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  • March 12, 2017 at 12:07 PM #22297
    gzz
    Participant

    Time for a new header!

    “That said I do acknowledge that rates are a piece of the picture, for sure. And I do acknowledge the possibilities that 1. low rates are helping keep home valuations high and 2. this could continue to be the case for some time.

    What I push back against is this idea that monthly payments are all that matter, and that as long as rates are low, high purchase valuations are inconsequential. (Or, that homes are “undervalued” just because rates happen to be low right now).”

    I agree with all of this, which is why I said the source of our disagreement is where rates are headed.

    Of course we agree that rents are part of the picture too. But we probably also agree where nominal rents are headed: going up roughly at or a little higher than the pace of nominal income growth. I say “a little higher” specific for San Diego since we some factors like high construction, permitting and land costs that restrict supply growth, plus the secular trend of people moving where the weather is nice and toward low-crime urban areas.

    There is also the issue of down payments, which restrict buyers who can afford a specific monthly payments much more in the high price/low rate situation than in the reverse. It is hard to pin down this factor’s effect, though I think down payment constrained buyers are not especially important to the market.

    Next there is the issue of tight or loose lending. Then there are the animal spirits of investors and where their emotions are telling them to put money. I think they’re both really important in the short to medium term, but in both cases they effect prices that still move along a fundamental rate/rent trend.

    You claim rates and home prices reliably move inversely to each other. (For instance, in another thread, you said, “In the end, a house that rents for $2000 will go up in price with lower rates as surely as a bond that pays $2000 will go up.”)

    “In the end” is key here. The housing market is less efficient, less liquid, and less short-term rational than the bond market. In fact, my specific point there was that the local housing market had underperformed the given the change in rates, but only because it moves more slowly.

    But as described here, there has historically been very little correlation between rates and home prices.

    Depends on your time frame. I see the long term secular trend on prices going up and rates going down. Rates can’t explain the big bubble or the post-Cold-War bear market, but we know what caused them, and there is no reason to think that rates did not provide the trend line along which these shocks operated.

    The other big up-and-down was centered around 1980. I’d explain this by (1) the late 70’s run up in prices was because people expected high inflation to be semi-normal (2) Volker jacked up rates and lowered inflation, to the point that by 1983-1985 inflation was much lower, but mortgage rates were still 12% and up! So of course prices would fall, expected rent increases went way down, while payments were extremely high and the drop in inflation meant that they’d stay high a lot longer.

    March 12, 2017 at 12:27 PM #805953
    gzz
    Participant

    Additionally, I happen to believe that rates are more likely to go up than down, but that’s secondary to my main disagreement.

    After clarifying that I don’t think the rent/rate or “payment ratio” model is either perfect or instant, I think it really is where we disagree.

    I again think it sets the trendline along which other factors push prices up or down. You can even see it in your article where valuations, despite the worst recession in 70 years, stayed above 77-78 and 84-89.

    http://www.voiceofsandiego.org/wp-content/uploads/2017/02/monthly-home-payments-lower-than-average-doesnt-assure-higher-prices022317-02.png

    If you want to make the case for sub-1% long term rates, go for it. But to say that there’s “NO reason” long term rates will stay above 1%, when inflation is significantly above that number… come on.

    My main case is based on inequality leading rich people to greatly increase the pool of loanable funds, but demographic changes to decrease the demand by creditworthy borrowers for those funds.

    I very much think the US 10-year rate will semi-permanently fall below most measures of inflation within a few years. Indeed, that is already the case for shorter term U.S. rates, and is already the case elsewhere in the world. In Germany, the 10 year rate is about 0.5% and the inflation rate is about 1.6%. Our aging demographics are basically Germany’s shifted back a few years.

    In the unlikely event we see some real inflation, sure that might drag up nominal interest rates a bit. But even then real rates will continue to fall.

    March 12, 2017 at 12:36 PM #805954
    gzz
    Participant

    In response to AN:

    gzz, I don’t believe we’ll see a sub 1% long term rate. I agree with Rich on this point.

    I should clarify that I am talking about 10-year Treasury rates, and I think it may be a good 5-10 years before they move south of 1% for more than a few days at a time.

    However, in July 2016 the US ten-year dipped down to 1.37%. So .38% below the rate a few months ago isn’t that bold a prediction.

    I also think gov bonds are a bit overvalued compared to corporate and munis. So it is possible gov rates and gov-influenced mortgage rates go flat while other important rates fall. Indeed, I own plenty of bonds but no US gov debt.

    March 12, 2017 at 5:30 PM #805955
    Rich Toscano
    Keymaster

    [quote=gzz]

    But as described here, there has historically been very little correlation between rates and home prices.

    Depends on your time frame. I see the long term secular trend on prices going up and rates going down. Rates can’t explain the big bubble or the post-Cold-War bear market, but we know what caused them, and there is no reason to think that rates did not provide the trend line along which these shocks operated.
    [/quote]

    This is a good point.

    As far as the whole topic: I see what you are getting at, but I don’t know how much it really matters in the end. I suppose if we could know for sure that rates would stay permanently low, and the whole market knew that for sure that and priced it in, then we might start to see that correlation you speak of. But we can’t know that; uncertainty is part of the market and always will be.

    But also, yeah, it seems kind of moot, because I just don’t agree with your forecast. You are banking on something (bonds) going from “really expensive on a historical basis” to “really, REALLY expensive on historical basis,” all based on “this time is different” style economic narrative. It sounds like straight up bubble-style reasoning, tbh… rationalizing why the past “rules” don’t matter any more, and why an already very extended trend can be extrapolated permanently into the future. I just can’t abide by that kind of reasoning –but, I am a value/mean reversion guy, so you can’t expect much different of me. 🙂

    So yeah, the disagreement is more about just the direction of rates than I initially thought. But it’s still more than just that, I think. You are making a forecast on rates, and then a forecast on how the housing market will react to rates. And while your reasoning for the second part is plausible, it is pretty different from how things have played out in the past unless you really squint your eyes…. and I think that’s important. But I understand your reasoning a lot better now.

    March 12, 2017 at 6:13 PM #805957
    gzz
    Participant

    OK, so we agree I think that “fundamentals” for RE are payments and rent (or rent+income), but other factors can dominate fundamentals in the short to medium term.

    Looking at those other factors, I think they are generally bullish: lots of prior buyers are sitting on nice gains, every homeowner with a brain and good credit has refi’d into low rates and can hold/rent if they buy another house, supply growth is very low, income growth is fairly good, wealth effects from stock market gains, and long-term trends favor places with clean environments, good weather, and low crime.

    Affordability of down payments and conservative banks are the main damper on things.

    Regarding “this time is different,” inequality just keeps getting worse and I believe now has broken the old records from the Gilded Age. And we’ve never had such an old population with such a low birthrate, and the concept of demographic momentum means even a big increase in the birthrate, as unlikely as that would be, would take a very long time to change these trends.

    March 13, 2017 at 8:15 AM #805959
    FlyerInHi
    Guest

    gzz, wouldn’t low population growth result in less housing demand?
    If the birthdate is low, we need immigration in California. And immigrants are much more tolerant of high prices than native born Americans who can move back to Ohio.

    March 13, 2017 at 2:12 PM #805965
    gzz
    Participant

    In the long run pop growth is important. But the reason we have weak native population growth is women are delaying children and marriage or not marrying at all. So that is bullish for the market as single women earn more and for a longer time than their married peers, and may also buy a house or condo and live alone. The technical term for this trend is a decrease in household size. Even when they do have children, once a woman hits three kids daycare usually is more expensive than working at even a upper middle class job. But this happens much less often. So instead of a one income couple with three kids we have more dual income couples with one kid who use that double income to bid up rents and house prices.

    The work from home trend is also bullish and i think enough to offset the population issue. When you work from home you need more space and have more to spend on it without commuting expenses. I wonder if work from home people will prefer urban or outer suburban areas. You could feel really isolated out in the burbs if you never leave for work and prefer somewhere with street life and walkable amenities. On the other hand, you no longer need to live close to a job center.

    March 13, 2017 at 3:34 PM #805972
    FlyerInHi
    Guest

    Good point about women buying houses on their own.

    March 13, 2017 at 4:12 PM #805975
    millennial
    Participant

    [quote=gzz]In the long run pop growth is important. But the reason we have weak native population growth is women are delaying children and marriage or not marrying at all. So that is bullish for the market as single women earn more and for a longer time than their married peers, and may also buy a house or condo and live alone. The technical term for this trend is a decrease in household size. Even when they do have children, once a woman hits three kids daycare usually is more expensive than working at even a upper middle class job. But this happens much less often. So instead of a one income couple with three kids we have more dual income couples with one kid who use that double income to bid up rents and house prices. [/quote]
    Sorry I think this is all BS. Less people = less people who need a place to live = smaller house = smaller amount of $ spent on housing. Even your second point doesn’t make sense. less people having to be at office = less requirement to live close to office = more people being able to move in less expensive areas like Temecula and Murrietta.

    Your basic premise that people will spend every cent they have to buy a bigger, or more expensive house is ridiculous. I bought my house with 5 bedrooms because I have 3 kids. If it was just my wife and I, we would live in a 2 bedroom house and spend our money on traveling and investments. Whoever thinks a house brings happiness is a fool. If anything, I would rather have less so I could be tied to nothing (including my job) if I want to take off.

    March 15, 2017 at 1:45 AM #806025
    gzz
    Participant

    Millennial, your personal philosophy and preferences are anecdotes. I am just telling you what the economists and demographers who study these issues for a living say.

    Population growth is a pretty minor factor for housing prices that is easily outweighed by others. Del Mar’s population fell by 12% since 1980. How did real estate do during that time?

    As for better housing not leading to happiness, it really depends. If I moved up from my 800,000 house to a 1.6m one nearby, probably I’d be a tiny bit happier. But I know I was happier when I moved up to this one from a more cramped situation.

    My comfort level and space requirements were largely set growing up in suburban 1960’s houses of about 2200sf on big lots. I did not like being more cramped when I first moved here. It was like a slight background anxiety was lifted when I moved to a bigger place with more space and privacy (and I could do so within budget).

    March 15, 2017 at 6:15 AM #806026
    flyer
    Participant

    Per the philosophical aspect of housing, here’s an article I forwarded to a friend a few years ago.

    https://www.psychologytoday.com/blog/the-power-prime/201008/personal-growth-will-new-house-bring-you-happiness

    March 15, 2017 at 6:34 AM #806027
    Ribbles
    Participant

    [quote=gzz]As for better housing not leading to happiness, it really depends. If I moved up from my 800,000 house to a 1.6m one nearby, probably I’d be a tiny bit happier. But I know I was happier when I moved up to this one from a more cramped situation.

    My comfort level and space requirements were largely set growing up in suburban 1960’s houses of about 2200sf on big lots. I did not like being more cramped when I first moved here. It was like a slight background anxiety was lifted when I moved to a bigger place with more space and privacy (and I could do so within budget).[/quote]

    This. I am happier in 3,000sf than I was in 2,000, and certainly happier than I was in a cramped condo. A bigger garage makes for a better man cave, more distance between neighbors means that cave can have a subwoofer, there’s room to store things without feeling like I need to constantly donate stuff that actually does have some value to me. It’s little things like the kids having a fort under the stairs because we have the room to spare. It’s a sanctuary/resort/stress reliever.

    March 15, 2017 at 9:14 AM #806030
    FlyerInHi
    Guest

    I think that I’m younger than my age and should be a millennial. I have been downsizing over the years. I like to own because good design is important to me. I recently remodeled a 450sf rental studio and I could be happy in it.

    To me, it’s all about good design and location, location, location. When I’m retired, I’d rather own 3 or 4 condos in good locations and make the rounds than live in a big house that I have to maintain.

    Educated young professionals are moving to big metros all over the world. One day we will be like Japan where prices in Tokyo at high but where the small towns are dying.

    March 15, 2017 at 10:03 AM #806033
    millennial
    Participant

    [quote=gzz]I am just telling you what the economists and demographers who study these issues for a living say.

    Population growth is a pretty minor factor for housing prices that is easily outweighed by others. Del Mar’s population fell by 12% since 1980. How did real estate do during that time? ).[/quote]

    Which economist? Do all agree, or just the ones you follow? Regarding pop growth being a minor factor, I agree to a certain extent. Long term though, a declining population is devastating to an economy which also affects many other areas including housing values. Also your example of Del Mar is not a very accurate depiction considering the infill location. I think places on outskirts would be more prone to devaluation.

    [quote=gzz]
    My comfort level and space requirements were largely set growing up in suburban 1960’s houses of about 2200sf on big lots. I did not like being more cramped when I first moved here. It was like a slight background anxiety was lifted when I moved to a bigger place with more space and privacy (and I could do so within budget).[/quote]

    We can disagree, but I believe that just like money, home/habitat follows a u shaped curve with diminishing returns and actually takes away from happiness after a certain point. Malcolm Gladwell covered it in his latest book David and Goliath.

    March 15, 2017 at 10:11 AM #806034
    millennial
    Participant

    [quote=FlyerInHi]
    Educated young professionals are moving to big metros all over the world. One day we will be like Japan where prices in Tokyo at high but where the small towns are dying.[/quote]

    I agree. I think values have shifted and will continue to shift. People are having less kids because they are no longer a necessity or part of the norm. Most of my friends aren’t married yet and will probably start marrying and having kids in their late 30’s/early 40’s. In places like Japan and Korea its been the norm for kids to live with their parents until they get married since housing is so expensive.

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