per year and millions had foreclosed?
Housing Bubble Blogs predicted no end to the free-fall.
There’s still too much FOMO today.
Anecdotally, we bought a house in 2014 but I experienced severe fear.
What if I lost my job like 25% of my co-workers did at the time? Some of these co-workers were so underwater and over-extended that they had to foreclose after not being able to find a job for over a year. Some raided their 401Ks and took the tax hit to not lose their house. They couldn’t refi without finding enough cash to achieve the 80% LTV.
Even though house prices had fallen to 2002 levels(10 years of no gains), buying a house was very scary.
Read the book “Nomadland” to get a sense of the fear at the time.
I don’t agree. At all.
Property for property? My rent would have been close to parity with the mortgage…. and, presently, I’m living in a “free house” – paid for, in it’s entirety, by the last non-investment, consumable, depreciating asset we owned.
You just have to learn how to effectively manage your money…. and know how not to get fleeced when something goes haywire. Just about anything you buy is a depreciating asset. Even your spousal unit’s diamond ring. Yesterday’s lunch. Your shoes. The car in your driveway.
It’s just a matter of priorities. I like having a fixed *rent* on my dwelling. I can assure you that you can’t rent a home like this for what we pay (all in, including accruals for future broken stuff). Even if i invested the original price in 5% t-bills, I’m still ahead because this dump has appreciated in market value and the delta between what this would rent for and what I pay is a zero sum game.
Your mileage may vary…. but not everyone who buys a house vs. renting is a rube.
(PS: Buffett is a cheap azz…. lives in his original house, drove an old Caddy until the wheels fell of it, and had a flip phone up until the point he couldn’t replace it – or so the legend goes).
Primary residence is for sure an expense, not an investment, a rental property can be an investment.
You do realize that real estate is not housing, but land…
@Louie I don’t like to look at a primary residence or even a vacation home as an “investment” but that does not take away the fact that more often than not they go up in value over time more than people pay in mortgage interest greater than market rent, n taxes, insurance and maintenance cost resulting in a positive return on investment over time. P.S. Many people that bought Bay Area rental properties over the past 50 years have had a better return on their investments than if they bough Berkshire Hathaway…
Buffett is brilliant but some of his personal values… He had a lot of money, even early in his marriage, but kept his wife on a small weekly allowance and had her use a drawer in a dresser as the crib for Howard, their first son. He didn’t want to buy one.
Correction: I posted something I remember reading about in “Snowball”, Buffett’s biography. Slightly different: He used the drawer as a bassinet for the first child. He rented a crib for the second child.
Wrong. The tax code makes homes the most attractive investment on the planet at the moment. That’s the problem the tax code is FUBAR.
winnah winnah chciken dinnah!
“The tax code makes homes the most attractive investment on the planet at the moment”
I’ve dealt with many folks that are serial flippers and bank that $500k tax free every 2 years or as often as possible. it’s a very lucrative lifestyle.
By *slowly* lowering (or raising) the interest rate, mortgage rates are more likely to trigger transactions, leading to more effective policy and quicker overall outstanding mortgage rate adjustment. By increasing rates too fast the Fed messed up. They ended up locking in a bunch of homeowners who would have otherwise been fine to trade in a mort suitable home if the mortgage rate was only a point or two higher. Now what the fed has created is two groups of haves and have nots: low mortgage rate folks who are still spending like crazy, in homes that don’t fit them, and house poor folks without any money to spend. Or folks who lost the housing lottery by having to give up their low rate mortgage for one reason or another. I believe this rapid increase in rates was a policy error that backfired and led to a lot of housing market inefficiencies that will continue for the foreseeable future.
But wasn’t there this little problem called inflation? There is more to life than mortgage rates.
This is the best comment I’ve read in a long time ANYWHERE. You hit the nail on the head.
“There is a delay between when mortgage rates rise in response to higher policy rates, and when the total amount in mortgage payments in aggregate rises as more mortgages with 7% rates make it into the averages.”
to the fed, who could argue with that logic!!!!!! in the same token, a higher policy rate of say 6%-7% should accomplish that task even more effectively! No? 🤣❤️ :-)
6%-7% policy rates might crash the labor market and then lead to lower interest rates. Wall Street would love that. They’ve been praying for it. Easy does it. Keep the rates higher without crashing the labor market so that rates can stay higher for longer.
C’mon, Wolf, that sounds like something Barry Sternlicht would say right now as he’s begging for rate cuts. We need BIG rate hikes, and soon.
Depth Charge,
We all know that’s how you feel. We all know that you want the Fed to collapse everything and burn everything down so that somehow we can rise from the ashes. And you keep forgetting: if rates go too high, the labor market will tank at some point, and then rates will get cut a lot. That’s the last thing you, who wants higher rates, should want.
If the Fed crashes the market, won’t home prices fall because the unemployment rate will rise and there will be a flood of homes hitting the market?
wolf,
please do explain how 6-7% policy rates would/might:
‘crash the labor market’
and
‘lead to lower interest rates’.
seems to me, neither of these is a direct consequence BOUND to happen. the subject isnt about gravity’s effect, chemical reactions, or anything with a defined and predictable outcome.
easy does it?
no, easy ISNT doing it. that much is abundantly clear. ‘real life/costs’ is/are the only reference anybody needs to see that.
while i dont share quite the same level of Depth Charge’s sentiment.. it is correct in that NOT ENOUGH was done with regard to the purported ‘fight’ to really get inflation down..
the fed is a big joke.. they show their whole hand to everybody before hand, make nonsensical projections about cutting rates when there is NO REASON to, and generally come off as spineless when it comes to doing what they should be.
there NEEDS to be some kind of ‘shakeup’. not fully scripted theatre as their has been. the market(s) NEED TO feel fear once again. they are laughing and have been laughing for awhile now.
wall street needs a punch in the mouth. not a warm fuzzy hug from uncle fed..
i really struggle to understand how you can argue against this logic, considering your attention to the goings on out there and writing on this site nearly everyday.
n0b0dy,
I agree with you 100%.
The business cycle always has booms and busts, so maybe it’s not that bad of a thing if the Fed does shake up the economy.
so this ‘transmission mechanism of fed policy’ works real fast when the fed cuts rates but not so when they raise rates. hmmm … who could’ve known? certainly not all the PhD’s at the fed.
All this will accomplish is funnelling even more homes to the wealthy. The only thing that will fix the housing market at this point is phasing out investor tax breaks for single family residence home ownership over a multi-year period. The other thing that could help is reducing regulations and fees for home construction. The concentration of wealth is out of control.
“All this will accomplish is funnelling even more homes to the wealthy.”
What is “this”???? Higher mortgage rates for longer? Bringing rent inflation down? Bringing home prices down? What exactly do you mean by “this?”
There is a wage-rent spiral, and anyone under 35 doesn’t have a chance in this game. All cash buyers have gone from 10% of all purchases in 2003 to 32% now, and I promise you that the bulk of those all cash purchases are not by people under 35 years old.
1. NAR less than a month ago: “All-cash sales accounted for 28% of transactions in March, down from 33% in February but up from 27% one year ago.”
2. The year 2003 was after the Nasdaq had collapsed by 78% and the S&P 500 by 50% and a lot of the wealth and cash had vanished, and cash buyers with them. DUH.
3. What plunged over the past two years were mortgage applications and therefore the number of buyers having to finance. What dropped less but still dropped were cash buyers. Because they dropped less than mortgage-buyers, their share increased some. Basic math.
4. How would someone “under 35” come up with the cash to buy a home? What kinds silly nonsense is this? You accumulate wealth as you get older unless you’re born with silver spoon in your mouth. That’s how it has always been. You pay cash for a house when you’re older after you have worked, saved, and invested for decades.
5. Here is the NAR’s chart of all-cash buyers going back to 2008. The rate of last month (28%) is represented by the red line:
Jeff:
Both of my children could be “all cash buyers” on a home into the 7 figures The “cash” would come in the form of either a loan from me or an equity position in the property + their down money. It still is reported as an “all cash” sale, but they can refinance and get me out of the picture within a few months. “All cash” isn’t what most people think it is. Could be a hard money loan. HELOC. Drunk father in a moment of weakness. Spinster aunt with tons of money.
All cash is attractive to sellers. No appraisal hokey-pokey. No demands on repairs, etc., as with a VA or “get me done” mortgage. I sold my sister’s house for $100K less than it should have brought if I waited for a sheep to shear. Why? All cash. No contingency. Quick close (14 days). If I carried that turkey much longer, it might need a roof, the pool could throw ace-deuces, a tornado could have leveled it, a hurricane could have shredded it, plus the carrying costs (without any mortgage) were $3k+ a month. In month 6, I have $18K+ of that $100K back, the proceeds have earned $25K rusting in t-bills, with the added bonus that I can sleep at night. I can only imagine what the 2024-2025 insurance premium would have looked like (it was in FL).
All this cash buying sounds like desperate impulsive gambling. For the past 15 years prior to QT, people have been buying on credit. It was mostly free money, so why pay cash? Now, it’s not so free anymore, but the compulsion remains. So they put all their chips on the roulette table and bet on black. What could possibly go wrong?
When a Dad takes $500K out of 5% CDs so one of his kids can join the list of “all cash buyers” and pay him 5% on the money after buying a home it is not “gambling (especially if the Dad is on the title as a co-owner)”…
These types of family dynamics are toxic to personal character growth and unhealthy for all the parties involved, whether they realize it or not.
I’ll venture to say that people paying cash to buy RE in high-priced locations don’t understand or appreciate the concept of opportunity cost. Cap rates are currently in the 1-3% range, plus there is increased potential for loss. I can get better returns by holding a piece of treasury paper. What brought riches in the past isn’t likely to recur.
But I won’t blame flippers for buying with cash now, as long as they plan to get and out in a hurry. Even flipping is getting risky at these price levels.
Financially you might be better off buying a house with a 30-yr mortgage as an owner occupant. Then, when convenient, become a renter somewhere else, rent your house out and turn the house into income property, getting all the tax benefits that that involves.
You guys are hilarious. All you are doing is driving my point home. All of the sales are currently to those with wealth, not low level workers who desperately need a home they can afford from the fruit of their own labors. Look at the latest quarterly report from the california Association of Realtors, focusing on the “qualifying income” data they present (which assumes a 20% downpayment). These are the wealthiest 20% of the population that can hit those *household* income levels (assuming a 20% downpayment). What are the other 80% that don’t have a rich daddy supposed to do?
“With its monetary policy of 5.25% to 5.5% rates and $1.6 trillion in QT so far, the Fed has been trying to push down demand to remove some fuel from inflation, and that has worked to some extent.”
I am going to wholeheartedly disagree with this. The FED stopped well short of where rates should be, and that is why inflation is now rocketing higher and you see these massive speculative bubbles shooting the moon. All-time highs in all stock indices. All-time highs in many housing markets. Crypto going parabolic with all-time highs. Meme-stocks are back, etc.
It used to be said that the FED was there to take the punch bowl away just as the party was getting started. Now we have a raging mania everything bubble and they are just standing by watching rather than being proactive and raising rates. There is absolutely NO DANGER in raising another 100 basis points. But these cowardly, corrupt pr!cks won’t do it.
DC – but what about all the people that /make/ money from higher rates?
Its a double-edged sword.
I tend to agree with Depth Charge. I don’t think raising rates a little more will tank the labor market. Inflation is out of control, and the market rallied. Inflation is coming down, the market rallies. It’s to the moon for infinity. I see Wolf’s point about not wanting to crash things but I just don’t think we are even remotely close to that with all of the strong consumer indicators Wolf has shown us over the past week and all the newly originated corporate debt.
With current interest rates, someone I know has more than doubled their income in retirement over the past 18 months. That money will go somewhere…. buy their kid a house, send them a check for several grand for no other reason than they feel like it. Or they could keep it invested and let it compound out the wazoo. If it goes higher, it just continues to stack.
The same tale of the tortoise and the hare still applies. Punishing one class of people benefits another. Raise interest rates? Works for them. Depress interest rates and the equity markets go to the moon? Works for them (if they’re diversified). Home prices rise? Cool. Drop? Likely doesn’t matter if they have no intention of selling. No one person’s situation is identical to that of everyone else. Heck, one of my silly piles of depreciating junk has become a 6 figure car… and it’s original (paint chips and all) and bone stock…. it once was depreciated to the point that it became nearly worthless and trashed by the fart pipe generation.
Rant all you want…. most people are resilient and will figure out a way to thrive.
Government spending is the problem now. Like it or not, the Fed’s core rate policy lever will soon be impotent. Maybe they aren’t raising rates because they don’t want to let people see how little control their rate actions actually have, waning by the day.
People say financial conditions are tight but they are not. They have been loosening all year.
https://www.chicagofed.org/research/data/nfci/current-data
CRE has been blowing up just fine for the past two years. And massively so. Investors and banks are taking huge losses. Developers are having the hardest time getting funding for anything. Refinancing many maturing loans is nearly impossible because lenders refuse to do it at the amounts needed to pay off existing loans. This is a HUGE mess, and we’ve been talking about it here for two years. How many more industries do you want to see collapse like that before you’re happy?
While I’m not happy with industries “blowing up” I’m tired of taxpayers being on the hook for every failed industry that’s been mismanaged and for zombie companies that should have been held accountable and let fail years ago. Janet Yellen’s idea that everything that her friends have invested in is “too big to fail” is just another entitlement that is going to be very ugly when the cost comes home to rest.
Investors got wiped out just fine during the bank failures in 2023. Uninsured depositors got bailed out, but not by the taxpayers but ultimately by the bigger banks that have to pay the special assessment to the FDIC. This was very different than the bailouts in 2008/2009, where investors got bailed out.
I’ll guarantee you not one developer/banker has missed a day out on the course, missed a single payment for his kid’s private school, cut back on any vacations, etc.
Now pension funds and IRA’s have likely taken a hit. 2008 deja vu.
Wash, rinse, repeat.
The flip side to the current exuberance will be a forceful downturn eventually, leading to solvency challenges.
Forecasting lower interest rates, albeit with caveats, was not a great idea, unless it was in acknowledgment of the downturn to come.
When house prices are falling and becoming more affordable for the masses, they call it a “housing crisis.” When prices are shooting the moon and putting people out on the streets, they celebrate it. Bankers and their political toadies are a cancer upon society.
Love you DC!
They call it a housing crisis when prices fall because the “masses” usually hocked themselves up to their eyeballs and now they are upside down and can’t manage the HELOC, the second and the purchase payments. Those people also get destroyed. It’s a two edged sword.
We bought a house for my daughter out of foreclosure in 2010. The previous owner had it hocked for $550K…. we bought it for $350K from the bank. Cash. Only an inspection contingency. 30 day close. The *seller* (aka knucklehead) hocked the house to put in a fancy kitchen for his wife, sued his neighbor because the bamboo said neighbor planted took over their yard and he took the proceeds from that and over-improved the yard, then he bought a motor home and a boat plus a pickup to haul the boat….. and lost it all.
So, who was the victim? The bank? The prior owner? Both? We paid a fair price for the house (market plus a tad).
That was the fifth house I bought from a bank / distressed seller. In all cases, the other party was happy to get out and we were happy to get in. That’s how it’s supposed to work. But in order to participate, you have to either have big boy pants or brass ones. We’ve used both. Could have rolled 7’s but we didn’t.
Simplistic “solutions” don’t resonate with most of the world. Too many variables Blaming ‘da Fed or Banksters is naive. If someone showed me a muzzle print on their forehead that proved they were an unwilling participant, I’d have empathy for them. Without that proof of coercion, they’re just a player that lost a game they didn’t understand.
As my Daddy used to say, “If you’re looking for sympathy, you’ll find it in the dictionary between sh*t and syphilis.”
Sure…a player playing a negative sum game on a minefield with moving goal posts, lots of smoke-n-mirrors, ever-changing rules and liars/cheats for referees.
Not everyone starts life with a jetpack and a gold plated double safety net. The types of handsome endowments you humble brag about doling out to your kids are actually pretty rare. $350K cash for a house? Yeah — that’s not the norm. At least none of the kids I grew up with ever had it so soft. They were lucky to bum the gas card from their dads on a Saturday night (and usually felt low-lived for doing it).
For many Americans, the pursuit of happiness is a heart disease-inducing grind through the aforementioned playing field/hellscape. Why do you think there’s such a ‘wellness’ mania right now? Perhaps because people feel a bit sicker & tireder than in generations prior?
Trying to blanket delegitimize a generation’s grievances with a broken system by reframing it as poor game on their parts is myopic at best, and sneery nonsense at worst. You shouldn’t have to be a scheming cut-n-thrust psychopath to get a little ahead in this country — it shouldn’t be a disadvantage.
In the distant past, the Fed used to trigger recessions, which gave people many good entry points to invest in RE and stocks. People didn’t have to worry about the build-up of artificial stimulus, moral hazards, and system-ending financial instability.
The next time asset prices fall, they might not reflate for a LONG time. Politicians and monetary authorities have been kicking the can for 30 years. Things were good, albeit unsustainable, during those 30 years, but will it continue the next 30 years? The next year?
We’ve never seen the system pushed this far with artificial stimulus.
“Fed triggering recessions”. I guess you’re basing this on a Fed reaction to the inevitable excesses of ‘the business cycle’.
Ray Dalio has a good animation of these sequences called, “The Economic Machine”. It can be found on the web.
Depth Charge -Excellent comment
Don’t be intimidated –
Nothing is coming down with the stock market hitting all time highs. The only thing that is happening is increasing the wealth divide and screwing over gen Z. This wait and see approach is just draining the pockets of young non-homeowners and lower middle class. People who feel rich because the stock market is up and they have 50% in home equity are not going to stop spending. The only thing that fixes this is a mild but somewhat longer recession with unemployment in the 5%’s. It’s enough to kill speculation, see some of those vacation homes start to hit the market and cause a bit of a stock market correction but not enough to necessitate going all the way back to 0.
What I wonder is how can people who are supposed to be economic experts be this dumb? They sat and watched 2021’s housing market and thought what, yay I own a home, so I’m getting rich? They just screwed a whole generation.
The amount of home equity one has is not a driver of spending in a high interest rate environment to anyone with an IQ larger than their shoe size. If your pants are that short that you need to HELOC money to buy toys, you have no business doing so and, if you lose, there’s no one to blame but yourself. Those people are the one that will provide the ramp for the Gen Z folks… or the Millennials, or whichever the most recent wronged demographic is.
BTW, the vacation homes appear to be hitting the market. That’s where we live…. among PIPs (Previously Important People) who bought a winter home because they could. A year ago, you could count the for sale signs on one hand. Today? Probably 8% +/- of all homes in this community are on the market. Desirable properties (with a view and zero traffic noise) sell in days (usually to people in inferior locations in the same community) and those that have non-correctable defects languish.
This is all a game. Spend the time to learn it and you’ll do fine – regardless of your age. Think you’re playing a video game with a reset button? To quote Scooby Do: Rots of Ruck.
I was referring to the psychology of wealth. When a person feels rich they don’t feel as inclined to save or be cautious.
MB, imo, you’re giving a very reasonable description of what’s going on. But to think that a “mild but somewhat longer recession with unemployment in the 5%’s” can be engineered is not a likelihood. You’re talking about a near-perfect soft-landing with minimal pain and suffering. I can only imagine that every Fed officer would love to be able to pull that off but never has.
Inflation is just people making choices. Smart corporate CEOs have a responsibility to shareholders to get the highest prices they can for their products. Stupid people make the choice to pay those prices because they think they have to.
Want to get rid of inflation? Don’t look to Fed monetary policy. Raise taxes! Index tax rates to 1% over inflation. Let corporations and people know that if inflation goes up 5%, their taxes will go up 6%! Inflation will end tomorrow. But nobody wants inflation to go away that badly. What would we have to whine about?
Intersting idea, but I wonder what the unintended consequences might be?
I also don’t get why they keep dangling the hypothetical carrot of rate cuts in front of the market, if they want to inflation to go down they need to stop propping up the stock market. There’s a statistic Bank of America released back in 2022 and I’d also heard it during my CPE for my CPA license, once inflation has breached 5%, it’s on average taken 10 years to get inflation back to 2%.
Why all the smoke and mirrors that this is going to be over soon other than to prop up the stock market?
They’re dangling three carrots in front of the market: rate cuts, no change for a long time, and rate hikes. The market just refuses to see the other two carrots.
Based on historical data and statistics, as well as just common sense, they had to know inflation wouldn’t be conquered in just 2 short years. I don’t even understand why there was talk of rate cuts last December. These people are supposed to be the experts, yet often they’re so far out of touch its alarming.
MB:
That’s exactly why they were perpetuating the “rate cut mania.”
Jawboning is a primary tool, more effective and less lags than rates.
No crash desired, only soft landings. A no-landing is a soft feeling.
Also? Election year!
Wait for May to pass, check back in October and we’ll see what the “bubble” looks like in a year.
It still boggles my mind the Fed started talking about interest rate decreases in December, even though they qualified it. It set dovish expectations.
At my house, we don’t pull the ice cream out of the fridge until the kids’ homework is done.
Two words: Election year.
And I’m sure it affected people who were about to lock-in their buyer’s mortgage rate or whether to put a house on the market or wait.
@Bobber, but don’t you do forward guidance in your house? I.e. tell the kids that ice cream is on the menu if the amount of housework to-do comes down enough.
I have a friend in a high growth city. A few years ago he and his new bride tried to put down roots in a new build. They signed, and prices skyrocketed. Three years later she slapped him with a divorce out of the blue then disappeared with a new man. He was then stuck with a big house he can’t afford.
He bought a new smaller house THEN listed the old one, banking on a quick sale and to cash in on $200-300k in appreciation on their now empty McMansion. It’s been on the market for a few months now with no offers in his asking range. He turned down one shy of asking right away. His realtor said he is now being outdone by new builds right down the road because of the builders’ ongoing interest rate buy downs.
The combined mortgages on these two houses exceed his gross (yes, gross. She was the higher earner) income, so he is burning through several grand a month in savings holding both. The clock is ticking.
He’s convinced he is going to walk away with 200-300k in cash for doing nothing productive. Time will tell if he is right. That theoretical appreciation has a lot of sellers clinging to unrealistic expectations IMO, and he is one of them.
Two observations:
Car business allegory: “Your first loss is your best loss”. His greed will eat him alive and he’ll likely lose both houses and destroy his credit in the process.
Second mistake is to buy a house in a new build area. The developer / contractor controls the value of your house until the development is built out. This ain’t rocket surgery. I’d never buy a new home unless the development was sold out. Period. Exclamation point.
To think many peoples financial futures will be determined by whether they could afford to buy in 2020/2021 at 3% vs 2023 or later at 7% is really upsetting. On a $400K loan that’s $1,000 difference a month, $12,000 difference a year. If you assume a 7% market return annually with both people owning their house for 10 years and all other things being equal, person A ends up between ~$120K – $190K (the range is because of various potential tax effects) ahead of person B soley because they bought a house slightly before person B. Yes rates might drop a bit, but I’d be surprised to see them dip back below 5.5% anytime soon.
Their financial future is determined by themselves.
Assume I want a Bentley Continental Coupe. They’re kinda pretty. They’re a tad spendy. All swoopy and stuff. Wonderful leather and exquisite wood trim. However, in order to have one, I have choices to make. What do I give up?
Ditto homes. Or any other major purchase. What are you willing to sacrifice to satisfy your lust? Dunno about you, but spousal unit and I made home ownership a priority in our first year of marriage and that’s what we did. She became known as “Same Suit Sally” and I drove a rusty used car with a muffler that was held on with baling wire. That lasted for a few years, but the rest is history. Ww waited 7 years for our fist spawn.
Contrary to popular belief, you can’t have it all. That’s so 1980’s.
Don’t say it’s unreasonable and I’m “out of touch”. I have two kids… 30’s and 40’s year of age. Both figured it out. It’s all about compromise, sacrifice, and reasonable expectations for your place in life. If anything, I taught them to run their lives like a business. It served my parents (Greatest Generation), us (the dreaded Boomers), and them (I guess Millennials). 100+ year track record (my Father was born in 1914).
Live your life. We’re not all destined to be fancy like.
Nor do we all need to be “fancy like” El Katz. Sounds like you set a positive financial example for your children.
And despite the current romanticizing about the 1980’s, the ongoing theme of “you can have it all and then some” was prevalent in that decade’s culture, and I’m sure it led to many regrettable financial decisions. Remember the “Excess in Moderation” 80’s bumper sticker? And Robin Leach with “Lifestyles of the Rich and Famous”?
I continue to wonder how the current drunken sailor lack of spending restraint will be regarded in the future. How many overspending sailors will wake up one day and ask that profound question: “What was I thinking?”
For most, financial restraint will be learned only by experience – like a cold financial slap in the face. Not from the wisdom of their elders.
Cold – never saw an “excess” sticker (what part of the country?), but: “…he who dies with the most toys, wins…” was common (for awhile, until hubris had its inevitable way) out here in the West…
may we all find a better day.
El Katz, same here. I drove a 2003 held together by duct tape & zip ties, and lived with several roomates in dumpy, low-cost apartments. All of this so I could squirrel away every extra penny for a down payment.
First apartment: spent $50 on a desk & table at the local thrift store. But I couldn’t fit them in my car and didn’t want to pay for a U-haul, so I wheeled each piece 10 blocks down the street in a shopping cart.
Even yesterday, my buddy & I went dumpster diving at the luxury apartments near his place. Scored some barely used chairs and barstools.
There’s no shame in living like you’re poor in order to save up for your goals.
MM – have comfortably-augmented my living standard for decades from the staggering number of goods in our nation that were/are considered mere discards (…some trade skills often handy, here, natch…).
may we all find a better day.
91B20 – Indeed, there are so many things discarded in this country that are still perfectly functional.
I’m still using the Cuisinart toaster oven I got from the dumpster of my last apartment a few years back, and the office chair I got at Allston Christmas in 2016 (?) or sometime around then.
I’d guess 90%+ of what I own came from a thrift store, dumpster, or was a family hand-me-down. I only buy new when I’m buying a gift for someone else.
I love the folks here. If we had a party we would all bring second hand trashed chairs and tables , some bartered veggies, bulk food, and hopefully someone would bring a boombox that they bought from RadioShack in 1983 and we would throw a rager talking about monetary policy.
I still have a nice wooden bookcase that a neighbor left out on the curb for sanitation to pick up some 30 years later. Filled with some nice books too.
You’re in luck, one of my 1099 gigs is doing live sound for bands. I’ll bring something slightly nicer than an 80s Radioshack boombox.
Man I miss radioshack.
My point was that a 2 year time difference creates a significant lifetime wealth difference (especially if you extrapolate that out with 30 years of compounded interest). Without covid, rates would have stayed steady and housing prices might have increased 3-4% a year versus housing increasing 40% in 2 years.
This has nothing to do with one saving or being financially responsible (although I know everyone who bought in 2019/2020 likes to pat themselves on the back like they’re a real estate investing genius – they totally predicted the 40% market spike coming. They’re so smart.) and everything to do with terrible monetary policy that will continue to increase the wealth divide which long term increases social and political unrest.
It’s simple: prices have to come down — and in many places they’re already coming down. Since June 2022, prices nationwide have remained roughly unchanged to down. So the markets where prices went up roughly balance with markets where prices went down. It’s one market at a time.
I agree with Wolf that “prices have to come down” and I was surprised to read on SF Gate this morning that “California home prices hit record high” and “Every Calif. region saw home prices increase last year, except for one” (the “one” was the “Far North region, which saw a 5.2% decrease”)
The SF Gate is full of manipulative bullshit, and no one should cite this effing rag ever, or read it ever. You’re dragging this effing BS into here at your own risk.
Here is San Francisco, plus the other big Bay Area counties, same data from the C.A.R. that the SF Gate lied about. Note that the peaks were in April or May 2022 — just about exactly two years ago.
And for extra credit 🤣
Yes, the monetary policy is terrible but a person/family doesn’t have to buy now, and I’d say they shouldn’t buy now, so no one is forced to take that lifetime hit in wealth difference you say.
We should have seen much more progress against inflation by now. At a minimum, financial conditions should be weaker, not stronger.
The Fed should just STFU until inflation is back to target. Credibility must be earned.
The Fed should focus on eradicating inflation, not providing financial counsel to market participants. The Fed has the tools to eradicate inflation. The only thing lacking is conviction. Pausing while inflation runs at twice target is timid and counterproductive. Slowing QT is a mistake.
A 20% stock market drop and 10% RE correction would be signs of progress against inflation, not a “blow up”. Asset price deflation is needed for CPI disinflation.
CRE has been blowing up just fine for the past two years. And massively so. $5 trillion in debt and trillion in equity. Landlords, investors and banks are taking huge losses. Developers are having the hardest time getting funding for anything. Refinancing many maturing loans is nearly impossible because lenders refuse to do it at the amounts needed to pay off existing loans. This is a HUGE mess, and we’ve been talking about it here for two years. How many more industries do you want to see collapse like that before you’re happy?
As you’ve said before Wolf, we have bankruptcy laws to deal with companies that take on too much risk.
If the commercial RE problems result from a normalization of interest rates, then the businesses were too speculative and leveraged to begin with.
Let them declare bankruptcy. The sustainable portion of those businesses will continue uninterrupted.
I am sick and tired of watching the Fed and government bail out speculators (individuals, companies, industries, etc.) that take on too much risk.
Exactly. Bankruptcy is the correct way forward, and always has been. It hurts the ones who knowingly took risks in hopes of outsized rewards, and leaves others relatively unscathed. This should have been the *only* way the US handled economic issues since the early 1980s. Instead, the politicians took payola to pass financialization initiatives. Now, the federal goverment is entrenched in MMT ideology.
Bobber-
On your comments about Fed “credibility,” and necessary policy rate implications:
(From Jefferson’s speech) -“Fortunately, data on expectations suggest that the FOMC’s inflation-fighting credibility remains intact. While there has been a recent uptick in Americans’ inflation expectations over the next 12 months, long-term inflation expectations, over the next 10 years, remain close to pre-pandemic levels. That shows the American people believe that we will make good on our commitment to bring inflation fully back to our objective.”
Jefferson mentions “dual mandate” several times in his remarks, consciously or unconsciously omitting the third explicit mandate of promoting “moderate” interest rates. Policy rates were decidedly NOT “moderate” during the ten years between GFC and pandemic. It seems logical to assume there will be a longer than normal correction period during which policy rates will need to be IM-moderate on the high side if the Fed hopes to retain the credibility of the markets. At least, that’s the message I hear from Vice-chair Jefferson’s speech.
I’m guessing there were more than a few mortgage bankers in the audience mopping the sweat from their foreheads by the time that speech ended, and hoping that this was just tough talk. For the rest of the markets, when expectations disappoint, markets react in dramatic fashion. Volatility (up or down) and over-leverage are two sides of the same coin.
Shorter message:
I agree with your sentiment that Fed should address inflation more decisively. The soft landing pipe dream will not work, and the hard landing will hurt like hell.
Rock v. hard place
I concur. A 5% interest rate might be restrictive if applied over a 10-year period, but inflation can’t be allowed to run hot for that long a period in pursuit of a soft landing. Rates should be set to get inflation back to target in one year or less, recession or not. Otherwise, are we really fighting inflation, or coddling it?
I think the Fed and bankers are just trying to get as many people to buy over priced assets as they can. They love debt and want lots of debtors to collect interest from. People need to quit spending like drunken sailors and save more for when the shtf. I don’t put any stock in what the Fed says because of all the harm they did to the country with the zirp and dollar debasement when they should’ve known better. And whoever is behind all these stupid msm stories about chances for cuts and that they’ll supposedly make the market go up have a hidden agenda to trick people into buying. Hussman shows that cuts have led to big downturns. My finger is on the sell button for the junk I foolishly bought if there is a spike.
One thing to watch for is the changing seas re remote work. I know people who jumped on the craze to move and now the demands to be on-site some days each week are hanging them out to dry having moved hundreds or thousands of miles away.
Something about this FED speaker is schizophrenic.
On one hand, he seems to be mad about 30-year mortgages slowing the transmission of monetary policy. If more people would buy home at higher rates, they would have less to spend each month and slow inflation.
On the other hand, he admits spending too much on a house and having too much of your monthly income tied up in house payments is bad for you.
I don’t think he can have it both ways.
He is not mad about 30-year mortgages slowing the transmission of monetary policy. He is explaining why the 30-year mortgages are NOT slowing the transmission as much as some people have claimed.
Can the Fed impose more restrictions on using MBS as collateral at the discount window? I am just wondering if this is just Fed talk, or if they really decide to bring out the hammer what options there would be.
Given how creative the Fed can get when it wants asset prices to go up, they must be able to get creative to make them go down.
TulipMania-
Taking your thoughtful question concerning MBS a step further: How much “discounting” (lending to the commercial banking system) is enough, and how much is too much?
Each time the Fed accumulates an asset, it stimulates the economy and alters the pricing of risks. And each discount granted alters the application of consequences for borrowers and lenders, allowing them to be incrementally more aggressive in their future productive and financial decisions.
This is the self-defeating aspect of central banking: in a noble quest for economic growth and banking stability, the technocrats sacrifice bond price discovery and, ultimately, the long-term sanctity of the currency. (This argument also holds true for the treasury bond market as well as for the MBS market, in my opinion.)
We all are reaping the consequences of decades of asking too much of our Banker’s Bank…
Presumably the mortgage term length differential between the US (30 years) and Canada (typically 5) ought to mean that interest rate policy transmission ought to be faster in the latter country.
As for the effect of the cost of housing on family well-being, well, yeah — it’s currently a disaster all over the anglosphere if the housing affordability and homelessness crises are any indication.
Gee thanks captain obvious. So WAGES matter after all. Unfortunately, the REAL minimum wage is zero.
Interesting times
Genius’s at the Fed that pumped 9 trillion into economy, are household economic gurus for disposal income now? Supply and demand models for housing market not hot enough. Homes, cars, food all inflated, services and insurance out of control. People whining about not be able to buy a $70,000 pick up truck and affording a $7,000 mortgage. Just pull yourselves up by the boot straps and keep marching forward. Inflation was not transitory remember, buy some $GME and $YOLO your way to economic freedom and prosperity. Our next POTUS will turn the subsidized QE faucet back ON in January. If you are under the age of 35 and not drowning in debt, the American dream is not working. Price stability at 2% is forever in the review mirror. The bottom 80% are now thoroughly focused on not buying the shit they don’t necessarily need. Housing is at the top of the list. Nancy is up $20 million and counting, just follow her lead.
Nancy supporting more crypto ETFs, Kennedy buying GME, Trump hyping crypto. These are our supposed policy makers? Not a good sign.
One of the most important lessons I tried to teach my high school econ kids in the personal finance unit was that houses are hardly an appreciating asset, and certainly not something you should consider as “saving for retirement.” For me to make money off it, the house I bought for $320k at 5% interest over 30 years would have to be sold for well over $600k, because I will have paid almost 500k over the 30 year life of the loan, plus the new siding, roof, kitchen, etc that will have added at *least* 100k to how much money I’ve put into the thing.
I always told them you buy a house because you want to live there, but don’t expect to make serious money off it, unless that literally is what you do for a living (flipping houses).
On a side note, I’m glad to know the Fed governors are finally so cued into the pain of the average homeowner. /s
Yeah I grew up on that info, and it was wrong unfortunately.
If you teach HS Econ, teach them the actual comparative math not that house “hardly an appreciating asset”
There is the math on purchase cost, taxes, interest, insurance, upkeep, appreciation/depreciation and inflation assumptions as well as lost capital opps.
And there is the the math on rental costs for the same time, capital opps with dwn pymt.
Your example of a $320k house “costing” over $600k is only part of the story and hard to know if that is good or bad.
All valid points, however I was teaching *seniors* in an elective class, often second semester, so there were limits to how much complex math I forced them to do. One can only do so much to counteract senioritis, and I wanted them to walk away with a better understanding of personal finance without making it a full-scale Economics course. The main point they needed to understand is that compound interest matters, especially on larger balances, and one needs to take that into account – as well as all the upkeep/improvement costs – before considering whether selling your house for $50k more than what you bought it for 15 years ago is really a *win.* You shoulda seen the lesson where I taught them how to really read a credit card statement; lots of wide eyes on that one!
The bottom line, though, is it is never as easy as its made out to be, and *certainly* not as easy as my boomer parents tried to teach me it was.
“A house is an investment towards retirement!” they told me.
“Prices never go down!” they stated.
Z – re: ‘senioritis’. Much like ‘…generals tend to fight the last war (strategically AND tactically)…’, so often goes the conduct of one’s personal OS with the advent of advancing years…
may we all find a better day.
Did you tell your students about the value of having a place to live for 30 years compared to the cost of renting something comparable for those 30 years? That doesn’t appear to be factored into your comment.
In terms of investing in a home as “savings for retirement,” I think it is though I view it somewhat differently than most people. My wife and I do not have traditional pensions. In order to maintain the lifestyle we want, while reducing our income taxes as much as possible by limiting what we need to withdraw from tax deferred accounts, owning a home free and clear is much better than renting. By significantly reducing our monthly expenses (renting would cost about $4,000/mth more than our expenses/maintenance), owing a home allows us stay in a lower tax bracket during retirement and have greater control over our budget.
Our savings versus renting something comparable functions as a small tax-free pension. In this way, owning a home is absolutely “saving for retirement,” just not in the sense of extracting cash from the value of the home to pay for other retirement expenses directly.
That was my thinking too. Wouldn’t want to keep paying rent into retirement.
Currently my monthly P+I payment makes up about half my recurring expenses. Once the mortgage is paid off, I’ll be able to live off significantly less income.
Absolutely. Lower fixed expenses = lower necessary income = lower income taxes. It’s a virtuous cycle.
Yup – and at that point my (lack of) income will put me below the poverty line, and I’ll be able to qualify for property tax exemptions from the city.
Wealth consists not in having great possessions, but in having few wants. – Epictetus
That’s what I tell young people. It’s amazing how much capital you can accumulate when you don’t need to spend much of it at all to be perfectly content.
Wolf, not sure if you’ve done an article on it yet (may have missed it) but the proposal for a GSE-backed second mortgage market is not being talked about nearly enough, IMO.
We certainly don’t need more liquidity, but if there was ever going to be a catalyst for another wave of inflation, $850B in untapped equity will provide no shortage of gas for that fire.
Just my opinion, worth as much as you are paying for it, but I think we’re not hearing much about it because if you want to know where the real causes of problems are, or the real sources of corruption/distortion of the system are, look at what neither political party or ‘major players’ are highlighting in their talking points.
Both parties are drunk from the kool-aid, and neither one wants the spending party to end…especially on their watch.
you really want to educate your kids… have them watch the documentary theCon.
Think if Stephen King wrote a novel about real estate, wall st. and main street as the clueless victim
You missed it:
https://wolfstreet.com/2024/05/12/its-funny-how-wall-street-tries-so-hard-to-get-homeowners-to-pay-interest-fees-on-their-own-money/
Just read an article about how rental in most swing states have increased 40-60% or more in the last four years. 2020 to 2024. Before that rents crept up 2-5% a year.
THAT is the only argument that needs to be made. “You’re paying 2035 rents today because of the insane housing inflation of the last four years”. And it has been insane. And no, wages did not also increase 40-60+ across the board despite what California McDonald’s workers are now making.
Housing is an asset but it’s also supposed to first be a good. Like food. Consumed, accessible. When it gets so out of whack as it has now bad things will happen. Even if housing prices and rent essentially stay flat for the rest of this decade a lot of people are going to be angry, frustrated, giving up on their slice of the American Dream. What do large groups of people without hopes and dreams do? I guess we’re about to find out. The election of ’24 could only be the first of a series of wild political swings in this country.
Makes me wonder if a third party candidate could run successfully on a labor agenda that served the bottom 70% of society and small business (e.g., tax rate progressiveness, anti-monopoly, balanced budgets, incentives for US production and jobs).
Bobber – reckon that would turn on the amount of analog thoughtful-focus vs. high-emotion digital (knee-meet-jerk) reaction generated…
may we all find a better day.
Fascinating string of comments. I especially appreciate the remarks about moving to an area where you can afford the housing you want. I did exactly that–I moved from beautiful but infuriatingly expensive Connecticut to a dump of a town in Virginia. The VA house is exactly what I wanted/needed, and cost under $200 k. It would have cost $425 k six years ago and over $650 k in Connecticut by now. The VA property tax and insurance is 5-10% of what it would be in CT, not to mention HOA dues. My big problem now is whether to get a second mortgage (when HELOC goes to 5%). I explored that at Discover and they quoted 9%-plus. Bah. Identical houses in my neighborhood (an over-55 community) are selling for $150 k more than I paid, and one just sold in literally one day. Because the houses are first-class and the growing number of over-55’s, I doubt prices will come down all that much. But I have the impression second mortgages are for fools, suckers and those who have mismanaged. I just want the money to travel and jazz up my kitchen. Internet searches on the subject are mostly sales pitches. So, the question is whether to refi or not?
Do you have enough saved up for medical? I had a relative in his 80’s spend a few months in a nursing facility recently. That costs about $600 per day. Ouch. Medicare doesn’t cover a medical expenses such as home care and assisted living.
I wouldn’t touch the home equity for “stuff” and “experiences” unless I had enough savings or current income to cover foreseeable future costs.
This article made me look up ARM data. While not a large proportion of borrowers, the dollar amount percentage of total mortgages is higher. Can these borrowers of the last five years really afford the reset? I assume they are “payment buyers” who originally maxed out, but maybe that’s wrong. On top of that, most property taxes increased over 25% in my area after last year’s assessment, along with insurance going up everywhere.
Does that include people with the 3-2-1 buy downs that were big during the summer of 2022?
“It is often argued that this loan structure dampens the effect of monetary policy,” Jefferson said. Of course it does. But what it also does is insulate the American home buyer from crazy vacillating Fed policies. One of the hallmarks of America is the 30-year mortgage, which means you can plan for the long term even though you are likely to change during the course of the mortgage. These disingenuous Fed policymakers would probably want us all to have floating rate mortgages so we would “respond” better to their craven interest rate policies.
Maybe its the other way around: the Fed felt comfortable with aggressive rate hikes /because/ the 30YFM insullates homeowners from interest rate policies.
I feel like the 30 year is a variable they just can’t control.. and that can be both good and bad depending the view from where one sit. Both stories have threads of truth.
Fed officials are out to lunch. Monetary policy used to effect the housing market when large portions of mortgages were 2-year variable rate. 95%+ of mortgages are 30-year fixed, and they wonder why housing inflation is sticky?
Basically the Fed picked winners and losers by enabling the entire house-owning generation to refinance at sub 4% rates and royally screwed an entire generation of first-time buyers.
They should not be in the king-making business.
As Jefferson points out, people who buy high priced properties will be reducing their spending, but people on the other side of those transactions (the sellers) will be increasing their spending, along with all those folks who are receiving a lot more interest, rent, and dividend income.
If Jefferson is suggesting inflation will subside if the Fed just sits tight, I think he’ll be proven correct in 10 years or so, but that is not a reasonable time period for tackling inflation.
It’s not the price, it’s the mortgage payments that reduces spending. He said that if the seller then buys a new home with a higher interest rate, then that is included in the effect of reducing spending.
Lots if brag and big numbers. Accidents do happen, but can they do it over and over?
And where will you live while spending all those profits and did you consider inflation?
No shack is better than the dirt it sits on.
The worst home in the best area is the winning combination.
Paying cash and marking it up works too.
Asking rent increases as property owners pass along the impact of higher rates on their loans. Renters have to pay it because the same rates make owning a house that much more expensive as prices remain elevated. Renting is the “better deal” for the group that got screwed by not owning before thing went sideways.
Two groups – owners before the spike, and those that don’t. Lost decade for those that don’t. So spend it all because who cares?
Rates will fall in response to weakness which will open the housing volume, decreasing prices, decreasing rents, etc, a tumble from the highs we float upon today.
“Rates will fall in response to weakness”
Not as long as inflation remains.
Economic slowness caused by inflation running high. Economic slowness precedes inflation faltering and falling. A strong economy drives inflation.
Sticky prices, sticky inflation clings to rent and home prices more strongly and moves more slowly than to the price of an egg or gas.
Until it all falls, or significant time passes and prevailing winds permanently shift, shelter prices will remain.
J Powell has said rates will not be cut until inflation returns to the Fed’s target. I believe him.
Government spending can go Weimar Germany. It’s already started. The CBO projections *always* underestimate what ends up occuring, so consider current CBO projections as a ridiculously set lower bound.
Just a bit confused, I don’t remember there being a housing shortage in 2019? What happened????
I guess immigration would be partially to blame, but they’re taking the lowest of the of the rental property spectrum, not single family homes.
Interesting comment by Mr. Jefferson about the Fed’s supposed credibility.
He thinks low long-term rates reflect a belief the Fed will fight inflation. I don’t agree. I think the low rates reflect a different belief – that the Fed will repress rates for a long period of time (i.e., “do what it takes”, Mario Draghi style) in the face of rising unemployment. This latter view is consistent with historical evidence. In other words, I think the LT bond market is expecting stagnation and a strong stimulus response to that.
Mr. Jefferson seems to think the market is driving interest rates, but isn’t it the Fed’s heavy hand that dictates financial conditions at this point in time? The market simply tries to predict what the Fed will do next.
Until the Fed clearly disavows use of QE, will there ever be true price discovery for anything? Supply and demand across the board may be imbalanced and sub-optimal for the remainder of our lives.
Rate cut hopium is the only reason to buy long bonds right now.
Stagnation and then strong stimulus. This is the total idiocy that has screwed up a bunch of nations through history and yet we are foolishly destroying the US this way too. You don’t save a junkie by giving him another hit. Eventually the drugs kill him. All the lobbyists, gov’t policy makers and Fed PhDs should be given their walking papers to save our country.
the buyer strikes back-
“All the lobbyists, gov’t policy makers and Fed PhDs should be given their walking papers to save our country.”
Justifiable anger on your part, if you ask me.
Trouble is, if you fire all of the current monetary movers and shakers in banking and academia, the current institutions would simply procure new players to administer the current banking and monetary authority playbook. Same play, different cast.
Any effort to effect change needs to go deeper, especially reforming the triple mandate of the central bank (“to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates” – 12 U.S.C. Section 225a).
Thorny questions include: what is “maximum employment” (and should the Fed be charged with achieving it); does pursuit of “stable prices” amount to price-fixing; and how do we define the term “moderate” as used in “moderate interest rates?” (E.g. is a 0.25% moderate; or 15%, or 5.25%?)
There are arguably many legitimate and achievable functions justifying the existence of a “central bank,” but the current triple mandate is a set-up for failure.
Reform the triple mandate.
Since were in a deep dive, I’m wondering if there’s an inherent conflict between the Fed, which is run by bankers largely for bankers, and the bottom 70% of the population.
When asset prices are inflated, banks have lots of loans out there supported by overpriced collateral. When economic slowdowns hit, many of the banks would face solvency problems if asset prices were allowed to drop.
When slowdowns hit as they inevitably do, can the Fed be trusted to do what’s right for a majority of the population and allow normal asset price discovery to happen, or will it aim to keep asset prices elevated to preserve bank stability? It’s hard to have both, given asset prices (RE and stocks) have risen 300% to 500% since the Great Recession and prices are now at all-time highs relative to income/GDP.
To eliminate conflicts, I think we need much tighter restrictions on banks, including tighter capital requirements and investment restrictions. The goals of banks should never conflict with the majority of our population.
No business should depend on taxpayer bailouts to survive, unless its highly regulated. Bear in mind, taxpayer bailouts take many forms. They can be explicit bailouts initiated by Congress, or they can be back door inflationary bailouts initiated via monetary policy. The latter category is the worst kind. The inflation tax is shouldered largely by the bottom 70%.
Bobber-
Agree with you on the evil of bailouts, subsidization and the picking of winners and losers by the banking elite (technocrats, bank managements and academia).
Could you define who you include in the “bottom 70%?” Do you measure by income, net worth, something else? I assume that the fallout they receive from money/banking policy is in the form of decreased purchasing power? (Selfishly, I wonder how the “responsible” (aka cautious/conservative) saver or retire fits into your assessment of winners v. losers.)
John H,
By bottom 70% I meant to describe the portion of the population living primarily on wages or fixed income. Generally, these people have been the main victims of inflation in my view.
Thanks Bobber-
Respectfully, I would describe the group a little more definitively, or you’ll sound like you’re wanting to eat the rich. Inflation hurts plenty of people who made honest livings and successfully set money aside in order to retire comfortably and securely. Some are in your 30%, I think. Many would qualify as “wealthy capitalists.”
The wealthy capitalists also provide jobs to wage-earners. Many are honest and hard working. You need wage-earners in a healthy economy, but you need capitalists willing to take risks, too. (Bubba calls then entrepreneurs, I think.) Capitalists are not all in the “hard-working” and “honest” categories, of course, but hey, neither are all wage-earners!
I’m not meaning to get down on you. Love your thinking and comments. But just wanted to suggest another perspective to you on this specific comment.
I have a bias that I’m displaying in this comment, of course, and expect to get savaged a bit. And maybe I’m way off on my interpretation of your reply… if yes, I apologize.
Cheers
Until the Fed clearly disavows use of QE, will there ever be true price discovery for anything?
That’s the core right there. And the answer is no. Behold the beauty of our political economy for those who have the catbird seats.
Given that these components make up 32% of CPI, I’m not sure what all the fuss is about here?
I just don’t see where Jefferson is making any sort of pronouncement here that’s hard to figure out or accept as being objectively true.
We should all be happy that, for now at least, there gonzo price increases have given way to plateauing (existing) and downward (new).
It’s about dang time.
The average person moves 11.4 times in their lifetime, owns 3 houses, and lives in them about 8 years. Moving from city-to-city costs money.
So, saying asset price inflation has no impact on consumer price inflation seems wrong.
“…saying asset price inflation has no impact on consumer price inflation seems wrong”
I don’t see anyone saying that. But asset price inflation and consumer price inflation move for different reasons, and differently as asset prices can collapse, while consumer prices don’t. And so they are tracked separately. Just like wage inflation is tracked separately.
It’s my understanding that the inflation rate was negative during the Great Depression. That makes sense and doesn’t happen but once in a blue moon, I guess. Something tells me & DepthCharge that we’ll see a GD 2.0 in our lifetimes. I’m 57.
Sure it was “negative” ca. 90 years ago, but it didn’t “collapse,” or go to zero or vanish or do stuff like that, which what asset prices can do and do. You don’t have to go back that far either. There are thousands of stocks thousands of bonds and loans that went to zero and are gone. The entire Nasdaq Composite collapsed by 78% during the dotcom bust. That’s what asset prices do routinely.
“It is often argued that this loan structure dampens the effect of monetary policy.” He should have noted that it predominately dampens RESTRICTIVE monetary policy. Most people could still refinance when rates went down even after the 08 meltdown.
This article reminds me of comments from a couple weeks ago that suggested that the burden of lowing inflation through reduced spending falls more disproportionately to Renters and New mortgage originators. While I am not in that group, I find the actions of the FED that resulted in this dynamic to be irresponsible at the very least. This is truly an unfair burden.
The US hasn’t been building, and replacing depreciated housing fast enough for a number of years. Wolf would know better but I think we were adding 500k unit a year which doesn’t match demand. Demand driven in part by the 8 million new “residents” the we’ve added the last three years has put further pressure on the market. It takes a long time to add houses and high interest financing without the expectation of sharply rising asset prices doesn’t help drive more supply. Reducing housing inflation is hard to do without more supply so it will take a awhile.
“but I think we were adding 500k unit a year which doesn’t match demand.”
We added about three times as much, 1.6 million in 2021, 1.55 million in 2022, and 1.41 million in 2023, all three were multiyear records.
https://wolfstreet.com/2024/01/18/residential-construction-starts-fall-in-2023-multifamily-from-38-year-high-single-family-for-2nd-year-both-still-higher-than-pre-covid/
A lot of people are spreading the notion that there is shortage of homes in USA.
In my hood, the home prices increased more than 80% or so in last 4 years but the population stayed more or less same.
In USA, the number of homes per capita has never been this much.
There is no shortage of absolute number of homes.
What is happening is: Lot of people have faith in FED/Govt and are thus made to think that home prices won’t go down. Thus people are sitting on multiple homes and are also using STR to pay off home expenses.
Once this myth of ‘home prices never go down’ is proven false, we’d see lot of second homes coming to market.
This is my personal observation from my hood: So Cal where prices are flirting with ATH or more.
Thanks for the terrific data! Not as bad as I thought however it doesn’t appear that we have yet made up for the lost inventory build for years after the housing bust. We have more people, but building hasn’t kept up with the demand for natural new household formation, replacement of worn out housing, and immigration.
From a newsletter I get:
Since the pandemic, rent growth far outpaced wage growth in 44 of the 50 largest US metro areas.
The greatest difference was Tampa, Florida, where wages rose 15.3% from 2019-2023 while average rent rose 50%.
Nationally, rents rose 10.2 percentage points more than wages in 2019-2023.
However, wages have grown faster than rent in a few areas, notably San Francisco, Houston, Minneapolis and Milwaukee.
Have read 80% of the rentals are mom-n-pops and am guessing many of them are probably retiring boomers looking for income to support that, This leads me to believe rental increases to remain pretty sticky for quite awhile.
“Have read 80% of the rentals are mom-n-pops and am guessing man…”
That’s for rentals of single-family houses. It does not include rentals of apartments and condos (multifamily buildings).
^ The above assumes all the multi-family building going on is coming in at similar rents, which around here is true.
They may be the driver for lower rents ultimately if they can’t fill them. You still don’t get what you pay for in those, again around here.
Price is what you pay, value is what you get.
Want to unfreeze the housing market? Revisit/increase the 1997-era cap gain exclusions on sales of primary homes. Revisit the 1031 rules on sales of investment properties. Homeowners of primary and secondary homes that carry any low-interest mortgage rate have every incentive to hold onto those properties until death when the homes receive a step-up in basis. Revising the 1997-era cap gain exclusion is cheap and will work fast. Kill the estate tax step-up basis rule instead? That’s the end of your political career.