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There is more to high house prices than constrained supply

economist.com

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Re: There is more to high house prices than constrained supply

#161

Post by HeyLaughingBoy »

CalRobert wrote: post #156
phkahler wrote: post #13

Home prices vary inversely with interest rates. Here's how that works: 1) person tells bank they'd like a mortgage to buy a house. 2) banker asks for info on income, expenses, etc. 3) banker estimates persons maximum monthly payment. 4) banker figures out max loan amount based on #3 5) buyer is encouraged by everyone to spend the full amount from #4 Everyone - the seller, their agent, your agent, the bank, and maybe…

I just agreed to buy a house. It's very cheap. It's very small and strange, so thankfully banks wouldn't give a mortgage on it. It was built around 1800, most likely when several people nearby got together and gathered a lot of stones to erect walls, and peat from a nearby bog and oat straw (which was grown locally) to make a roof. Over the subsequent hundred years it had a couple rooms added until it reached its cur…

Why can't I just gather materials and build my own house?

In the US, you certainly can, as long as you use approved materials and get the necessary permits and inspections.

If you want to fell trees and gather rocks to build your home, you can also do that, but it becomes much harder to get it registered as a homestead. In either case (assuming you are living outside city limits), you will probably need an approved septic plan.

You can build something that doesn't meet the local building codes, but it may be difficult or impossible to sell it later.

Re: There is more to high house prices than constrained supply

#162

Post by Spooky23 »

brownbat wrote: post #60
phkahler wrote: post #13

Home prices vary inversely with interest rates. Here's how that works: 1) person tells bank they'd like a mortgage to buy a house. 2) banker asks for info on income, expenses, etc. 3) banker estimates persons maximum monthly payment. 4) banker figures out max loan amount based on #3 5) buyer is encouraged by everyone to spend the full amount from #4 Everyone - the seller, their agent, your agent, the bank, and maybe…

I expected this was true for the same reasoning when buying a home, but when I sampled the historical numbers, there was no strong relationship. Bankrate came to similar conclusions: https://www.bankrate.com/finance/mortgages/rising-rates-lowe... I think your reasoning is valid, so best I can figure it's because home prices and interest rates are both directly correlated with economic activity. So if the economy is h…

I’d dig deeper. Buying power is a zero sum game driven by price, interest and tax.

When you look at tax rates, there’s a direct correlation between home price and taxes in high price states like NY, that correlates tightly with the impact on buying power.

I’d guarantee that if you were looking at the 11% 30-year mortgages with 85% LTV requirements that were typical in the 1980s, prices would be very close to 1980 levels adjusted for inflation.

Re: There is more to high house prices than constrained supply

#163

Post by candybar »

mattm wrote: post #51
phkahler wrote: post #13

Home prices vary inversely with interest rates. Here's how that works: 1) person tells bank they'd like a mortgage to buy a house. 2) banker asks for info on income, expenses, etc. 3) banker estimates persons maximum monthly payment. 4) banker figures out max loan amount based on #3 5) buyer is encouraged by everyone to spend the full amount from #4 Everyone - the seller, their agent, your agent, the bank, and maybe…

It's crazy how this isn't more common knowledge that the Economist needs to write an article about it. We're also seeing the same thing recently with tuition prices. There is more money available for student loans so schools just jack up the tuition to meet the supply of money available.

The relationship between student loans and tuition prices has always been the other way around - schools are more expensive so people take out larger loans. Government subsidies for student loans are comically low compared to actual tuition these days and have barely been keeping up - private student loans have always been available and the limit has always been based on creditworthiness of borrowers as opposed to government policy.

The idea that student loans leads to higher tuition prices has always been a politically motivated talking point from the right as opposed to something based in reality. Going to college or often going to as good a school as you can get into and afford is considered more important than ever before and disposable income and wealth among the upper middle class in the US have been going up significantly, not to mention among the global elites who see US colleges as status goods. On the supply side, prestigious institutions are hardly expanding their capacity for fear of losing prestige and school administrations are becoming increasingly market-savvy and less willing to charge less than below-market prices for otherwise wealthy students and their parents.

Re: There is more to high house prices than constrained supply

#164

Post by chillacy »

fallingfrog wrote: post #118

I have to say I just don’t understand why anyone would willingly pay the kinds of prices for housing that I see people paying. It seems like the consensus is that you should pay 2.5 times your household income on a house; I see people around me paying 5 times or more. That’s bonkers . We paid 1.25 times our household income and we’d never have considered more. I’d rather live in a double wide than put that much of my…

A comment about not getting something ends with everyone else is irrational? If you don’t understand something the problem is often with your model of reality being incomplete, not other people.

Re: There is more to high house prices than constrained supply

#165

Post by Spooky23 »

brownbat wrote: post #145
Apes wrote: post #104

Earlier quoted context omitted.

I don't believe your analysis. The relationship has such a high correlation, you can just look at the the graph and probably eyeball estimate the regression within 10% error. Banks and relators have such a massive conflict of interest in pretending that the inflated prices on housing are normal. Rising interest rates are causing housing sales volumes to plummet to record lows, and after over a year of pretending noth…

When I eyeball the graph, 2002 to 2011 really jumps out. For about a third of the graph the two move in lock step. It's a weird sort of inverted relationship when the variables spend so much time moving in the same direction. Here's another take: “If you look at the relationship between [mortgage] rates and [home] sales and home prices, the relationship is almost zero,” said Sam Khater, deputy chief economist at Core…

There is no conspiracy, just that the rules changes to keep demand going.

All sorts of garbage loans that would have been illegal in the past are now common.

Re: There is more to high house prices than constrained supply

#166

Post by candybar »

phkahler wrote: post #13

Home prices vary inversely with interest rates. Here's how that works: 1) person tells bank they'd like a mortgage to buy a house. 2) banker asks for info on income, expenses, etc. 3) banker estimates persons maximum monthly payment. 4) banker figures out max loan amount based on #3 5) buyer is encouraged by everyone to spend the full amount from #4 Everyone - the seller, their agent, your agent, the bank, and maybe…

So there is both a theoretical and an empirical relationship between real estate prices and interest rates but they have nothing to do with mortgages per se - you will find that this roughly holds true even in countries where mortgages aren't available.

The reason is that even in a world without mortgages, real estate tends to yield either payments (as an investment) or benefits (as the owner) that are roughly fixed and not entirely based on interest rates. If you consider the value of real estate to roughly equal the sum of discounted cashflows, this means the lower the interest, the higher the value.

Note that in theory, only land prices move this way, not the value of improvements, since the value of improvements is strongly tied to the cost. So if you consider the value of housing theoretically as a sum of land and improvements, only the land portion is subject to interest rates. So some have observed here that empirically the connection between real estate prices and interest rates has been weak - this will be the case in real estate markets dominated by the cost of improvements (most US markets until fairly recently I believe).

Re: There is more to high house prices than constrained supply

#167

Post by djrobstep »

CalRobert wrote: post #156
phkahler wrote: post #13

Home prices vary inversely with interest rates. Here's how that works: 1) person tells bank they'd like a mortgage to buy a house. 2) banker asks for info on income, expenses, etc. 3) banker estimates persons maximum monthly payment. 4) banker figures out max loan amount based on #3 5) buyer is encouraged by everyone to spend the full amount from #4 Everyone - the seller, their agent, your agent, the bank, and maybe…

I just agreed to buy a house. It's very cheap. It's very small and strange, so thankfully banks wouldn't give a mortgage on it. It was built around 1800, most likely when several people nearby got together and gathered a lot of stones to erect walls, and peat from a nearby bog and oat straw (which was grown locally) to make a roof. Over the subsequent hundred years it had a couple rooms added until it reached its cur…

> Why can't I just gather materials and build my own house?

Indeed. This is why discussion of "supply" misses the point.

- Many people would quite happily build their own house in the middle of Central Park. But they cannot, because government intervention prevents them.

- Many homeless people would happily sleep in unused climate-controlled office buildings at night, but cannot, because government intervention prevents them.

- Many people would happily live outside of cities, but can't for financial reasons (effectively, the government coerces them via property law, into moving into cities to do work).

Supply is not the issue. There's plenty of supply already existing or easily created. The issue is that people are violently prevented from using it.

Re: There is more to high house prices than constrained supply

#168

Post by greglindahl »

fbonetti wrote: post #135
mattm wrote: post #51

Earlier quoted context omitted.

It's crazy how this isn't more common knowledge that the Economist needs to write an article about it. We're also seeing the same thing recently with tuition prices. There is more money available for student loans so schools just jack up the tuition to meet the supply of money available.

It drives me crazy that people don’t see the very simple reason why tuition has risen so much: student loan debt is not dischargable through bankruptcy. Even if the student is run over with a bus the debt can be passed on to family members. The lenders that give out these loans therefore have essentially no risk and are highly incentivized to give out loans to any and every person that wants one, regardless of their…

Student loan debt not being dischargable through bankruptcy is relatively recent; the increase in tuition has been going on for a lot longer than that. Even if the step you advocate is taken, US federal student loan guarantees will continue to have a large effect on tuition rates.

Re: There is more to high house prices than constrained supply

#169

Post by thaumaturgy »

darawk wrote: post #159
thaumaturgy wrote: post #105

Earlier quoted context omitted.

> The rent itself however is controlled by supply and demand No, it's not. Folks have got to stop using simplistic remedial high school economics classes to explain complex social problems. They just aren't that simple. During the 2008 financial implosion, a single investment company called Blackstone Group went on a buying spree around the US. As of this time last year, they owned, through a subsidiary company, full…

Basically none of that makes any economic sense. The fact that Blackstone can own 1.5% of the property in Sacramento is a supply issue. I.e. we are back to supply and demand. The entire rest of your post hinges on there being no supply response to demand. So yes, once again, everything is still and always will be mediated primarily by 'remedial high school economics'. > Building more housing is not going to fix this…

These replies to my comment are super weird. I'm reading them collectively as, "I don't see how the influx of millions and millions of dollars of investment capital would have an effect on housing prices."

Well, okay, I guess. How many houses do you think need to be built to satisfy the investment needs of everyone looking to outperform the S&P 500? For extra credit, realize that this means that every metropolitan market is now an international investment vehicle.

Re: There is more to high house prices than constrained supply

#170

Post by pjmorris »

nzealand wrote: post #126
phkahler wrote: post #13

Home prices vary inversely with interest rates. Here's how that works: 1) person tells bank they'd like a mortgage to buy a house. 2) banker asks for info on income, expenses, etc. 3) banker estimates persons maximum monthly payment. 4) banker figures out max loan amount based on #3 5) buyer is encouraged by everyone to spend the full amount from #4 Everyone - the seller, their agent, your agent, the bank, and maybe…

Historically, it is more about construction costs and comparable rent prices. http://www.econ.yale.edu/~shiller/data/Fig3-1.xls

Can you describe how you reached your conclusion from the data in the spreadsheet? I don't see any of the three series correlating particularly strongly with house prices. My own pet theory is that adding the Fed's QE purchases to the graph would show stronger correlation than the series that are present.
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