Housing bubbles are universally destructive • Hacker News Board

Re: Housing bubbles are universally destructive

#51

Post by saint_abroad » Tue, Oct 02, 2018, 11:39 AM UTC

david927 wrote: post #43

CPAhem wrote: post #41

Real estate bubbles rarely burst unless there is accompanying unemployment. The reason is psychological, people hate realizing a loss. Another practical reason is that if borrow $1 million for a house, and it is now worth $800,000 you just keep paying off the mortgage and hope prices go up again. Selling it would require you pay in some cash to pay off the loan. All this is provided you keep you job and can afford th…

The faster a bicycle goes, the more stable it is and therefore less likely to fall over. But also when it does fall over, the damage is much more devastating. You're right that there's a keel keeping real estate from tipping. The reason isn't just psychological (although there is a strong sentimental sense of attachment you have to your house); real estate is also less liquid than almost everything else. Other factor…

> The crash of 2008 wasn't so much averted as postponed.

This.

The US housing market correction from 2006 was 30%. In this time, the US Fed funds rate went from 5.25% to 0.15% cutting banks' monthly cost for a $250k loan from >$1k/m to In the meanwhile, median LTV has gone from 80% in 2007 to 95% in 2017 [1] and median loan sizes have gone from $175k to $325k. What happens when interest rates normalise and mortgage interest doubles?

The banks have been propped up but the risks have not left the system.

[1] https://www.urban.org/research/publication/housing-finance-g...

Re: Housing bubbles are universally destructive

#52

Post by chadcmulligan » Tue, Oct 02, 2018, 11:50 AM UTC

purplezooey wrote: post #25

It's no bubble now because we don't build nearly enough in these areas. We need some kind of big federal or state project where lots of people get bought out to leave, or moved via eminent domain, and higher density built.

I'm in brisbane, australia, and this seems to be the case here as well. There has been huge increases in property values and rental returns. Recently though they're has been a high rise building boom and sure enough rental prices seem to be dropping and there's an over supply. There is a general property slow down occurring to, though how far its going to go no one knows. The supply side of the demand / supply seems to be increasing.

Another theory that seems to be going around recently is its the availability of credit that causes these bubbles, which on the face of it seems to make sense. If credit isn't available then prices wont increase, if easy cheap credit is available then people will leverage up, which pushes up house prices and the circle continues.

Re: Housing bubbles are universally destructive

#53

Post by dgudkov » Tue, Oct 02, 2018, 12:43 PM UTC

He is talking about inflation as a way to resolve it, but my personal (and totally unscientific) pet theory is that inflation is already here. The prices are so high not because the real estate is expensive, but because the intrinsic value of money is declining. How come elevated inflation is not reflected in official stats? The problem with counting inflation is that it doesn't account for the loss of quality which is happening in all areas except high-technology products. E.g. while the price (in real money) for a burger in McDonalds can be more or less the same as in the 90s or 60s, the quality went down due to excessive use of herbicides and drugs in farming.

No wonder many people get debts because it's the right strategy when money are losing value. If the real inflation is say 5%, then getting a mortgage at 3.5% earns you 1.5% a year. No wonder stock indexes are record high nowadays -- it's not because businesses excel more than ever, it's because the dollar is worth less.

Re: Housing bubbles are universally destructive

#54

Post by mistermann » Tue, Oct 02, 2018, 12:59 PM UTC

llamaman wrote: post #30

mistermann wrote: post #20

Earlier quoted context omitted.

> It's almost impossible to avoid this once the values are already ridiculous, but what the article suggests can mitigate it somewhat: Sustained moderate inflation combined with a large increase in the housing supply, so that real values come down even though nominal values are stable. I'm having trouble understanding what inflation means in this context. From the article: > There is a way out, but it’s not a pleasan…

I believe the author is referring to high inflation as measured by things that reserve banks look at (in Australia this would be the consumer price index etc); while house prices either stay stagnant or rise slower than said rate of inflation. Thus, the nominal price of housing is maintained, while the real value tanks. How this might happened is something I do not have the economics to know - as you mentioned, an in…

> I believe the author is referring to high inflation as measured by things that reserve banks look at (in Australia this would be the consumer price index etc); while house prices either stay stagnant or rise slower than said rate of inflation. Thus, the nominal price of housing is maintained, while the real value tanks.

Yes, this makes perfect sense in theory - housing inflation has dramatically outpaced everything else, so if the government causes a whole bunch of monetary inflation by printing money and that money doesn't go into housing but goes into other things (maybe even wages!), then it will let those prices catch up, while also devaluing the cost of the housing debt.

But I think printing money is what got us into this situation in the first place, it just mostly all went into housing, to stop that from continuing you'd need to change the collective beliefs of nearly the entire population. This is one thing that could genuinely be "different this time": the belief that real estate always goes up. And you can hardly blame people, because it's more or less true, and is virtually guaranteed by more than one government policy.

Re: Housing bubbles are universally destructive

#55

Post by jeffbax » Tue, Oct 02, 2018, 1:03 PM UTC

debacle wrote: post #10

msvan wrote: post #2

It is true that housing prices in urban areas have risen astronomically in many regions of the world, and while we may well see a correction, I wonder if these these areas have simply become way more valuable than they used to be. People thought that the internet would make location irrelevant, but it seems that the opposite has happened. I can think of many armchair theories as to why, but it's not a simple question…

For starters, there are a lot of places in the US I can't live because I need home access to good Internet.

That's going to change rapidly with 5G

Re: Housing bubbles are universally destructive

#56

Post by mistermann » Tue, Oct 02, 2018, 1:09 PM UTC

shkkmo wrote: post #39

mistermann wrote: post #20

Earlier quoted context omitted.

> It's almost impossible to avoid this once the values are already ridiculous, but what the article suggests can mitigate it somewhat: Sustained moderate inflation combined with a large increase in the housing supply, so that real values come down even though nominal values are stable. I'm having trouble understanding what inflation means in this context. From the article: > There is a way out, but it’s not a pleasan…

> And if we're speaking about monetary inflation,well, where did all the money come from in the first place to make housing so expensive? Yes I know, when one house sells in a neighborhood or city everything is revalued, but when you've been at it for 10++ years and have had significant turnover of the entire inventory, this excuse begins to run thin after a while. If GDP growth is more or less flat, and there isn't…

This would be partially explained by: https://en.wikipedia.org/wiki/Velocity_of_money

I don't completely understand it either though, say you cut one blade of my grass and I pay you $20, then I cut one blade of your grass and you pay me $20, rinse repeat and you get massive GDP, but no increase in wealth. Now do something similar with housing, except this time print a whole bunch of money and pour it all into housing (including construction), and compare that to a country that instead invests into education and building manufacturing plants - who is going to be wealthier?

I think this is all far more complicated than governments let on, or maybe they actually don't even understand it all, from what I can tell a large number of economists don't, so perhaps it's no surprise we're in the situations we are.

Re: Housing bubbles are universally destructive

#57

Post by a008t » Tue, Oct 02, 2018, 2:00 PM UTC

dgudkov wrote: post #53

He is talking about inflation as a way to resolve it, but my personal (and totally unscientific) pet theory is that inflation is already here. The prices are so high not because the real estate is expensive, but because the intrinsic value of money is declining. How come elevated inflation is not reflected in official stats? The problem with counting inflation is that it doesn't account for the loss of quality which…

Why is gold doing so poorly then?

Re: Housing bubbles are universally destructive

#58

Post by wh0knows » Tue, Oct 02, 2018, 2:13 PM UTC

claydavisss wrote: post #47

zimablue wrote: post #42

There's a kind of interesting way to think about this, especially in the UK. Because people don't automatically think in terms of opportunity cost and don't know eg. that the long term equity return is X, there's a disconnect between reality and how people think of it. People in the UK think of rent as "wasted" money. In an efficient market, it wouldn't be wasted at all because the saving from lower rent vs mortgage…

Who are these people who intentionally seek a lower rent over a higher mortgage so as to invest in stocks? I've yet to meet one. Renters are just as likely to give in to vanity purchases, dumb spending habits etc... And why are stocks such an awesome alternative? A stock can go to zero...even foreclosed homes have some value. Stocks are optional - shelter isn't. Since you must commit some of your earnings to shelter,…

Take a look at the FIRE community, or anybody who is interested in a self-funded retirement.

Most people who are the ones renting and investing large amount are not buying single stocks, they are buying broad index funds that encompass the entire market and are rebalanced to keep an even representation.

These broad index funds going to zero is not a very likely scenario outside of total anarchy. It would mean all publicly traded companies becoming worthless and you would be much more worried about acquiring water, shelter, food, and protecting yourself from looters than anything else (in this scenario I would imagine the piece of paper saying your house is yours would not be worth very much either).

Now think of the much more likely scenario of a local real-estate market collapsing, uninsured natural disaster destroying your house, or climate change making your area unliveable, and you can see which proposition is really the riskier one.

If you don't sell your house you don't profit you only pay more in property taxes.

The thing is it doesn't, that's the point. If I want to rent to keep flexibility and invest my money in stocks in order to retire I am at a decided disadvantage than somebody who buys a house and has it appreciate to double its initial value. In the vast majority of countries this appreciation is free from capital gains tax, or the house's value is not taken into account in the wealth tax. So why is the house owner rewarded for saving and putting money in a mortgage and the renter penalised by capital gains/wealth taxes?

Re: Housing bubbles are universally destructive

#59

Post by dgudkov » Tue, Oct 02, 2018, 2:19 PM UTC

a008t wrote: post #57

dgudkov wrote: post #53

He is talking about inflation as a way to resolve it, but my personal (and totally unscientific) pet theory is that inflation is already here. The prices are so high not because the real estate is expensive, but because the intrinsic value of money is declining. How come elevated inflation is not reflected in official stats? The problem with counting inflation is that it doesn't account for the loss of quality which…

Why is gold doing so poorly then?

My guess would be that the intrinsic value of gold is declining as it has no much use outside of manufacturing and jewelry. Gold itself is a complex market heavily influenced by regulations and a few players. But I'm in no way an expert in it.

Re: Housing bubbles are universally destructive

#60

Post by dionidium » Tue, Oct 02, 2018, 2:21 PM UTC

claydavisss wrote: post #47

zimablue wrote: post #42

There's a kind of interesting way to think about this, especially in the UK. Because people don't automatically think in terms of opportunity cost and don't know eg. that the long term equity return is X, there's a disconnect between reality and how people think of it. People in the UK think of rent as "wasted" money. In an efficient market, it wouldn't be wasted at all because the saving from lower rent vs mortgage…

Who are these people who intentionally seek a lower rent over a higher mortgage so as to invest in stocks? I've yet to meet one. Renters are just as likely to give in to vanity purchases, dumb spending habits etc... And why are stocks such an awesome alternative? A stock can go to zero...even foreclosed homes have some value. Stocks are optional - shelter isn't. Since you must commit some of your earnings to shelter,…

> even foreclosed homes have some value.

Homes can go to zero. Homes can go to below zero, which is why there are land banks all across the Rust Belt with thousands of properties they have trouble giving away.

> On a subjective level, home owners have better finances, more say in guiding their communities, and many other advantages.

Of course, because we live in a society in which nearly everyone is convinced that it's better to own a house, so anybody with enough resources to own a house chooses to own a house. And because most of those folks have an even dimmer view of apartment-dwellers than you've displayed here, they use zoning to literally separate themselves from those lower classes, to fairly predictable outcomes.