owner’s equity in real estate is about to exceed it’s 2006 peak
I get the sense that in the cities most constrained by housing supply, markets are very hot at a price just below, say, $1 million, but somewhat tepid once the price gets above, sa,y $1.3 million. If this is an accurate guess of the shape of demand, it could be explained by income constraints. That is, would-be buyers are willing to bid as much as their income will allow, based on mortgage qualification rules. As prices rise, there is a drop-off in the number of potential buyers who can qualify for a loan.
One sign that this is taking place would be that one can find much better value (say, lower cost per square foot) in houses that are priced too high for most buyers to qualify. The most over-priced homes (with the highest cost per square foot) might be the ones that sell in the range where there are many qualified buyers.
If this story is correct, then the current home price boom will run into income constraints. If the typical young professional household can afford a $1.0 million home but nothing more expensive, then prices are going to stop rising once those households have satisfied their demands.
I think we might see that happen this year. This summer could see the last of the bidding wars.
The number one factor in this equation is the second income. People might prefer not to have two incomes, but if all the decent housing gets bid up by two income households, you don’t have much of a choice.
This is a very good point. Women going to the workplace has left most people worse off. It has led to a “bidding up” of important positional goods like housing.
Politically incorrect to observe, but there’s a lot of truth to it.
I get the sense that in the cities most constrained by housing supply, markets are very hot at a price just below, say, $1 million, but somewhat tepid once the price gets above, say, $1.3 million.
I am hearing the exact opposite in SoCal as we are forgetting that a lot of the buyers of the really expensive houses on the urban coast are foreign buyers or well off retirees who have more to spend on overvalued houses. These buyers don’t care if they can buy 3x larger house in other parts of the US.
Several Points:
1) Right now there is still a decent mid range buyers as Home Equity amounts helps with down payment. So a family bought in 2010 has $300,000 in home equity to blow. (This reality helped fuel the 2001 – 2003 bubble.)
2) There is partially limited supply because good buyers want a separate detach house not an apartment or condo. (This is one reason I am not sold higher building size transforms everything.)
3) The question if credit quality starts to weaken. That is what happened 2003 and later. To be honest, I don’t know if this happens. I know there is not a lot of trust of government buyers but I remember HUD programs had the cleanest balance of any bank in 2008. (I still hold it banks and especially shadow banks were making tons of money that they learned to ignore a blind eye to credit quality.)
4) The other item I am seeing in our neck of the woods is a lot of GenSmart houses of multi-generational living. Is this going up anywhere else in the US?
One additional note the single house mortgage debt is relatively flat since 2010 (~$10.3T) although we did see an increase 3% in 2016. Lots of cash buyers as well as low interest rates means more principal paid off and I believe there is more 15 year mortgages.
The question is with higher rates if 2016 continues or remains flat with higher rates. Towards the end of the bubble total mortgage were increasing 5 – 10% despite increasing interest rates.
One thing to consider is that while there is indeed an income constraint on to taking on additional debt, that doesn’t tell us how one’s debt portfolio is distributed. Many college graduates have large loans that can be comparable to house prices. Along with real estate rent and tuition, taxes and health insurance premiums are also pretty hefty and practically mandatory expenses. Collectively they are like Neo-Ricardian sectors that compete with each other to extract ‘rent’ from indivuals and, theoretically, can use their leverage to keep gaining on incomes until all remaining surplus gets taken away from individuals.
So, future house prices could continue to rise, even with flat incomes, if the other three NR bills shrink at a portion of income. Or, in the same stagnant scenario, prices could fall if the other 3 rise. And, since health premiums and tuition seem to rising faster than wages, whereas NPV of expected future taxes is flat at best (at least if you ask the fiscal hawks), then real estate prices could slow or even decline slightly.
Arnold likes to point out how the Real Esates lobbies are the most powerful political force in the country. Well, if there’s nothing anyone can do about that, the least we could try is to convince them that it’s in their best interests to lobby for policies that will keep higher education costs as low as possible.
Arnold likes to point out how the Real Esates lobbies are the most powerful political force in the country.
Yes they are powerful lobbies but aren’t Real Estate lobbies most powerful with local governments?
They are the most powerful because millions of ordinary home owners are a part of the lobby. It’s a very very broad special interest. By contrast everyone except college admins hates increases in college tuition.
Perhaps you have accurately diagnosed a hot/cold break at $1 million, but this creates a new question about why there would be a discontinuity. Wouldn’t a smooth distribution of willingness to pay be more likely? Perhaps it is a psychological artifact relying on the salience of $1 million as a focal point. Then couples who are close “stretch” to attain it and perhaps those otherwise able to pay slightly more also hold firm. Or lenders “lump” a bunch of buyers into their “$1 million loan” bin and thereby create a thick class at this price point. In any case, if your observations are correct, some story is needed.
otherwise slightly above
I’d bet that a county by county graph of homeowners’ equity would show a huge correlation of Clinton votes, and %, with equity amounts, and % growth over last 5, 10, 15, 20 years.
There were islands of Clinton support above 80% supporting Clinton — in very blue, very high priced RE markets.
I think once your wealthy enough not to care about money, you mainly consumer cultural status virtue signaling. People who are still trying to afford their mortgage and other expenses are more worried about tax rates, etc.
Mortgage interest is deductible only on mortgages up to $1 million ($1.1 including home equity debt). These limits were introduced in the 1987 OBRA and are not adjusted for inflation. So, now that the cost of an increasing number of houses are starting to bump up against those limits and as the tax subsidy falls away there is an additional brake on prices. Thank you Ronald Reagan and Jack Kemp.