There's some of that for sure, but real estate is a good inflation hedge. So if you print like we have been and new supply doesn't jack up, then here we are.
That's just a natural economic thing; not a political system at play, other than a byproduct of massive printing which has been out of control for some time.
I mean, we had interest rates jack up (for the US in modern times at least lol) and prices didn't drop as much as they should (and many that lost in bidding wars in the frothy market went to the sidelines)
When the Fed goes the other way because they have no real choice, prices are going even higher.
Real estate prices is propped up with credit. Credit can be created at ever increasing numbers until there is a collapse in the credit markets or the monetary system. When loans become unpayable, defaults occur. If credit markets collapse, then housing prices go down.
Real estate has value & a premium associated with the credit markets & revenue generated by the property (e.g. rentals).
> Real estate has value & a premium associated with the credit markets & revenue generated by the property (e.g. rentals).
Yes for commercial - usually cap rate based which is related to return and risk, replacement cost valuation, or revenue multiplier.
With regard to residential - prices are going to go up when fed goes the other way. They have NOT been propped up with credit or favorable interest rates. Those factors have gotten worse but prices have held strong.
They have been propped up because supply is still low and new construction is expensive. Those things aren't likely to change anytime soon. Not to mention US RE is still a good place to park foreign cash in relative terms and is a good inflation hedge.
Rents will go up. Home prices will go up.
Commercial hasn't fallen out yet though. Office space should be converted to multi family residential or mixed use.
Commercial collapse is likely though which I think you are referring to.
But to the article at hand - could be a way to monetize a sharp drop in revenue due to WFH and the hike in interest rates - convert to affordable housing and offset any investment to cities (ie taxpayers) to address the homeless and affordability crisis.
> They have NOT been propped up with credit or favorable interest rates.
We really can't tell yet. Since interest rates have gone up, lots of people don't want to move (to upgrade or downgrade) because you can't just transfer your current loan to another house. That has led to very tight inventory problems, which makes the market even crazier.
We can tell that despite less favorable lending, there are still multiple bids on homes in many top markets.
If the lock in is a large factor, then inventory will shoot up as rates come back down. But then so will home prices as monthly payments come down and those dejected from losing bids before re-enter the market.
Is the market going to be flooded with new housing? No. Is the market going to be flooded with people downgrading and moving into rentals? Prob not. For every old couple downgrading there's a younger couple needing to upgrade for more space due to WFH and/or kids or a first time homebuyer ready on the wing. Or an investment group ready to buy and rent.
So basically - if rates go higher - many people are further locked in. Enjoy the favorable loan and inflation protection in RE. Inventory stays low.
If rates go lower - more buyers. Maybe some upgrade/downgrade inventory.
But there will be no magical new housing starts. Construction costs (labor/materials) unlikely to drop meaningfully.
Home prices remain stable in most places and going up with inflation and time.
And when the Fed reverses course - prices will jump.
I don't see how prices drop as some might hope (first time homebuyers) in the near future.
> We can tell that despite less favorable lending, there are still multiple bids on homes in many top markets.
But supply and sales are still down, because inventory is really tight. Less supply can affect prices just like less demand can.
> Is the market going to be flooded with people downgrading and moving into rentals? Prob not. For every old couple downgrading there's a younger couple needing to upgrade for more space due to WFH and/or kids or a first time homebuyer ready on the wing.
But that's just it. Those old people aren't downgrading because it doesn't make sense for them to downgrade. They would only be paying more for less, so why bother? That younger couple that needs to upgrade for more space is even more screwed in this kind of market.
> But there will be no magical new housing starts. Construction costs (labor/materials) unlikely to drop meaningfully.
Yes, but that isn't really the point right now. There are still plenty of ongoing projects in my neighborhood that were started before rates shot up. That is significant amounts of new supply, but it is balanced by much fewer second hand homes on the market.
> And when the Fed reverses course - prices will jump.
The economy is whacked by inflation right now, you better believe that the Fed has gotten religion in considering housing costs as part of their inflation measure. So...as long as housing costs keep rising, interest rates are going to stay high anyways. Given how many people are now asset heavy, with speculation and everything, don't count out some kind of political solution to get out of the hole.
> I don't see how prices drop as some might hope (first time homebuyers) in the near future.
I agree, but that doesn't mean the market is stable.
> The economy is whacked by inflation right now, you better believe that the Fed has gotten religion in considering housing costs as part of their inflation measure. So...as long as housing costs keep rising, interest rates are going to stay high anyways
The Fed is completely incompetent. "Inflation is transitory" over and over. And interest rates cannot stay high. At 32T in debt and rates, we'll eventually have to pay 1.6T in just interest annually. In the last quarter of 2022, we paid $213B in interest alone.
The longer interest rates are this high, the more pain on the entire world, as there are ~20T in USD denominated debt in addition to the 32T in US debt. And about 190T in unfunded liabilities in the US! Already insolvent. The only solution is to print.
The US and the world cannot sustain higher interest rates as the world reserve currency and the high debt load. But the Fed has to do something to at least appear like they are in control and competent. And to tame inflation to avoid civil unrest and political backlash. Most people have seen inflation outpace their wage growth.
I bring this up because the ones in charge are the ones with assets. And those with assets don't really care about inflation.
That's a large part of my thesis. And I'll be holding tangible assets like real estate when the printer goes back in overdrive because there is no other choice.
> That's a large part of my thesis. And I'll be holding tangible assets like real estate when the printer goes back in overdrive because there is no other choice.
You and everyone else, which is part of the run up on real estate prices right now. There is no such thing as a sure bet, especially when almost everyone is taking the same bet.
Don't know where you get "everyone else". I'm not talking about primaries and those with primaries aren't just "holding"... they need a place to live. Most people do not have real estate investments.
Investors are not in RE as a pure buy and hold. Maybe a few foreign entities parking cash in the US. But outside of that, no they don't. They live in them. Or they rent them for a profit or near break even. Rents have/can/will go up even more.
There aren't many properties that were purchased at elevated levels that have no economic prospect to them and could thus flood the market like you insinuate - ie an airbnb bought for 800k that now can't service the debt because short term revenue dropped and long term local rental revenue is too low. Even then, those that bought aren't looking to take a major hit and didn't buy with lax lending like 08, so the prices are what they are. You need foreclosures and short sales to make meaningful drops nationwide.
My properties cash flowed before the pandemic. During. And after. I honestly don't care about values, I'll buy more if they plummet but values have never been a bet in my plan. I care about cash flow and risk in an economic downturn but I'll take the inflation hedge too. You make money when you buy. There are still places you can buy now and make money. I look at a lot of things but always at replacement cost and cash flow.
The thesis is that there is no escaping the debt load. About the only sure bet IS that the money printer will return in overdrive. There is NO choice. And I don't care if it's this year or next year, but it will return soon.
You need assets before and when that happens. Not cash on the sidelines waiting for a dip that probably won't happen.
Whatever asset though - IMO, it should be cash flowing and be able to weather an uncertain economic and financial climate.
You seem to think Fed is going to fight inflation and bring down housing prices and save everything and also create this buy opportunity in various assets. Perhaps they keep hiking and we finally get a commercial RE crash and the Fed member's banks and associates can have a feast. Sure. I'm surprised that didn't occur a long time ago. But we're not talking about commercial RE.
How does the US escape the debt load and maintain these interest rates and higher and get to 2% target inflation?
Every solution involves printing. And how do you print a shit ton and keep inflation at 2%? You can't. You have to inflate something.
Best to have that something than cash or a non inflation hedging asset.
Even without the politics/nimbyism I am trying to imaging a realistic scenario where housing prices go down and stay down in California, but I just can't.
It seems that the price of housing is directly related to how much people can afford to pay, meaning that increases in wages won't remediate housing cost increases, but contribute to them directly and indirectly.
Japan. For an island with limited space they treat their real estate market very differently. The land itself has value, but structures depreciate to zero.
Housing prices in Japan have been going up for years. They had the implosion after the superbubble in the 1990s (prices got so ridiculous, that the land beneath the emperor's palace was worth more than all the land in California)
But other than this extreme, the trend has very definitely been up and to the right, year after year after year. Even as the population declines.
Wages have gone up significantly recently: when wages go up - house prices (and the price of everything else) go up. Raising wages doesn't magic up more houses.
"Since President Biden took office in January 2021, the increase in prices due to inflation is over 14%, resulting in a loss in real wages of nearly 4%"
it makes sense though as this is how the middle class sees a lot of their wealth passed through death and marriage, its houses for the middle class. its just that the middle class is shrinking and so now the same houses are owned by fewer families. for everyone else there is renting and homelessness.
In SF/Bay Area there is definitely a separate issue besides just the shrinking middle class. SWEs that by all other metrics would be solidly middle class if not upper middle are having a hard time finding affordable homes there. The only people I know who've entertained ownership in the area are DINK, and I know many people in their late 20s and early 30s who have been consistently earning over 6 figures since the day they left college.
That said, I can understand arguments for protecting existing middle class homeowners. I think a huge chunk of the problem could be resolved by having policies that treat property like any other speculative investment while having some sort of exceptions for primary family homes that are actively being lived in by the owners. I'm guessing if that were the only class protected by the SF property tax laws only a small minority of the current places would remain with locked-in rates.
I think you could ban investment properties entirely and we would still have the same problems, it would barely be a blip I bet. There just isn't enough housing and there isn't likely to be anytime soon.
