Housing bubbles are universally destructive • Hacker News Board

Re: Housing bubbles are universally destructive

#61

Post by a008t » Tue, Oct 02, 2018, 2:32 PM UTC

saint_abroad wrote: post #51

david927 wrote: post #43

Earlier quoted context omitted.

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 i…

Why would interest rates "normalize" though?

Re: Housing bubbles are universally destructive

#62

Post by leoedin » Tue, Oct 02, 2018, 2:39 PM UTC

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…

When people talk about the opportunity cost of buying, they very rarely take into account leverage. A typical house buyer might have somewhere between 2 and 9x leverage on their deposit (ie a 66-90% loan to value). Once you take that into account the returns, even if you don't take into account capital appreciation (essentially the saved cost of renting minus maintenance costs) rise significantly, becoming competitive with the long term returns on an index fund. Nobody's going to lend you significant money to invest in an index fund at anywhere close to mortgage rates.

As an example, a flat which costs £400k might have a rental value of £1.4k/month, or 4.6% annually. However, if you bought that flat with a 75% LTV at an interest rate of 2% you'd have invested £100k and have an effective return of £16800/year less £6k/year of interest. That means an annual return of 10.8%. The long term S&P 500 average return is around 12.11%[1]

It doesn't take much price inflation to tip you into better returns than the index fund. House prices since 1952 have risen by an average of 7.9%[2].

[1]: https://ycharts.com/indicators/sandp_500_total_return_annual [2 - XLS]: https://www.nationwide.co.uk/-/media/MainSite/documents/abou...

Re: Housing bubbles are universally destructive

#63

Post by a008t » Tue, Oct 02, 2018, 2:41 PM UTC

lewis500 wrote: post #9

This whole piece makes me ask what a bubble really means. The author admits to having been wrong about housing prices since 2000. But that’s okay because bubbles can, apparently, last decades. If a bubble can last a very long, but totally indeterminant amount of time, does it have any reality?

Houses have intrinsic value, which comes from future rental cashflows. Let's ignore the premium that some people would pay over that just because they want to be owners of a house.

Then, it seems to me that house prices can be approximated as a function of rents, interest rates (determining required return on owning a house), and anticipated growth in house prices (which again can be decomposed into growth in rents, reduction in interest rates and 'irrational' growth). Using London as an example. Rental yields appear to be around 3.5% in London at the moment, which suggests to me that a good deal of anticipated growth is priced in. But where can that growth come from? Rents are a function of incomes and are unlikely to outpace inflation. Interest rates seem to be more likely to go up than down. So it seems that house prices are unlikely to rise, and once that is realized by the market, prices may even come down as participants stop anticipating growth just because "London house prices always go up".

So a bubble means that house prices are disconnected from fundamentals, that some irrational assumptions are built into the price. I am not entirely sure that there is a bubble - it seems to assume that you need to assume that there is also a sovereign debt bubble, i.e. the "risk-free rate" or the treasury yields are irrationally low. I am not sure if that is the case or not, but that is the subject for a different discussion.

Re: Housing bubbles are universally destructive

#64

Post by qubax » Tue, Oct 02, 2018, 2:42 PM UTC

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…

> Real estate bubbles rarely burst unless there is accompanying unemployment. The reason is psychological, people hate realizing a loss.

Real estate bubbles generally burst when buy side gets squeezed. It doesn't matter if people sell homes and realize losses. The bursting of bubbles isn't a supply or sell side issue. It's a demand or buy side issue.

But there are many ways the demand side can be squeezed. The most prominent is increasing interest rates. Then there is unemployment as you noted during economic downturns. There are also legal methods - draconian anti-buyer laws. Imagine if a law was passed that banned sale of homes to foreigners and even gave foreigners 3 months to divest all property in X market. Not only would that burst the bubble, it would crash the housing market.

Bubbles form when the demand side is artificially increased while limiting supply side. For example, if you granted citizenship to foreigners if they buy a house. That would spike the demand for homes but the supply of homes wouldn't increase as quickly.

There are a myriad of reasons why bubbles form and why bubbles burst. Ultimately it's the manipulation of supply and demand sides which causes one or the other.

Re: Housing bubbles are universally destructive

#65

Post by thescriptkiddie » Tue, Oct 02, 2018, 3:04 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,…

> A stock can go to zero...even foreclosed homes have some value.

It's possible for a foreclosed home to have negative value, because the unpaid property tax bill is more than the value of the property. On the other hand, a total stock market index fund like VTSAX can only go to zero it something catastrophic happened.

Re: Housing bubbles are universally destructive

#66

Post by dsfyu404ed » Tue, Oct 02, 2018, 4:05 PM UTC

randomdata wrote: post #46

As a resident of a more rural area that has seen a complete economic turnaround in the last few years, which seems to be attributable to people leaving the big city to find more affordable ground, the big city housing bubble is the best thing that has ever happened. It may be destructive at a local level, but I'm not sure it is universally so.

>As a resident of a more rural area that has seen a complete economic turnaround in the last few years, which seems to be attributable to people leaving the big city to find more affordable ground, the big city housing bubble is the best thing that has ever happened. It may be destructive at a local level, but I'm not sure it is universally so.

Your town is going from the "boarded up storefronts" phase to the "hardware store and Chinese take out restaurant" phase. You'll probably start considering the housing market driven gentrification destructive again when it gets to the "organic free trade hemp clothing store and bars that only serve micro-brews" phase.

Re: Housing bubbles are universally destructive

#67

Post by ThrustVectoring » Tue, Oct 02, 2018, 4:08 PM UTC

leoedin wrote: post #62

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…

When people talk about the opportunity cost of buying, they very rarely take into account leverage. A typical house buyer might have somewhere between 2 and 9x leverage on their deposit (ie a 66-90% loan to value). Once you take that into account the returns, even if you don't take into account capital appreciation (essentially the saved cost of renting minus maintenance costs) rise significantly, becoming competitiv…

Also a 30 year fixed mortgage effectively shorts long-term bonds with an embedded call option (via refinancing) to further reduce the risk of the position. It's an incredibly valuable consideration that's not super obvious.

Re: Housing bubbles are universally destructive

#68

Post by malvosenior » Tue, Oct 02, 2018, 4:12 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…

I fully agree, except that McDonald's actually is a lot more expensive now than in the past, which I think helps make your point:

https://seekingalpha.com/article/4119246-big-mac-index-may-t...

Re: Housing bubbles are universally destructive

#69

Post by AnimalMuppet » Tue, Oct 02, 2018, 4:29 PM UTC

dionidium wrote: post #60

claydavisss wrote: post #47

Earlier quoted context omitted.

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 i…

> 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.

Could you give some reference(s) on this? I'd love to see a bank that was trying to give away property, and to find out why they couldn't (and to see if I could find a way where the property would have positive value to me).

Re: Housing bubbles are universally destructive

#70

Post by restalis » Tue, Oct 02, 2018, 4:31 PM UTC

baybal2 wrote: post #50

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…

>in the UK they will literally give you money to buy your first house, the government is so committed to the your-house-is-your-bank philosophy No wonder, banks were lobbying the state for generations. House is a purchase like any other, having to pay your tax money for somebody's else default on his McMansion is stupid. I myself have zero reservations about renting till I kick the bucket. My dumbest decision in life…

Wow! First, is Vladivostok that bad to be called "a hellhole" (that is, if you're referring to it, of course), and second, if it was only to make your parents shut up, couldn't you somehow done it with much, much less (say, a village house somewhere)?