Zelman on housing

[LearningMachine]

8 minutes ago, ERICOPOLY said:

Obviously rates matter.  

 

500,000 loan at 6% for 30 yr term:    2999 per month payment

500,000 loan at 3% for 30 yr term:    2108 per month payment

 

Now, what if $2108 per month was max buyers could afford to pay before 10% inflation and 10% interest rates hit. After 10% inflation, say they could afford $2318.  So, with 10% interest rate price would have to adjust for mortgage payment to be $2318.

 

Why didn't the nominal price adjustment happen in 1970s when interest rates shot up?

Edited October 27, 2021 by LearningMachine

[ERICOPOLY]

20 minutes ago, rohitc99 said:

There is also a level of keeping up with the joneses and status to it. How do you show that you are successful in life ?

 

You must be thinking of my parents' neighbors.  There's no reason for what they've built -- however they are from Asia and much of what they've purchased is for show.  I've never even seen them on their tennis court.

 

[KJP]

27 minutes ago, LearningMachine said:

Now, what if $2108 per month was max buyers could afford to pay before 10% inflation and 10% interest rates hit. After 10% inflation, say they could afford $2318.  So, with 10% interest rate price would have to adjust for mortgage payment to be $2318.

 

Why didn't the nominal price adjustment happen in 1970s when interest rates shot up?

 

 

See slide 22:  https://www.stlouisfed.org/~/media/Files/PDFs/Bullard/remarks/BullardBipartisanPolicyCenter5June2012Final.pdf

 

LTVs appear to be going down from 1970 to about 1982, but I believe this is for all mortgaged homeowners, which may not be the same as LTV at purchase.

 

Also, what is the exact period you're looking at and what was nominal wage growth during that period?

Edited October 27, 2021 by KJP

[KJP]

1 hour ago, LearningMachine said:

 

Until recently.  However, it needed Covid to prove that it would work for highly paid knowledge workers.  Still need to wait for supply and inventory to catch up for it to show its real impact.

 

https://fred.stlouisfed.org/series/HOUST

https://fred.stlouisfed.org/series/MSACSR

 

I think we discussed this last year.  Are people in cities because that's where the jobs are, or are jobs in cities because that's where the people are?  To the extent it's mainly the latter, work from home may not have a substantial effect on demand for urban housing.  See:  https://fred.stlouisfed.org/series/SFXRSA

Edited October 27, 2021 by KJP

[ERICOPOLY]

13 minutes ago, KJP said:

 

I think we discussed this last year.  Are people in cities because that's where the jobs are, or are jobs in cities because that's where the people are?  To the extent it's mainly the latter, work from home may not have a substantial effect on demand for urban housing.  See:  https://fred.stlouisfed.org/series/SFXRSA

 

Many if not most city dwellers do like being in cities. 

 

The area I live in is in between and it's like living inside the game Far Cry 5 but without the shooting:  all these white guys driving exaggerated white pickup trucks around inside of some political cult.

[Gregmal]

I always like checking out the Starbucks indicator. 1) Does the town/area HAVE a Starbucks. 2) How busy is the store. 3) What kind of cars are typically on line at the drive through? Those will tell you pretty much everything you need to know.

[LearningMachine]

3 hours ago, KJP said:

 

 

See slide 22:  https://www.stlouisfed.org/~/media/Files/PDFs/Bullard/remarks/BullardBipartisanPolicyCenter5June2012Final.pdf

 

LTVs appear to be going down from 1970 to about 1982, but I believe this is for all mortgaged homeowners, which may not be the same as LTV at purchase.

 

Also, what is the exact period you're looking at and what was nominal wage growth during that period?

Thank you KJP for sharing. 

 

Very interesting to see that Average LTV ratio of mortgaged homeowners was much lower those days.  That can partially explain that at that time, housing was not as much of a financial asset dependent on interest rates as it is today, and thus increase in interest rates didn't impact nominal price of housing as much those days as it impacted other financial assets, e.g. stocks, those days.  However, it doesn't explain fully why nominal house prices didn't drop when interest rates went up in 1970s.

 

For example, you see a spike in interest rates after 1974 and then again in early 1980s.  However, there is no drop in nominal home prices at those times. 

 

https://www.multpl.com/10-year-treasury-rate:

 

 

https://www.multpl.com/case-shiller-home-price-index (Nominal home prices):

 

 

Wage growth doesn't explain it either as wages didn't double within a year of interest rate spikes.

Edited October 28, 2021 by LearningMachine

[LearningMachine]

3 hours ago, KJP said:

 

I think we discussed this last year.  Are people in cities because that's where the jobs are, or are jobs in cities because that's where the people are?  To the extent it's mainly the latter, work from home may not have a substantial effect on demand for urban housing.  See:  https://fred.stlouisfed.org/series/SFXRSA

 

Thanks KJP.  Yes, we discussed it last year.  Looks like you're offering chart of San Francisco housing prices as proof that remote work didn't have a substantial effect on demand for urban housing.   Housing actually went up everywhere.  Some would argue it went up more as a percentage in exurbs than in city centers. 

 

I think we are not fully done with impact of remote work yet.  So far, we have been caught with emotional pent-up demand for more space, lowest inventories, construction rate not hitting 2 million housing units per year yet, remote-work policies slowly being put into place, people looking to their companies and colleagues' behavior for confirmation that remote work is here to stay, etc. 

 

https://fred.stlouisfed.org/series/MSACSR

https://fred.stlouisfed.org/series/HOUST

 

I'm not arguing that people won't have any desire for being close to cities.  I'm saying some people will be willing to go farther out from their employers than they used to be. Before covid, in tech hubs, most desirable real estate was next to big tech employers.  Now, I see people with families willing to drive much farther out from their employers for new construction, bigger lots, water, etc.  Search radius for most desirable real estate for families has gone up from pi* 1^2 miles = pi square miles to something like pi * 30^2 miles = 900 pi square miles, or even pi * 50^2 miles = 2500 pi square miles.  There are multiple good school districts in bigger areas, and I see people realizing schools get better  in general where they move in big numbers for new construction.  However, this huge increase in size of desirable area didn't have much impact on housing so far due to several reasons.  As those reasons get addressed, I think this increase in size of desirable area will have an impact.  The biggest thing we need to wait for is for new construction and inventories to come up in the bigger area. 

Edited October 28, 2021 by LearningMachine

[ERICOPOLY]

4 hours ago, LearningMachine said:

Why didn't the nominal price adjustment happen in 1970s when interest rates shot up?

 

The reason my father was able to negotiate a "good deal" on the home he purchased was that interest rates were 9% at the time and had recently shot up.  The market was in a bit of affordability shock. 

 

By 1979 the rate reached 11% according to this link:

https://www.rocketmortgage.com/learn/historical-mortgage-rates-30-year-fixed

 

But what I've heard about the truly absurd rates in 1981 is that transactions dried up because people couldn't afford to sell and purchase elsewhere.  So they stayed put and continued paying their lower rate mortgage.

Edited October 28, 2021 by ERICOPOLY

[ERICOPOLY]

Figure 5 shows the drop in building rates Coastal California from the 1940s onward.  Far more extreme decline than in the rest of the US.

 

https://lao.ca.gov/reports/2015/finance/housing-costs/housing-costs.aspx

 

Jump in California Housing Costs Occurred as Building Slowed. A look at housing costs in California’s coastal metros in recent decades shows a connection between the slow rate of building and higher housing costs. The slowdown in building in California’s coastal metros corresponded with a substantial rise in housing costs relative to the rest of the country. In 1970, home prices in the state’s coastal metros were about 50 percent more expensive than in the rest of the country. This gap has widened considerably since that time. Homes in the coastal metros are now more than three times more expensive than the rest of the country. Similarly, rents have grown more expensive, with the gap between the coastal metros and the rest of the country increasing threefold since 1970 (from 16 percent more expensive to around 50 percent more expensive).

[ERICOPOLY]

IMO, nowhere else in the country can you find a climate like that of Coastal California.  It's not so friggin hot during the summers and not so friggin cold during the winters. 

[ERICOPOLY]

Interesting charts going back to 1960:

 

https://wolfstreet.com/2019/07/12/changes-in-house-prices-rents-and-household-incomes-since-1960-in-the-us-by-region-and-major-metro/

 

Shows that the early 1980s when interest rates were peaking was actually a time when median house prices were truly soaring relative to incomes like never before.

[ERICOPOLY]

Gmthebeau's comment that SF price outperformance vs the US began only after a 2012 tech boom still blows me away... been living under a rock or something.

Edited October 28, 2021 by ERICOPOLY

[ERICOPOLY]

And there is no way this is caused by a drop in interest rates because lower interest rates don't help renters:

 

"Similarly, rents have grown more expensive, with the gap between the coastal metros and the rest of the country increasing threefold since 1970"

Edited October 28, 2021 by ERICOPOLY

[Spekulatius]

Don't forget that housing in some areas went to zero. Detroit and other cities in the midwest are an example. You find abandoned houses throughout in the US. So there is some survivership bias in averaged data as well.

 

Housing in the 70's was a way to protect from inflation, as there were few other things were average Joe could protect assets from inflation. That may be one reason why housing did reasonably well in the 70's until Volker put a squeeze on interest rates in 1980 and killed the housing market with it.

[Cigarbutt]

57 minutes ago, Spekulatius said:

...That may be one reason why housing did reasonably well in the 70's until Volker put a squeeze on interest rates in 1980 and killed the housing market with it.

Warning: irrelevant digression (apologies to you Spekulatius for this post related to sustainability and resilience)

 

Disclosure: i'm a fan of Mr. Volcker (long term thinking commitment despite potential short term pain, ability to mix global perspective and technical knowledge/application, ability to steer policy through a combination of consistency in principles and flexibility in means, including the use of constructive strategies to get things done despite various oppositions) and, of course, this opinion is not shared across the board especially recently. That's fine.

His legacy (opinion):

Longer version:

Managing a New Policy Framework: Paul Volcker, the St. Louis Fed, and the 1979-82 War on Inflation (stlouisfed.org)

-----

Wildly irrelevant addition.

On my desktop this AM a medical article (available upon request) recently published showing that statin use (to lower cholesterol) over the long term was correlated to increased diabetes progression. The authors who are super bright and scientifically sophisticated (although IMO somewhat challenged in multi-disciplinary thinking) explore various metabolic pathways to explain this counter-intuitive finding (similar to the explanation given by high the BMI  group "it must be my metabolism", forgetting the massive human trait to prefer easing instead of painful reforms, including for the period since the 1970s).

i will now go for my planned outdoor 4-hour high-intensity ride for the sake of sustainability.

-----)Back to housing prices and larger square-foot houses protecting smaller households looking for social status and security.

[LearningMachine]

http://zillow.mediaroom.com/2021-09-14-Remote-Work-Will-Fuel-Housing-Demand-for-Years-to-Come

 

Quote

areas 60‒90 minutes outside the city center experiencing the fastest home value growth

 

 

Quote

Lingering uncertainty over permanent flexible work policies suggests that we're closer to the beginning of the Great Reshuffling than the end.

 

 

Quote

After the company announced a permanent flexible workplace policy in October 2020, the monthly relocation rate jumped more than 45%, compared to typical relocation rates in 2018 and 2019.

 

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As more people learn how often they'll have to be at their workplace or make a job change to gain that flexibility, we expect to see more people move. Remote work will be a significant driver of housing demand for years to come, along with demographic trends

Edited October 29, 2021 by LearningMachine

[ERICOPOLY]

15 hours ago, Spekulatius said:

Don't forget that housing in some areas went to zero. Detroit and other cities in the midwest are an example. You find abandoned houses throughout in the US. So there is some survivership bias in averaged data as well.

 

Yes nothing says housing doesn't follow inflation better than abandoned houses that have not followed inflation.  

[ERICOPOLY]

What houses follow isn't inflation.  It is supply and demand that it follows.  If wages follow inflation to some degree then inflation is to some degree a component of demand.

Edited October 29, 2021 by ERICOPOLY

[Spooky]

Half baked thought here but it seems like the dividing line in the data is 1975 which is the last year before the US left the gold standard in 1976. One thing I have been thinking about is how much of the run up in the prices of homes is related to the incineration of the value of fiat currencies.

[LearningMachine]

On 10/27/2021 at 8:34 PM, ERICOPOLY said:

 

The reason my father was able to negotiate a "good deal" on the home he purchased was that interest rates were 9% at the time and had recently shot up.  The market was in a bit of affordability shock. 

 

By 1979 the rate reached 11% according to this link:

https://www.rocketmortgage.com/learn/historical-mortgage-rates-30-year-fixed

 

But what I've heard about the truly absurd rates in 1981 is that transactions dried up because people couldn't afford to sell and purchase elsewhere.  So they stayed put and continued paying their lower rate mortgage.

 

Thanks @ERICOPOLY.  I found the following interesting at your link:

 

Quote

Rates in 1971 were in the mid-7% range, and they moved up steadily until they were at 9.19% in 1974. They briefly dipped down into the mid- to high-8% range before climbing to 11.20% in 1979. This was during a period of high inflation that hit its peak early in the next decade.

 

The increases from 7.5% to 9.19% (22.5% increase) , and then to 11.20% (49% increase from 7.5% rate), are not as drastic as increases could be from 2.5% to 5.0% (double) or 7.5% (triple), or 10% (quadruple).   I understand the mortgage payments don't go up exactly proportionally due to amortization component, but still the impact could be more devastating this time if interest rates were to follow inflation this time, both

• (1) because of the potentially bigger impact from interest rate increases from a much lower base, and
• (2) because of LTVs being possibly higher now making housing more of a financial asset dependent on interest rates similar to stocks. 

 

Now, add the (3) impact of increase in supply due to increase in size of desirable area to 60-90 minutes outside city centers as Zillow confirms at http://zillow.mediaroom.com/2021-09-14-Remote-Work-Will-Fuel-Housing-Demand-for-Years-to-Come. Supply increase in this bigger desirable area will take some time to materialize with inventory being listed as people come out of covid woodworks and new construction.   

 

Potentially, all three factors could come hit together.

Edited October 29, 2021 by LearningMachine

[ERICOPOLY]

1 hour ago, LearningMachine said:

 

Thanks @ERICOPOLY.  I found the following interesting at your link:

 

 

The increases from 7.5% to 9.19% (22.5% increase) , and then to 11.20% (49% increase from 7.5% rate), are not as drastic as increases could be from 2.5% to 5.0% (double) or 7.5% (triple), or 10% (quadruple).   I understand the mortgage payments don't go up exactly proportionally due to amortization component, but still the impact could be more devastating this time if interest rates were to follow inflation this time, both

• (1) because of the potentially bigger impact from interest rate increases from a much lower base, and
• (2) because of LTVs being possibly higher now making housing more of a financial asset dependent on interest rates similar to stocks. 

 

Now, add the (3) impact of increase in supply due to increase in size of desirable area to 60-90 minutes outside city centers as Zillow confirms at http://zillow.mediaroom.com/2021-09-14-Remote-Work-Will-Fuel-Housing-Demand-for-Years-to-Come. Supply increase in this bigger desirable area will take some time to materialize with inventory being listed as people come out of covid woodworks and new construction.   

 

Potentially, all three factors could come hit together.

 

Homebuilders won't keep building if people cannot afford what they build, so we would remain undersupplied.  So there's that too to consider.

[Castanza]

26 minutes ago, ERICOPOLY said:

 

Homebuilders won't keep building if people cannot afford what they build, so we would remain undersupplied.  So there's that too to consider.

The question is what do banks say people can afford. A Coworker of mine makes the same as me. His wife also is a nurse so I have a good idea of their net income. The house they bought is probably 2.5-3x the cost of our. They drive two Audi and also have 80k in student debt. They bought their house after already owning those vehicles.  Seems like banks will lend to just about anyone these days. 

[ERICOPOLY]

27 minutes ago, Castanza said:

Seems like banks will lend to just about anyone these days. 

 

I remain the exception.

[DooDiligence]

35 minutes ago, Castanza said:

The question is what do banks say people can afford. A Coworker of mine makes the same as me. His wife also is a nurse so I have a good idea of their net income. The house they bought is probably 2.5-3x the cost of our. They drive two Audi and also have 80k in student debt. They bought their house after already owning those vehicles.  Seems like banks will lend to just about anyone these days. 

 

Sounds like your co-worker will be slaving away forever.

It also appears that lenders will remain ignorant until the next doomsday & beyond.

 

I don't need a lever to move my little world.