Zelman on housing

[ERICOPOLY]

On the topic of banks lending to just about anyone.  A person with no assets (aside from down payment) and a salaried income can get a 30 yr fixed rate mortgage even if they are 75 years old.

 

But not me...

Edited October 29, 2021 by ERICOPOLY

[LearningMachine]

3 hours 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.

 

I think it is a matter of timing but eventually increase in size of desirable area to 60-90 minutes from city-center will show through. 

 

• If interest rates are slow to move up, and builders are able to hit 2 million housing units per year sooner, that increased supply in increased size of desirable area will happen sooner. 
• If interest rates move up faster, causing slowdown in demand, and in turn causing builders to not be able to hit 2 million housing units per year, it will slow down how fast the supply increases until builders can build profitably. 

 

 

Edited October 29, 2021 by LearningMachine

[ERICOPOLY]

So I'm with my parents this weekend.  Their 1st mortgage in 1970 was 9%. Their 2nd mortgage was 10 or 11% (seller financing).  1970 was tough for sellers because rates had recently climbed from substantially lower 1960s levels and my parents could negotiate a 2nd mortgage from the seller into the deal.

 

 

 

 

 

 

 

[ERICOPOLY]

As for today:

Rates going from 3% to 6% over 5 years would slow the market I think, perhaps stagnate it for a couple of years, and I think building would decline.  But I don't think prices would go down.  

 

Reasoning:

It would raise my P+I payment by 42% if my mortgage interest rate double.  But my total payment increase (including taxes and insurance) would be more like 33%.  My mortgage is about 55% of my property's value.

 

1.  33% increase isn't all that bad over 5 years.  It's bad, but it's not catastrophic. 

 

If you are talking about 5% annual wage inflation it's a yawn.

Edited October 30, 2021 by ERICOPOLY

[ERICOPOLY]

Or, maybe 5% is too extreme.  But there's another component that I haven't mentioned:  those of us today with fresh mortgages at low interest rates will have it paid down by 11% in 5 years' time. 

 

So after knocking 11% off the P+I on the next mortgage if we move to a similarly priced property in 5 years, the next home at twice the interest rate will only be an increase of 26% in P+I.  And the total payment increase including taxes and insurance will be less than that.

 

Edited October 30, 2021 by ERICOPOLY

[ERICOPOLY]

It would be only an 18% increase in my total payment including taxes and insurance.  That's 5 years from now after a doubling of the interest rate.

 

18% rise over 5 years is not a shock large enough to collapse my buying power, but it will put a drag on the rate of market increases..

Edited October 30, 2021 by ERICOPOLY

[Gregmal]

Exactly. Too often people model these things in a vacuum. Well if rates go to 6% housing is fucked. However there’s reasons and things that happen that produce a 6% mortgage rate. And a lot of them aren’t wholly negative. Most as I’ve stated is my belief, won’t really matter one way or the other. 
 

I’m trying to explain that to a bunch of incompetent homeowners in a community where I am a trustee. They’re outraged dues went up 3% for NTM. And I’m like “1) have you been living under a rock? How much has your gas bill gone up? What about insurance? 2) your fuckin home value increased 35% year over year! Piss off”

 

 

[KJP]

On 10/27/2021 at 11:03 PM, LearningMachine said:

However, it doesn't explain fully why nominal house prices didn't drop when interest rates went up in 1970s.

 

 

As was suggested by Ericopoly, part of the reason may a collapse in transactions arising from supply also being withdrawn as a result of lower prices.  Although it addresses a different time period, see on this point pages 39-41 here:  https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.24.2.31

 

In particular, this paragraph:

"I have been fond of summarizing these data by saying that for homes, it’s
a volume cycle, not a price cycle. This very slow price-discovery occurs because
people celebrate investment gains, but deny losses. Owner-occupants of homes
can likewise hold onto long-ago valuations and insist on prices that the market
cannot support. Because of that denial, there are many fewer transactions, and
the transactions that do occur tend to be at the seller’s prices, not equilibrium
market prices."

[Gregmal]

^its funny you mention that cuz I recall seeing and thinking the exact same thing during covid with some retail CRE. Granted, there’s very different individual dynamics and scenarios. But the general gist is people often just sit tight rather than sell, to the extent they can manage to just carry the property. It wasn’t that prices went down; there was no transactions happening. When things are good, people tend to transact and move up quite a bit more. Along with newer market participants joining the fray. 

[thepupil]

https://www.google.com/amp/s/www.cnbc.com/amp/2021/11/03/house-democrats-propose-increasing-salt-cap-to-72500-through-2031.html
 

this would be wild for blue state high income real estate. A couple making $500K would have an extra $16-$20K / year for mortgage payments, at current rates improving purchasing power by some $200k+
 

for the record, I don’t really agree with the policy, though it would be wonderful for me. 

Edited November 4, 2021 by thepupil

[LearningMachine]

1 hour ago, KJP said:

 

As was suggested by Ericopoly, part of the reason may a collapse in transactions arising from supply also being withdrawn as a result of lower prices.  Although it addresses a different time period, see on this point pages 39-41 here:  https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.24.2.31

 

In particular, this paragraph:

"I have been fond of summarizing these data by saying that for homes, it’s
a volume cycle, not a price cycle. This very slow price-discovery occurs because
people celebrate investment gains, but deny losses. Owner-occupants of homes
can likewise hold onto long-ago valuations and insist on prices that the market
cannot support. Because of that denial, there are many fewer transactions, and
the transactions that do occur tend to be at the seller’s prices, not equilibrium
market prices."

 

Thanks @KJP for sharing.  Really appreciate it. The next paragraph after what you quoted from your source is also interesting :-):

 

Quote

The slow price discovery acts like a time-out, allowing the fundamentals to catch up to valuations and keeping foreclosure rates at minimal levels. In the early phase of the current [2006-2009] housing correction, history seemed to be repeating itself, since volume was dropping rapidly even as prices continued to rise. But then began a rapid 51 percent drop in home prices between August 2007 to March 2009, creating a huge amount of underwater valuation.

 

[ERICOPOLY]

All this talk of 18% rate in 1981.  Well, that was the 30 yr fixed rate.  

 

So I tried to find what the shorter term mortgage rates were.  I cannot.  Were there any?

 

Is it so that ARMs were first introduced in 1982?  And what were the rates on those?

 

https://en.wikipedia.org/wiki/Garn–St._Germain_Depository_Institutions_Act#:~:text=The Garn–St Germain Depository,provide adjustable-rate mortgage loans.

 

[ERICOPOLY]

My paternal grandmother lived in Australia when she passed at 94.  She had been there since 1950.  My grandfather passed in 2001 at 94.  They had married in England and moved to Australia in 1950 from England.

 

My grandfather had an inheritance that he invested in Sydney real estate in 1949.  

 

He made 3 purchases of real estate in Sydney:

There was the family home on two lots in Lindfield, a suburb of Sydney, and also the beach home in Palm Beach on 2 lots (again, Sydney).  I visited both of those properties from 1973 until my grandmother passed in 2011.

 

But then there was a 3rd property:  he purchased a greenbelt that is now Beechworth Rd in Pymble (now a very wealthy Sydney suburb).  He thought that greenbelt would be locked up for a long time but Sydney expanded very rapidly and he was able to develop it.  And the rest of that land is what is now the Avondale Golf Club (which explains their membership, I just remember the posh spread of food).

 

So, holy shit he invested well.  

Then my grandmother was a stock picker and she invested it herself with the help of a broker who'd point her to companies and she'd read the annual reports.  Yes, my grandmother was a retail investor who would be looking up stock quotes and reading annual reports to while away the time while I played on the floor and fought with my sister.

 

So, I spoke with her about real estate and bubbles and how the home prices cannot go up faster than inflation and all that rubbish.  She set me straight, explaining it was set by supply and wages.

 

So that's that.  She was a whiz.  Had all the numbers in her head.  Would have been a great friend of Buffett's, he would have been impressed.

 

 

 

 

 

[ERICOPOLY]

My grandmother told me that she inherited shares of Nokia from her father.   I was thinking to myself "oh my god!  she's loaded!".  When she noticed my reaction she explained that Nokia was a manufacturer of galoshes so she sold it. 

 

 

 

 

[finetrader]

@Eric

Incredible stories

no wonder you’re a good investor

[ERICOPOLY]

But I'm a speculator. 

 

My father is the one who had the Value Line binders out and all that in his study and his success has been reasonable.  Although he never sells anything... just holds and holds.  He has been holding Magellan since Peter Lynch managed it.  He bought MSFT because I worked there and still has it (glad I didn't work for Blackberry).  I convinced him to buy JPM and Berkshire and Markel.  He never sells -- you just can't get him to do it.  I'm very careful about what I tell him about for that reason.

 

My grandmother had small positions from reinvested dividend and her big positions were that way because she simply didn't want to pay capital gains taxes.  Australia brought in a capital gains tax in the 1980s and everyone's share purchased beforehand were grandfathered in.  Soon before she passed she liquidated in order to tidy up her affairs -- she was selling decades old positions in Westpac and BHP without taxes.  Now why can't the United States grandfather our tax rules instead of changing the game on us all the time?  Australia rocks.

[Gregmal]

5 hours ago, thepupil said:

https://www.google.com/amp/s/www.cnbc.com/amp/2021/11/03/house-democrats-propose-increasing-salt-cap-to-72500-through-2031.html
 

this would be wild for blue state high income real estate. A couple making $500K would have an extra $16-$20K / year for mortgage payments, at current rates improving purchasing power by some $200k+
 

for the record, I don’t really agree with the policy, though it would be wonderful for me. 

Jesus Christ. I'd love it, pretty much to the max, but fuck, how do you claim to be a party of the working class while now stuffing into one of the most scrutinized bills in modern memory, a tax deduction greater than the wages of the average person?

[ERICOPOLY]

16 minutes ago, Gregmal said:

Jesus Christ. I'd love it, pretty much to the max, but fuck, how do you claim to be a party of the working class while now stuffing into one of the most scrutinized bills in modern memory, a tax deduction greater than the wages of the average person?

 

Yeah.  Meanwhile they want me to yank my money out of Dhandho Holdings which has been smoked by pretty much any mutual fund you can find.  If you can find a worse performance I'm all ears.

 

And they continue to punish me with an additional 10% penalty to pull my money out of the Roth IRA early even though it's worth millions and they don't want Roth IRAs worth millions.  Just tell me where the insanity ends.

Edited November 4, 2021 by ERICOPOLY

[Spekulatius]

10 hours ago, thepupil said:

https://www.google.com/amp/s/www.cnbc.com/amp/2021/11/03/house-democrats-propose-increasing-salt-cap-to-72500-through-2031.html
 

this would be wild for blue state high income real estate. A couple making $500K would have an extra $16-$20K / year for mortgage payments, at current rates improving purchasing power by some $200k+
 

for the record, I don’t really agree with the policy, though it would be wonderful for me. 

I actually think that  re-instituting the SALT deduction while at the same time increasing the federal tax is a no brainer for the Dems. It’s mind boggling that they haven’t done this already.

[ERICOPOLY]

1 hour ago, Spekulatius said:

I actually think that  re-instituting the SALT deduction while at the same time increasing the federal tax is a no brainer for the Dems. It’s mind boggling that they haven’t done this already.

 

It was odd that Trump reduced it because I recall the Republicans being against double-taxation for dividends.

[Red Lion]

On 10/29/2021 at 11:39 AM, ERICOPOLY said:

On the topic of banks lending to just about anyone.  A person with no assets (aside from down payment) and a salaried income can get a 30 yr fixed rate mortgage even if they are 75 years old.

 

But not me...

I feel your pain, and know exactly how you feel. 

 

Even as a salaried employee of a C-corporation that I own a 50% stake in, that's having a monster year, I can't get a good 30 year fixed for nearly enough to purchase anything but a shithole in California. 

[Gregmal]

MRNA seems to be getting into value investor territory!(sarcasm)

 

Anyone else eagerly waiting for a thread to be started where our housing expert can enlighten us all on the future of investing? I'm sure there's at least some PTON investors who would find it compelling. 

[Gregmal]

https://seekingalpha.com/news/3774056-average-monthly-rents-increase-slows-in-october-but-metro-areas-see-yy-jumps

 

https://abcnews.go.com/Business/wireStory/october-existing-home-sales-hit-fastest-pace-january-81328263

 

LOL still waiting for those slow downs folks keep talking about. Seems when we say words like "stalling" or "lack of demand" we simply refer to month over month or year over year increases of mid single digits.....not real, actual lack of demand and/or prices cratering. 

 

These sort of trades are so fun because you know some folks have an agenda and an incentive to distort the narrative. Just like with inflation being transitory and oil prices having to come down, they lie, lie, lie, but the data is easy and obvious to read and the trades are often fish in a barrel. 

[fareastwarriors]

just glad I'm not renting... talk about ouch!

 

 

 

 

https://www.bloomberg.com/news/articles/2021-11-24/south-florida-new-york-see-apartment-rents-surge-more-than-30?srnd=premium

 

South Florida and New York See Apartment Rents Surge More Than 30%

Edited November 24, 2021 by fareastwarriors

[Gregmal]

https://www.cnbc.com/2021/12/06/apartment-rent-and-occupancy-hit-record-highs-in-november.html

 

Nothing to see here. Just more of the same noise. Sounds a lot like table pounding if I had to guess.