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What happens when housing prices go down?

clmarohn.substack.com

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Re: What happens when housing prices go down?

#261

Post by zozbot234 »

rwarfield wrote: post #77

This article is a mess. From the third paragraph: > What happens when prices actually start to fall? Because that’s not just a hypothetical. It’s already happening in places like Phoenix, Atlanta, Miami, Dallas... Then two paragraphs later > In The Atlantic, Rogé Karma recently pointed out that housing prices are rising fastest in the very cities once seen as escapes from high-cost coasts, places like Phoenix and Dal…

Even the title is a bit of a mess. What happens when the price of $THINGY goes down (where $THINGY is housing)? It depends. Did the price drop because of an increase in supply, a decline in demand, or both? That's what determines the overall effect (including something as basic as the change in quantity!), you can't just reason about a price change in isolation. If this article comes from the Strong Towns folks it's not making a very good argument for their POV, I'd expect way better.

Re: What happens when housing prices go down?

#262

Post by mlhpdx »

The universal agreement that “we need to build more housing” baffles me. I see persistent vacancy rates, so the raw capacity is there. High commercial vacancy means more will come without new builds.

If the issue is ownership versus renting (which is very important), building new will lead to more overcapacity in the system at large, won’t it? That won’t serve new owners well (or existing ones).

It’s a difficult problem without painless solutions.

Re: What happens when housing prices go down?

#263

Post by epistasis »

stego-tech wrote: post #237
epistasis wrote: post #198

Earlier quoted context omitted.

Still doesn't solve the problem of having enough houses. Rented houses are still housing people. The problem isn't renting, the problem isn't loans, the problem is there's not enough houses where people want them.

That’s not entirely true, for a number of reasons. * Low-density housing that’s rented instead of sold drives up rent for the tenant and property values for neighbors, resulting in increased costs for everyone but the landlord (who offsets costs by raising rent) * Investors are predominantly buying affordable homes, not luxury ones. Cheaper prices (even when paying cash to outbuy other bidders) means higher margins.…

> Low-density housing that’s rented instead of sold drives up rent for the tenant and property values for neighbors, resulting in increased costs for everyone but the landlord (who offsets costs by raising rent)

It's not the renting that drives up prices, it's the lack of supply in an area. The renting was always possible, it's a symptom that shows that people want access to the neighborhood but can't afford to purchase.

> * Investors are predominantly buying affordable homes, not luxury ones. Cheaper prices (even when paying cash to outbuy other bidders) means higher margins.

I have not seen evidence of investors buying affordable homes for renting them out. Cheaper prices don't mean higher margins, unless the sale price is higher.

> * Construction has fundamentally changed as a result. No longer are structures being built for sustainable operations, but simply to exploit valuation growth before being shoved off to the next buyer. The goal from everyone involved is maximum margin/profit, not quality and sustainable shelter.

This is not a change, construction was never for sustainable operations, it was always about profit. There's not some magical time in the past when builders and developers didn't care first and foremost about profit.

> * There’s a glut of “luxury” apartments in higher-density units that sit vacant as a result of gaming the local marketplace for higher rent instead of maximum occupancy.

I'm not sure where that's true, except in the places where prices are falling like in Austin. I know that in my severely undersupplied town, the "luxury" apartments that are only slightly higher in price than in other areas are filling up faster than was expected when the financial model was put forward at the time of designing the building. And this was a model built before interest rates got jacked up by the fed! Yet local people complain that they are vacant and not getting rented out and are vacant when they are not in fact vacant.

I see evidence of false complaints of vacancy all around the country too. One group in LA that spends a lot of their time trying to stop apartments had to retract their vacancy report:

https://laist.com/news/does-la-actually-have-more-vacant-uni...

Nobody has ever tried to maximize occupancy rather than profit. Maximizing occupancy is not a good metric to even optimize, we need vacancies so that there's room for people to move around. An area with less than 5% vacancy is severely undersupplied and severely restricts where people can live.

The housing crisis is all about regulatory restraints that small-holders of land use to create the crisis. It's artificial crisis, not from landlords maintaining 5% vacancy rather than 3% vacancy, but from landowners, especially homeowners stopping their local governments from legalizing housing.

Re: What happens when housing prices go down?

#264

Post by kjkjadksj »

bluGill wrote: post #142
rwarfield wrote: post #77

This article is a mess. From the third paragraph: > What happens when prices actually start to fall? Because that’s not just a hypothetical. It’s already happening in places like Phoenix, Atlanta, Miami, Dallas... Then two paragraphs later > In The Atlantic, Rogé Karma recently pointed out that housing prices are rising fastest in the very cities once seen as escapes from high-cost coasts, places like Phoenix and Dal…

Also no discussion of interest rates - I bought my house just a few years ago at just under 3%, today I would be paying more than 6% - I couldn't afford the payments if I refinanced. I believe that interest rates are the primary driver of less construction: people who want to buy can't afford to unless they downsize.

3% change really breaks your budget? Higher rates generally mean lower home prices anyhow making the effective mortgage rate more similar than anticipated.

Re: What happens when housing prices go down?

#265

Post by [deleted] »

bluGill wrote: post #142
rwarfield wrote: post #77

This article is a mess. From the third paragraph: > What happens when prices actually start to fall? Because that’s not just a hypothetical. It’s already happening in places like Phoenix, Atlanta, Miami, Dallas... Then two paragraphs later > In The Atlantic, Rogé Karma recently pointed out that housing prices are rising fastest in the very cities once seen as escapes from high-cost coasts, places like Phoenix and Dal…

Also no discussion of interest rates - I bought my house just a few years ago at just under 3%, today I would be paying more than 6% - I couldn't afford the payments if I refinanced. I believe that interest rates are the primary driver of less construction: people who want to buy can't afford to unless they downsize.

[deleted]

Re: What happens when housing prices go down?

#266

Post by kjkjadksj »

mlhpdx wrote: post #262

The universal agreement that “we need to build more housing” baffles me. I see persistent vacancy rates, so the raw capacity is there. High commercial vacancy means more will come without new builds. If the issue is ownership versus renting (which is very important), building new will lead to more overcapacity in the system at large, won’t it? That won’t serve new owners well (or existing ones). It’s a difficult prob…

There is always some level of vacancy rate by virtue of people moving out or in and renovations. Even keeping a unit off the market if you don’t want to have to let it out at lower rent and devalue your asset which is priced in part on rent prices.

And further in terms of inventory. What does it suggest to you in high demand cities when we see e.g. in socal virtually all available space already built to the limits of the zoned capacity? No real room to add inventory based on zoning laws, job growth continues to happen, and prices are rising. Do you believe this is a sufficient amount of inventory, todays zoned capacity with no avenue to meaningfully add housing inventory?

This is why the situation is fundamentally different in socal than anywhere else such as texas. Dallas metro region has farms on all sides to continue to digest to create regional inventory without making large changes to zoned capacity. Socal has mountains and the pacific ocean.

Re: What happens when housing prices go down?

#267

Post by zozbot234 »

stego-tech wrote: post #89

Ultimately, there is no solution in which the core groups will all be appeased: * If prices keep going up, then home ownership remains a luxury of the wealthy and an exploitation of the poor. Asset holders will be thrilled with returns, but the majority struggling to get or stay on the proverbial property ladder will grow increasingly angry at sky-high rents and prices with stagnant wages * On the other hand, if pric…

Price controls are a terrible policy. The nice things about rising housing prices is that they can be addressed in a way that also creates a nice tax base for local communities: Raise property taxes on the ground-rent portion of real estate values. For those living in California, this means you need to put an initiative on the ballot to get rid of the infamous Prop 13.

Re: What happens when housing prices go down?

#268

Post by kjkjadksj »

spicybbq wrote: post #63

> Price Drops Don’t Lead to Supply. They Kill It. Is anyone arguing that price drops "lead to" (i.e. happen before) increases in supply? It seems to me that it's the other way around: supply increases "lead to" price drops. This is what supply advocates hope to see in HCOL cities with expensive housing. The author is concerned that builders will stop building when prices fall, but that's rational. Suppliers should re…

The fact that there are still companies building new homes in say Youngstown Ohio shows that prices can fall significantly, by an order of magnitude even, in high cost of living metros before a point is reached where cost of labor and materials makes any build not pencil out.

Re: What happens when housing prices go down?

#269

Post by msgodel »

hattmall wrote: post #174
eviks wrote: post #81

The whole article is a mess of basic misunderstanding and conflation of cause and effect and reasoning from a price change instead of understanding what caused it. > When prices actually go down, builders get nervous, lenders get cautious, financing dries up, and projects disappear. No, it depends on the causes that drove the prices down. Some of those will get builders nervous, while others will make them giddy. > N…

Permits and licensing is a huge factor, most of the southeast didn't even have licensing boards until the late 90s. If you wanted to build a house you could just do it. Now it's functionally impossible unless you are capitalized enough to spend a considerable amount of time and money on the permitting and approvals process. One of the reasons there's so much gentrification is that it's much easier for builders to tak…

I'm just building my house myself and ignoring the permitting process. It's extremely rural and there's no one to really report the violation plus the house is so small if I'm forced to tear it down it's no big deal. The expected value of "breaking the law" this way is pretty deeply positive.

Re: What happens when housing prices go down?

#270

Post by 9rx »

ta1243 wrote: post #246
9rx wrote: post #116

Earlier quoted context omitted.

> The demand is still there It's not, though. That's the whole political contention. That demand is, because of high prices, not at the levels the population want to see. Demand is defined as having desire and willingness to pay for a good or service. High prices maintains the desire in most cases, but chases off the willingness. That's the whole point of having prices! > Even when it costs nothing, there's always a…

"Unmet demand refers to the gap between the demand for a product or service and the actual supply available in the market. " Now sure, if you offer $50m for a 1 bed house someone will sell you one, at the expense of the person only offering $40m. That doesn't mean there is no unmet demand.

> That doesn't mean there is no unmet demand.

Right, it doesn't tell us much of anything, but there does need to be some external mechanism that is getting in the way from transaction completion in order for demand to be unmet. A shortage is one example of such a mechanism, but there clearly isn't a shortage[1] in the housing market. Prices have risen just fine. There is probably some unmet demand in the fact that builders simply can't build fast enough — where people have the money in hand to buy and have a seller theoretically willing to sell, but can't do so because the place is not yet finished — however, there isn't a lot of evidence to suggest that is a big problem and it is definitely not the problem being discussed.

"I really want to buy a house but I cannot afford it" is not unmet demand. That is what we call dreaming. As before, demand is comprised of desire _and willingness_.

[1] Speaking in terms of a "shortage" in the technical sense. I recognize that, colloquially, it has become popular to use "shortage" to mean "The price is higher than I like", but that definition, while certainly appealing to emotion, is nonsensical when you really think about it. Literally everything is in "shortage" by that definition, making it a useless term (as useless as demand = everyone who wishes to have something). The technical definitions are actually useful, though.

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