Author Topic: Crystal balls and HCOL housing prices  (Read 2873 times)

GUNDERSON

  • 5 O'Clock Shadow
  • *
  • Posts: 64
Crystal balls and HCOL housing prices
« on: May 18, 2022, 11:33:46 AM »
How do you think the changes in mortgage rates, as well as other economic factors, will affect housing prices in recently super-hot HCOL cities over the next 5-10 years? I'm particularly thinking about Seattle, but it's a general question.

englishteacheralex

  • Magnum Stache
  • ******
  • Posts: 3892
  • Age: 44
  • Location: Honolulu, HI
Re: Crystal balls and HCOL housing prices
« Reply #1 on: May 18, 2022, 01:02:22 PM »
Posting to follow in case someone with a crystal ball shows up. That would be awesome.

Also, my totally wild conjecture is that housing prices will stagnate or drop a bit. I live in a VHCOL and track real estate prices as a dumb hobby, and I'm already seeing a reduction in the crazy bid-ups that I've noticed over the past two years in my area. But my crystal ball totally sucks.

affordablehousing

  • Pencil Stache
  • ****
  • Posts: 778
Re: Crystal balls and HCOL housing prices
« Reply #2 on: May 18, 2022, 03:14:39 PM »
I sure hope prices drop. Here in the bay area, rental rates are back up, and high prices seem to be holding, but more things year over year is on the market and people's purchasing power is dropping. That said, it's ridiculous the number of friends we have who are sitting on mountains of cash and are holding off on buying a house "until prices drop a bit". Until we lose the thick band of people who can, just choose not to pay whatever for a house the prices needn't drop. I wish there were more published statistics on savings amounts within certain areas to see if this is just anecdote or more pervasive.

clarkfan1979

  • Magnum Stache
  • ******
  • Posts: 3352
  • Age: 44
  • Location: Pueblo West, CO
Re: Crystal balls and HCOL housing prices
« Reply #3 on: May 19, 2022, 01:16:48 AM »
I sure hope prices drop. Here in the bay area, rental rates are back up, and high prices seem to be holding, but more things year over year is on the market and people's purchasing power is dropping. That said, it's ridiculous the number of friends we have who are sitting on mountains of cash and are holding off on buying a house "until prices drop a bit". Until we lose the thick band of people who can, just choose not to pay whatever for a house the prices needn't drop. I wish there were more published statistics on savings amounts within certain areas to see if this is just anecdote or more pervasive.

As a landlord, my renter pool is extremely strong right now. Couples that are currently trying to buy a house have 100K in their checking account and make 150K+. The strong renter pool has supported large rent increases.

waltworks

  • Walrus Stache
  • *******
  • Posts: 5653
Re: Crystal balls and HCOL housing prices
« Reply #4 on: May 19, 2022, 07:10:45 AM »
In my neck of the VHCOL woods, inventory has quadrupled or quintupled, back to at least "normal" levels, if not higher.

Price reductions are now common, and there are numerous houses on the market that have been on the market for a few months.

House prices tend to be sticky (at least in nominal terms) so I wouldn't predict a big decline, but a LOOONG stagnation or even slow/small decline is IMO likely (I'm copying Bill McBride's predictions here, basically).

Remember that at the high end, price effects take a while, because the lower ends where the first time/move-up buyers are is most dramatically affected first by mortgage rates, and that effect (the move up house seller who needs to sell to buy the VHCOL resort house) is hence delayed at the higher end.

In a worst case big recession/very high mortgage rates scenario I could see some markets crashing back to pre-covid levels - housing affordability is worse than it was in 2007 now!

-W

ChpBstrd

  • Walrus Stache
  • *******
  • Posts: 6659
  • Location: A poor and backward Southern state known as minimum wage country
Re: Crystal balls and HCOL housing prices
« Reply #5 on: May 19, 2022, 07:47:58 AM »
I don't think HCOL or VHCOL areas will suddenly become priced like Indianapolis or Memphis. They will remain on the extreme edge of affordability for whomever can obtain a job in those areas.

That said, the extreme edge of affordability changes a lot when interest rates change. 30 year mortgage rates have risen from a low of 2.65% on January 7, 2021 to 5.3% as of last week.

https://fred.stlouisfed.org/series/MORTGAGE30US/

To put that change in context, the monthly P&I payment on a house increased by 37.8% between those times due to interest rate changes alone.

https://www.calculator.net/mortgage-calculator.html

Add on the double-digit price increases, bidding wars, and all-cash offers seen over the past 17 months, and you paint a picture that looks a hell of a lot like a FOMO-driven bubble. Housing costs cannot continue to outpace wage gains forever. As @waltworks points out, affordability in at least some VHCOL areas is worse than it was in 2007.

As economist Herbert Stein noted, "if something cannot go on forever, then it will stop" and perhaps that is what @waltworks is observing in real time. At some point, consumers have to bail and move to lower-cost areas, because otherwise their money will literally run out. Hence the well-publicized exodus of Californians and their companies to lower-cost, unrestricted-construction places like Texas. Also, at some point, a recession will hit and the unemployment rate will no longer be 3.6%. What happens when people with huge mortgages lose their jobs and can't find another one? We've seen this movie before.

Almost nobody thinks housing could suffer a major collapse, but I do. I watched the 2007 bubble lead to a collapse of 23% that didn't recover for nine years, with VHCOL and HCOL areas doing worse than that (in LCOL markets, prices were flat through the "crisis", so it was the more expensive areas driving the decline in the national mean). We've seen an even steeper deviation from the home price trendline since 2021, suggesting another 2007-2009 crash could easily happen.

https://fred.stlouisfed.org/series/USSTHPI

How many of those potential homebuyers with $100k in their checking accounts will catch that falling knife when their stock investments have been decimated, they're watching other people lose hundreds of thousands of dollars on housing overnight, and their $150k jobs are suddenly in jeopardy?

These observations lead me to be wary of banks, home builders, and REITs right now. And if I owned property in a HCOL area right now, I'd be auctioning it to the last of the FOMOers.

waltworks

  • Walrus Stache
  • *******
  • Posts: 5653
Re: Crystal balls and HCOL housing prices
« Reply #6 on: May 19, 2022, 08:43:41 AM »
We've indeed seen the movie before, but it's not the 2007 movie, it's the late 70s/early 80s movie.

2007 featured lots of people going underwater when their house dropped 5% in value, who were pure speculators.

That is not the case now, we have a supply/demand imbalance (but more housing under construction than at any time in history!) and almost all homeowners have a ton of equity. There won't be a wave of foreclosures/forced sales in this environment.

I really recommend Calculated Risk for those folks who are interested in this topic. Just a few relevant links:
https://calculatedrisk.substack.com/p/what-will-happen-with-house-prices?s=r
https://www.calculatedriskblog.com/2022/05/nar-existing-home-sales-decreased-to.html
https://calculatedrisk.substack.com/p/april-housing-starts-all-time-record?s=r
https://www.calculatedriskblog.com/2022/05/3rd-look-at-local-housing-markets.html

Bill has a long and consistent track record of making predictions based on data that tend to pan out.

-W

Paper Chaser

  • Handlebar Stache
  • *****
  • Posts: 1851
Re: Crystal balls and HCOL housing prices
« Reply #7 on: May 19, 2022, 08:46:36 AM »
Some charts that might apply (with the caveat that this is national level data and local markets may vary a ton):

Mortgage rates:


Inflation:


Housing Supply:


Home prices:


It seems like the supply of houses does tend to increase during recessions/times of higher inflation, with little regard for mortgage rates which tend to decrease during those times. But there's not a lot of movement in the actual prices of homes that sell during those times either (outside of 2008 which centered on the housing market). I think this supports the idea that RE prices tend to be sticky and resistant to significant drops. So, if we're assuming that inflation sticks around, and more rate increases are on the way then I think it's likely that supply goes up (we're already seeing this in some places). But that may not lead to significant price adjustments. We've still got boomers and Millenials (the two largest generations in history) simultaneously buying homes, plus some amount of corporate and foreign buyers that probably didn't exist on nearly the same level 15 years ago, and that's likely to buoy to demand. So my crystal ball says a bit of a dip in prices on the national level is possible, but in the long term it will seem more like a flattening than a big drop.

waltworks

  • Walrus Stache
  • *******
  • Posts: 5653
Re: Crystal balls and HCOL housing prices
« Reply #8 on: May 19, 2022, 08:50:40 AM »
Nominal house prices are sticky. Real house prices are not. On a national level there were meaningful declines in real prices in both the early 80s and early 90s, but nobody noticed because the nominal prices didn't fall.

My take is that we got the next decade or two of appreciation accomplished in a few years, and now things will stagnate for a long time.

-W

YttriumNitrate

  • Handlebar Stache
  • *****
  • Posts: 1836
  • Location: Northwest Indiana
Re: Crystal balls and HCOL housing prices
« Reply #9 on: May 19, 2022, 08:59:21 AM »
How do you think the changes in mortgage rates, as well as other economic factors, will affect housing prices in recently super-hot HCOL cities over the next 5-10 years? I'm particularly thinking about Seattle, but it's a general question.
My prediction is: some HCOL areas will continue to go up, some HCOL areas will stay about the same, and some HCOL areas will decline.

Villanelle

  • Walrus Stache
  • *******
  • Posts: 6655
Re: Crystal balls and HCOL housing prices
« Reply #10 on: May 19, 2022, 09:23:23 AM »
My area is still having bidding wars and insanity. A group Im part of, comprised largely of people moving to the area, had someone post 2 days ago that they lost out on a 6th house after offering $100k+ over ask on all 6.  So no significant cooling here, yet.  Similarly, in a different H/VHCOL area where I'm about to sell a home, supply has edged up slightly but there are still bidding wars and prices still seem to be eeking up, though the pace of increase seems to be slowing.

If I was forced to guess what would happen in the next 5 years as an average in all H+COL areas, I'd put my money on slower increases or stagnation of prices, though each market could see different conditions. 

Telecaster

  • Magnum Stache
  • ******
  • Posts: 3551
  • Location: Seattle, WA
Re: Crystal balls and HCOL housing prices
« Reply #11 on: May 19, 2022, 01:00:17 PM »
My crystal ball says basically the same thing as @waltworks.   Housing prices have been rising faster than wages for a few years now.   That trend cannot continue indefinitely otherwise no one will be able to live in a house.    But that doesn't mean housing prices will go down.   People don't like to sell if they are underwater, or sometimes can't sell.   So they just don't move. 


ChpBstrd

  • Walrus Stache
  • *******
  • Posts: 6659
  • Location: A poor and backward Southern state known as minimum wage country
Re: Crystal balls and HCOL housing prices
« Reply #12 on: May 19, 2022, 02:08:47 PM »
My crystal ball says basically the same thing as @waltworks.   Housing prices have been rising faster than wages for a few years now.   That trend cannot continue indefinitely otherwise no one will be able to live in a house.    But that doesn't mean housing prices will go down.   People don't like to sell if they are underwater, or sometimes can't sell.   So they just don't move.
One way to think about homebuyer behavior in 2020-2022 is that people were in a frenzy to lock in 30 year mortgages and upgrade to their "forever homes" at historically low rates before the gravy train ended, because home prices were going up forever anyway but low prices wouldn't last forever. The people who feel they succeeded at this plan were generally able to make their payments and are unlikely to sell in response to anything except bankruptcy.

There is some economic tragedy here. Because so many people have tied themselves to their geographic locations, they will be less likely to move when they change jobs and get a long commute (so more traffic, lost time, and automotive financial/environmental waste) and they will be less likely to move to different cities to pursue opportunities. So housing turnover may be low for the next several years, even if prices fall. There might be fewer sellers and fewer buyers, and prices may be set by a lower volume of transactions. Geographic arbitrage opportunities will become more lucrative for the remaining people in such markets.

 

PDXTabs

  • Walrus Stache
  • *******
  • Posts: 5160
  • Age: 40
  • Location: Vancouver, WA, USA
Re: Crystal balls and HCOL housing prices
« Reply #13 on: May 19, 2022, 05:21:29 PM »
Nominal house prices are sticky. Real house prices are not. On a national level there were meaningful declines in real prices in both the early 80s and early 90s, but nobody noticed because the nominal prices didn't fall.

This is exactly what I expect to see starting right now. No nominal price declines, but in real terms housing will come down (though your cost to buy with a mortgage may actually go up).

ChpBstrd

  • Walrus Stache
  • *******
  • Posts: 6659
  • Location: A poor and backward Southern state known as minimum wage country
Re: Crystal balls and HCOL housing prices
« Reply #14 on: May 20, 2022, 06:56:08 AM »
Nominal house prices are sticky. Real house prices are not. On a national level there were meaningful declines in real prices in both the early 80s and early 90s, but nobody noticed because the nominal prices didn't fall.

This is exactly what I expect to see starting right now. No nominal price declines, but in real terms housing will come down (though your cost to buy with a mortgage may actually go up).
We're in the bargaining stage of grief if we're talking about real vs. nominal. Higher rates have created a double-digit increase in the size of mortgage payments for the same house now vs. six months ago. That doesn't just happen and then all the same homebuyers keep being able to afford all the same homes at all the same prices. Something else has to move, and that something else is price.

There was similar bargaining going on last fall/winter about the impact of higher interest rates on stock and bond prices, and a lot of people accepted the emotionally satisfying "they will go through a flat period" explanation.


LightStache

  • Pencil Stache
  • ****
  • Posts: 760
  • Location: California
Re: Crystal balls and HCOL housing prices
« Reply #16 on: May 20, 2022, 08:54:03 AM »
I started to get my spidey senses up in late 2020 and sold my last SFR in Spring of '21. So my timing (sorry not sorry ;)) was off by at least a year.

That was largely driven by irrationality I saw in acquaintances pursuing real estate*, similar to what @Villanelle observes. It's like the old adage of the shoe shine boy giving stock tips before the 1929 stock market crash. They express so much recency and confirmation bias in their thinking it's just crazy.

I boldly predict that we'll see negative price growth in many HCOL areas starting this year and lasting a year or two. As with past real estate corrections, that will be followed by another year or two of flatness.

So I'm buying into apartment syndications, because I think that market is slightly more rational. But I'm renting my primary residence and will continue to hold off buying for a least another year.

*ETA: and meme stonks and crypto
« Last Edit: May 20, 2022, 08:56:47 AM by LightStache »

PDXTabs

  • Walrus Stache
  • *******
  • Posts: 5160
  • Age: 40
  • Location: Vancouver, WA, USA
Re: Crystal balls and HCOL housing prices
« Reply #17 on: May 20, 2022, 09:20:42 AM »
Nominal house prices are sticky. Real house prices are not. On a national level there were meaningful declines in real prices in both the early 80s and early 90s, but nobody noticed because the nominal prices didn't fall.

This is exactly what I expect to see starting right now. No nominal price declines, but in real terms housing will come down (though your cost to buy with a mortgage may actually go up).
We're in the bargaining stage of grief if we're talking about real vs. nominal. Higher rates have created a double-digit increase in the size of mortgage payments for the same house now vs. six months ago. That doesn't just happen and then all the same homebuyers keep being able to afford all the same homes at all the same prices. Something else has to move, and that something else is price.

There was similar bargaining going on last fall/winter about the impact of higher interest rates on stock and bond prices, and a lot of people accepted the emotionally satisfying "they will go through a flat period" explanation.

I don't believe so, but I could be wrong. Real housing prices going down while nominal ones don't is normal in the USA. Look at the 1980s and 1990s in this graph.


Source: https://www.visualizingeconomics.com/blog/2011/03/23/real-vs-nominal-housing-prices-united-states1890-2010
« Last Edit: May 20, 2022, 09:23:13 AM by PDXTabs »

waltworks

  • Walrus Stache
  • *******
  • Posts: 5653
Re: Crystal balls and HCOL housing prices
« Reply #18 on: May 20, 2022, 09:24:26 AM »
The last time this happened (late 70s/early 80s, with roughly comparable interest rate increases and demographic trends), real prices dropped about 11% nationally. Nominal prices were flat or rose slightly.

https://calculatedrisk.substack.com/p/housing-dont-compare-the-current?s=r

I could obviously be wrong, but my prediction is flat nominal/10-20% decline in real prices.

-W

PDXTabs

  • Walrus Stache
  • *******
  • Posts: 5160
  • Age: 40
  • Location: Vancouver, WA, USA
Re: Crystal balls and HCOL housing prices
« Reply #19 on: May 20, 2022, 09:28:26 AM »
The last time this happened (late 70s/early 80s, with roughly comparable interest rate increases and demographic trends), real prices dropped about 11% nationally. Nominal prices were flat or rose slightly.

This is also what a lot of real estate pros are saying right now, but in different words. I keep hearing interviews with them where they say 4~5% price increase this year. But that means a ~4% increase when inflation is running ~9%. Not that I trust them as far as I can throw them.

EDITed to add: I found the most recent interview where I heard this.

“People should not anticipate another double-digit price appreciation. Those days are over,” said Lawrence Yun, chief economist at the National Association of Realtors. “So we may return to more normal price appreciation of 4%, 5% a year.” - Marketplace: There are signs that the red-hot housing market may be cooling down
« Last Edit: May 20, 2022, 09:48:53 AM by PDXTabs »

waltworks

  • Walrus Stache
  • *******
  • Posts: 5653
Re: Crystal balls and HCOL housing prices
« Reply #20 on: May 20, 2022, 09:34:32 AM »
Yeah, 4% increase right now is really a 4 or 5% fall. A million dollar house means a lot less if a loaf of bread is $10 instead of $3.

-W

Villanelle

  • Walrus Stache
  • *******
  • Posts: 6655
Re: Crystal balls and HCOL housing prices
« Reply #21 on: May 20, 2022, 09:55:33 AM »
For those who think real housing prices will drop this year, what's the alternative?  (Not snarky or rhetorical.  There are so many smart, educated people here on these subjects and I'm eager to learn.  Especially because I'm weeks away from listing my residential rental and will have cash money instead of RE equity.) 

If the housing market is going to lead to loses in real value, where do you put that money instead?  Surely, "just accept that we are all going to lose money, in real terms, over the next few years" isn't it, but I'm at a loss to what is.  (I know this is somewhat crystal ball-y, but so is the subject of this thread, so I figured it can't hurt to ask.) 

waltworks

  • Walrus Stache
  • *******
  • Posts: 5653
Re: Crystal balls and HCOL housing prices
« Reply #22 on: May 20, 2022, 10:30:30 AM »
For those who think real housing prices will drop this year, what's the alternative?  (Not snarky or rhetorical.  There are so many smart, educated people here on these subjects and I'm eager to learn.  Especially because I'm weeks away from listing my residential rental and will have cash money instead of RE equity.) 

If the housing market is going to lead to loses in real value, where do you put that money instead?  Surely, "just accept that we are all going to lose money, in real terms, over the next few years" isn't it, but I'm at a loss to what is.  (I know this is somewhat crystal ball-y, but so is the subject of this thread, so I figured it can't hurt to ask.)

If you want to buy real estate in the near future, re-acquaint yourself with the 1% rule/cash flow investing. Or invest in something else. Or hold onto cash until you see an opportunity. The days of buying any random property and having it appreciate 20% a year are probably over for the rest of our lifetimes.

-W

LightStache

  • Pencil Stache
  • ****
  • Posts: 760
  • Location: California
Re: Crystal balls and HCOL housing prices
« Reply #23 on: May 20, 2022, 10:41:09 AM »
For those who think real housing prices will drop this year, what's the alternative?  (Not snarky or rhetorical.  There are so many smart, educated people here on these subjects and I'm eager to learn.  Especially because I'm weeks away from listing my residential rental and will have cash money instead of RE equity.) 

If the housing market is going to lead to loses in real value, where do you put that money instead?  Surely, "just accept that we are all going to lose money, in real terms, over the next few years" isn't it, but I'm at a loss to what is.  (I know this is somewhat crystal ball-y, but so is the subject of this thread, so I figured it can't hurt to ask.)

As I mentioned above, there are other real estate sectors than single family homes and condos. I'm moving to apartments, which I expect to outperform SFH and condos over the mid-term.

But with the recent corrections in equities and fixed income markets, they are looking more attractive. And if you agree that real estate is headed for a dip, it's far better to hold cash than a concentrated and leveraged investment like a SFH.

ChpBstrd

  • Walrus Stache
  • *******
  • Posts: 6659
  • Location: A poor and backward Southern state known as minimum wage country
Re: Crystal balls and HCOL housing prices
« Reply #24 on: May 20, 2022, 10:57:22 AM »
For those who think real housing prices will drop this year, what's the alternative?  (Not snarky or rhetorical.  There are so many smart, educated people here on these subjects and I'm eager to learn.  Especially because I'm weeks away from listing my residential rental and will have cash money instead of RE equity.) 

If the housing market is going to lead to loses in real value, where do you put that money instead?  Surely, "just accept that we are all going to lose money, in real terms, over the next few years" isn't it, but I'm at a loss to what is.  (I know this is somewhat crystal ball-y, but so is the subject of this thread, so I figured it can't hurt to ask.)

There are times when the best choice is to lose the least possible amount of money or purchasing power. 2000 and 2008 were examples of such regimes, and rescue from those events only came in the form of rate cuts, which are probably not happening in the next 12 months unless a major crisis occurs. People have been in "don't fight the fed" mode for so long

Yes, if you buy BSV (a short duration bond ETF), treasuries, or even TIPS you are virtually guaranteed to lose purchasing power over the next six months, but in a world where all cash flow streams (i.e. all investment assets) are being discounted at higher and higher rates, that might be the best you can do.

Real estate is rapidly becoming unaffordable even in a full-employment environment, is facing a rising discount rate against low margins, and in many markets is priced based on the assumption of rapid price gains in the future rather than discounted cash flows. Furthermore, RE is typically leverged 5:1 by the people who will be selling their RE if their employment or hope for continued price gains changes.

Losing a couple percent of real purchasing power is small potatoes compared to what happens when people fight the fed. Imagine only losing a few percent in 2000 or 2008, and then emerging with most of your assets intact and ready to invest in the recovery. That should be the goal when inflation is >7% and the federal funds rate target is at 0.25%.


Villanelle

  • Walrus Stache
  • *******
  • Posts: 6655
Re: Crystal balls and HCOL housing prices
« Reply #25 on: May 20, 2022, 11:32:47 AM »
For those who think real housing prices will drop this year, what's the alternative?  (Not snarky or rhetorical.  There are so many smart, educated people here on these subjects and I'm eager to learn.  Especially because I'm weeks away from listing my residential rental and will have cash money instead of RE equity.) 

If the housing market is going to lead to loses in real value, where do you put that money instead?  Surely, "just accept that we are all going to lose money, in real terms, over the next few years" isn't it, but I'm at a loss to what is.  (I know this is somewhat crystal ball-y, but so is the subject of this thread, so I figured it can't hurt to ask.)

There are times when the best choice is to lose the least possible amount of money or purchasing power. 2000 and 2008 were examples of such regimes, and rescue from those events only came in the form of rate cuts, which are probably not happening in the next 12 months unless a major crisis occurs. People have been in "don't fight the fed" mode for so long

Yes, if you buy BSV (a short duration bond ETF), treasuries, or even TIPS you are virtually guaranteed to lose purchasing power over the next six months, but in a world where all cash flow streams (i.e. all investment assets) are being discounted at higher and higher rates, that might be the best you can do.

Real estate is rapidly becoming unaffordable even in a full-employment environment, is facing a rising discount rate against low margins, and in many markets is priced based on the assumption of rapid price gains in the future rather than discounted cash flows. Furthermore, RE is typically leverged 5:1 by the people who will be selling their RE if their employment or hope for continued price gains changes.

Losing a couple percent of real purchasing power is small potatoes compared to what happens when people fight the fed. Imagine only losing a few percent in 2000 or 2008, and then emerging with most of your assets intact and ready to invest in the recovery. That should be the goal when inflation is >7% and the federal funds rate target is at 0.25%.

I think this more or less answered my question, and it seems like the answer is "there is no great or maybe even good option (outside of wold speculation) so just aim for "least bad" and hold on.

I actually did have both equities (mutual funds and some bonds) in 2008, and real estate.  The property I'm about to sell was purchased in 2004, value went up about 20%, then dropped that plus another 20%.  Now we will sell it for a roughly 70% gain, if all goes according to plan. 

I'm selling for a combination of reasons.  Current prices, not wanting to deal with being a long-distance landlord anymore (especially as the property continues to age and more and more things are likely to go wrong), the realization that if we go back to that area, we wouldn't live in that home again even though we love it, this being our least lease-cycle to sell before cap gains exclusion expires, and a few others.  But one thine my AA and IPS doesn't cover is me selling this and getting out of residential RE, and I'm kind of at a loss on what to do, especially with a likely home purchase in 2-5 (or 8?) years. 

I'm great at having my plan and following it.  I didn't even blink in 2008.  But now that I'm in territory my plan doesn't cover, I'm floundering! 

ChpBstrd

  • Walrus Stache
  • *******
  • Posts: 6659
  • Location: A poor and backward Southern state known as minimum wage country
Re: Crystal balls and HCOL housing prices
« Reply #26 on: May 20, 2022, 01:32:11 PM »
For those who think real housing prices will drop this year, what's the alternative?  (Not snarky or rhetorical.  There are so many smart, educated people here on these subjects and I'm eager to learn.  Especially because I'm weeks away from listing my residential rental and will have cash money instead of RE equity.) 

If the housing market is going to lead to loses in real value, where do you put that money instead?  Surely, "just accept that we are all going to lose money, in real terms, over the next few years" isn't it, but I'm at a loss to what is.  (I know this is somewhat crystal ball-y, but so is the subject of this thread, so I figured it can't hurt to ask.)

There are times when the best choice is to lose the least possible amount of money or purchasing power. 2000 and 2008 were examples of such regimes, and rescue from those events only came in the form of rate cuts, which are probably not happening in the next 12 months unless a major crisis occurs. People have been in "don't fight the fed" mode for so long

Yes, if you buy BSV (a short duration bond ETF), treasuries, or even TIPS you are virtually guaranteed to lose purchasing power over the next six months, but in a world where all cash flow streams (i.e. all investment assets) are being discounted at higher and higher rates, that might be the best you can do.

Real estate is rapidly becoming unaffordable even in a full-employment environment, is facing a rising discount rate against low margins, and in many markets is priced based on the assumption of rapid price gains in the future rather than discounted cash flows. Furthermore, RE is typically leverged 5:1 by the people who will be selling their RE if their employment or hope for continued price gains changes.

Losing a couple percent of real purchasing power is small potatoes compared to what happens when people fight the fed. Imagine only losing a few percent in 2000 or 2008, and then emerging with most of your assets intact and ready to invest in the recovery. That should be the goal when inflation is >7% and the federal funds rate target is at 0.25%.

I think this more or less answered my question, and it seems like the answer is "there is no great or maybe even good option (outside of wold speculation) so just aim for "least bad" and hold on.

I actually did have both equities (mutual funds and some bonds) in 2008, and real estate.  The property I'm about to sell was purchased in 2004, value went up about 20%, then dropped that plus another 20%.  Now we will sell it for a roughly 70% gain, if all goes according to plan. 

I'm selling for a combination of reasons.  Current prices, not wanting to deal with being a long-distance landlord anymore (especially as the property continues to age and more and more things are likely to go wrong), the realization that if we go back to that area, we wouldn't live in that home again even though we love it, this being our least lease-cycle to sell before cap gains exclusion expires, and a few others.  But one thine my AA and IPS doesn't cover is me selling this and getting out of residential RE, and I'm kind of at a loss on what to do, especially with a likely home purchase in 2-5 (or 8?) years. 

I'm great at having my plan and following it.  I didn't even blink in 2008.  But now that I'm in territory my plan doesn't cover, I'm floundering!
I'm kicking arse doing deep-in-the-money covered calls on SQQQ. Basically, this is a bet that the market does not rally huge and I'm making about 10% every couple of weeks. But these are small gambles and I am dialing back until perhaps the next bear market rally.

clarkfan1979

  • Magnum Stache
  • ******
  • Posts: 3352
  • Age: 44
  • Location: Pueblo West, CO
Re: Crystal balls and HCOL housing prices
« Reply #27 on: May 21, 2022, 10:51:50 AM »
For those who think real housing prices will drop this year, what's the alternative?  (Not snarky or rhetorical.  There are so many smart, educated people here on these subjects and I'm eager to learn.  Especially because I'm weeks away from listing my residential rental and will have cash money instead of RE equity.) 

If the housing market is going to lead to loses in real value, where do you put that money instead?  Surely, "just accept that we are all going to lose money, in real terms, over the next few years" isn't it, but I'm at a loss to what is.  (I know this is somewhat crystal ball-y, but so is the subject of this thread, so I figured it can't hurt to ask.)

I try to be holistic in my thinking. If we are talking about rental real estate, you can make money in 5 different ways.

1. Instant equity on the purchase when buying an under valued property
2. Rental cash flow above the mortgage and expenses
3. Market Appreciation
4. Principle pay down
5. Tax advantages

My markets still have very low supply. I agree that with the recent increases in interest rate, the rate of market appreciation will slow down. However, rent increases are crazy high right now. Much higher than I would ever expect.

I had some tenants move out and I raised the rent from $1650 to $2140. For another rental, the market rent went from $1950 to $2450. I re-rented to the same tenants for $2150/month.

Overall, rent went up 20% for my rentals. However, I only raised the rent by 10% because I wanted to keep some good tenants. As a result, I am still under market rent. Even if the rental market is flat for next year, I will probably raise the rent by 5%.

When rents go up by 20%, your cash flow improves dramatically. Let's say that someone is getting $1600/month rent and their mortgage (PITI) is $1,000/month. Repairs, cap ex and vacancy are $400/month, so the person cash flows $200/month. If the rent increases to $1920, the cash flow goes from $200/month to $520/month, which doesn't seem like much, but this is an increase of 165% in cash flow.

Imagine being a small time landlord with $25,000/year of cash flow. Rents go up 20%, which gives you a 165% boost to your cash flow. One year later, you now have $66,250/year in cash flow. Do you really care if your property values are flat or even went down by 10%?
 


waltworks

  • Walrus Stache
  • *******
  • Posts: 5653
Re: Crystal balls and HCOL housing prices
« Reply #28 on: May 24, 2022, 07:26:48 AM »
Local update: there is now above-average (I went and looked it up) inventory here. Our little neighborhood (maybe 500 homes) has 8 for sale. Through the pandemic it would be a really big deal when one came on the market and it would sell in a day or two. Now 3 of 8 have had price cuts already and all have been on the market at least a week, with a couple pushing up past 2 months.

If you were looking to sell, the time was 6 months ago, it looks like.

All this might go out of the window if the IOC awards the 2030 or 2034 winter olympics here, though.

-W

ChpBstrd

  • Walrus Stache
  • *******
  • Posts: 6659
  • Location: A poor and backward Southern state known as minimum wage country
Re: Crystal balls and HCOL housing prices
« Reply #29 on: May 24, 2022, 07:38:46 AM »
Local update: there is now above-average (I went and looked it up) inventory here. Our little neighborhood (maybe 500 homes) has 8 for sale. Through the pandemic it would be a really big deal when one came on the market and it would sell in a day or two. Now 3 of 8 have had price cuts already and all have been on the market at least a week, with a couple pushing up past 2 months.

If you were looking to sell, the time was 6 months ago, it looks like.

All this might go out of the window if the IOC awards the 2030 or 2034 winter olympics here, though.

-W

@waltworks it sounds like you're on the front lines of what is about to become a price collapse. Thank you for the report. I'd short some homebuilders but Wall Street already got the memo and they have single-digit PE ratios.

waltworks

  • Walrus Stache
  • *******
  • Posts: 5653
Re: Crystal balls and HCOL housing prices
« Reply #30 on: May 24, 2022, 08:10:48 AM »
I wouldn't be surprised to see some price declines, for sure. Our house is worth 500% more than it was in 2012 (and it wasn't cheap then), which doesn't seem very sustainable.

I will admit to a little bit of remorse that I didn't sell, but since we don't have any immediate plans to move and there's nothing to rent...

If we get the olympics, I'm talking the family into moving, though.

-W

clarkfan1979

  • Magnum Stache
  • ******
  • Posts: 3352
  • Age: 44
  • Location: Pueblo West, CO
Re: Crystal balls and HCOL housing prices
« Reply #31 on: May 24, 2022, 10:38:16 AM »
I wouldn't be surprised to see some price declines, for sure. Our house is worth 500% more than it was in 2012 (and it wasn't cheap then), which doesn't seem very sustainable.

I will admit to a little bit of remorse that I didn't sell, but since we don't have any immediate plans to move and there's nothing to rent...

If we get the olympics, I'm talking the family into moving, though.

-W

I could definitely see a price decline in ski resort towns with an upcoming recession (Park City & Breckenridge). However, I am not expecting price declines in Metro areas with low housing supply (Denver & Salt Lake City).

I am expecting a small price decrease for Breckenridge. However, this is mostly because the city of Breckenridge put a hard cap on new licenses for vacation rentals. Investors then went 20-30 minutes south to Alma/Fairplay (Park County) and bought the majority of housing inventory with plans to turn into vacation rentals. Park County responded by putting a short-term moratorium on granting licenses for vacation rentals. I think they are going to pass some zoning legislation going forward and separating the long-term rentals from the short-term vacation rentals.   

 

Wow, a phone plan for fifteen bucks!