Housing bubbles are universally destructive • Hacker News Board

Re: Housing bubbles are universally destructive

#71

Post by sct202 » Tue, Oct 02, 2018, 4:33 PM UTC

a008t wrote: post #61

saint_abroad wrote: post #51

Earlier quoted context omitted.

> 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?

US Federal Reserve rates have been increasing so banks get loans at higher prices which means consumer interest rates will also increase.

Re: Housing bubbles are universally destructive

#72

Post by AnimalMuppet » Tue, Oct 02, 2018, 4:42 PM UTC

dgudkov wrote: post #59

a008t wrote: post #57

Earlier quoted context omitted.

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.

The intrinsic value of gold is set by manufacturing and jewelry; it has not changed much. The investment value of gold is (primarily) set by two things: the need for an inflation hedge, and speculation. Speculation is pretty much dead at the moment (nobody's buying gold because they think gold is going to go up). And gold's use as an inflation hedge is declining, because people are less worried about inflation than they were.

Why were people more worried about inflation recently? Because they thought that QE was going to cause a ton of inflation. As it now looks like the Fed will be able to unwind all of that without triggering mass inflation, people see less need for gold than they did, say, five years ago.

Re: Housing bubbles are universally destructive

#73

Post by dionidium » Tue, Oct 02, 2018, 4:45 PM UTC

AnimalMuppet wrote: post #69

dionidium wrote: post #60

Earlier quoted context omitted.

> 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 ).

The Land Reutilization Authority in St. Louis holds about 12,000 unwanted properties:

https://www.stltoday.com/news/local/metro/lra-owns-the-st-lo...

The LRA usually ends up with these properties when they fail to receive any bids at the regular tax auctions. Fewer are falling into their hands, recently, because the hot housing market is driving folks to look at things they previously wouldn't have, but properties still routinely go unwanted:

https://www.stltoday.com/news/local/govt-and-politics/fewer-...

St. Louis is the market I'm most familiar with, but similar land banks exist in cities all across the country.

Re: Housing bubbles are universally destructive

#74

Post by randomdata » Tue, Oct 02, 2018, 4:50 PM UTC

dsfyu404ed wrote: post #66

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 "hardwa…

That's scarily accurate. But I would say we're already in the last phase. Which is great, as it means we now have all the amenities one expects from the city, without having to live in the city.

Re: Housing bubbles are universally destructive

#75

Post by restalis » Tue, Oct 02, 2018, 5:13 PM UTC

jeffbax wrote: post #55

debacle wrote: post #10

Earlier quoted context omitted.

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

I think you don't quite understand how things work. 5G may be efficient but the exploitable bandwidth is still limited. In cities the density of cellular mobile communications antennae is higher which leads to a reduced areas covered by a tower in which subscribers have to share the bandwidth with others. Also, in cities as opposed to rural areas, even when the bandwidth is shared, the users of a given area are often just transient. The conclusion is that the urban network quality is different from the rural one and that it (unfortunately) adds up as another reason to flock to a city.

Re: Housing bubbles are universally destructive

#76

Post by AnimalMuppet » Tue, Oct 02, 2018, 5:51 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 think the key is interest rates.

Most housing doesn't face the demand part of supply and demand in the purchase price. The demand curve is set by the monthly payment. The relation between monthly payment and total price is controlled by the interest rate.

So if interest rates rise, home prices have to drop (or at least not rise) until wages rise.

Unfortunately, this doesn't actually help, because it doesn't lower peoples' monthly payments...

Re: Housing bubbles are universally destructive

#77

Post by mistermann » Tue, Oct 02, 2018, 6:23 PM UTC

bobthepanda wrote: post #32

llamaman wrote: post #30

Earlier quoted context omitted.

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…

Housing markets are only overheated if supply is not keeping up. There are scenarios where an overheated market leads to oversupply of housing; but there is a few years' lag between investing in construction and the units coming online due to the time it takes to finance and construct housing.

> Housing markets are only(!) overheated if supply is not keeping up.

Would this imply that there was a tulip shortage in Holland in the 1630's, or am I being excessively pedantic and should have assumed a prefix of "In the long run...."?

https://en.wikipedia.org/wiki/Tulip_mania

Or another way of putting it is: is there evidence that all markets are perfectly balanced at all times, always and everywhere? Is the market perfectly rational, or do various ratios sometimes vary for no mathematically obvious reason?

Re: Housing bubbles are universally destructive

#78

Post by nly » Tue, Oct 02, 2018, 6:39 PM UTC

isostatic wrote: post #45

nly wrote: post #40

Earlier quoted context omitted.

Are you comparing inflation adjusted house prices against unadjusted income? The % of take home pay people are putting, on average, in to housing here in the UK (ok, different economy) has gone from something like 20-25% in the 1950s to something like 40-50% now. I myself live in London and put 47% of my take home pay in to rent. That's without property related tax. I'm in the top 5% of earners in the land and can on…

Nope. But these are averages, London is extreme. My mortgage in Cheshire costs 25% of my takehome pay (not the household takehome pay) - and half of that is paying off the capital. That's on a 4 bed semi. Two earners on median £27k take home about £44k. 25% would be £900 a month, which is more than enough to rent a house. This house is half an hour out of Manchester, 40 minutes out of Leeds: https://www.rightmove.co.…

Regional house prices are correlated with regional demand which correlate with regional job opportunities. I could go live in the sticks but then I'd struggle to find work. I moved to London because I couldn't find satisfying opportunities in the South East, 25 miles outside of London, let alone in the suburbs of Leeds. If I hadn't moved to London my 10 hour work day would have become 12-13 hours, including a nasty rush hour commute, and I would still have been paying £500/month in transport for the privilege and a high rent.

The problem here is that salaries don't scale in a linear fashion with regional property prices. In places like London, where quality property supply is low, rents are set to the absolute maximum, while still filling tenancies, and salaries, just as else where, are set to the bare minimum to fulfill demand. The result is rent as a % of take-home is maximized.

There are only three solutions. Lower property prices and rents (more housing supply), higher salaries and/or a more regionally distributed job market.

Don't get me wrong, i'm not bitching. I'm comfortable. But when people hear what you earn, and you can see by the way they react that they think you're a rich git, they just don't see these realities.

Re: Housing bubbles are universally destructive

#79

Post by GreeniFi » Tue, Oct 02, 2018, 7:02 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…

I find it distinctly odd that arguably the central organizing feature of the British economy and culture is a massive state-sanctioned pyramid scheme, which as the author points out, is wrecking Britain, as populist governments invesnt ever more ludicrous tricks to inflate prices further to win political support.

I truly wonder how the Millenial generation might disrupt this idiocy and would welcome suggestions here. So far I have thought of the possible solutions:

1. A boycott on new purchases, which would tank the market as, being a pyramid scheme (or something akin to this) it depends on new money flowing in at the base. But I see no way for a boycott to be organized - and would not want to destroy the asset wealth of those caught in ownership who would see their primary asset tank in value. 2. There is beautiful and cheap housing stock in many parts of Britain that have fallen into decline. In particular south coast towns are an example. I wonder if these areas could (a) be rejuvenated, and (b) millenials could escape housing debt traps, if they had some sort of way of signaling to each other that many like-minded people would move there. Maybe high property prices in the SE benefit from a network effect (I live in London because people like me live in London) - but new networks could be established if people signaled their commitment to new networks.

I would be very interested to hear other ideas.

Re: Housing bubbles are universally destructive

#80

Post by AnimalMuppet » Tue, Oct 02, 2018, 7:54 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?

Prices go up for some reason. That's not a bubble.

People want to buy that asset because that's where the returns are (because the price is going up). Those people drive the price up further. That's still not a bubble.

People see that the returns are really good in that asset class, so they borrow money to buy into that asset class, so a ton more money moves in, limited only by banks' willingness to lend against that asset class. Now it's a bubble.

And the problem with bubbles is not that people lose money when they pop. It's that people lose borrowed money when they pop, and if it's a big bubble, that threatens the banks, which can threaten the whole economy (not just that asset class). And, because people invested borrowed money, as the bubble starts to pop, they panic sell, which drives the price down further, which leads more people to panic sell, so the whole thing comes apart very quickly.