As long as I'm in the mood to gripe about incorrect financial perceptions, how about home prices these day? They're skyrocketing! Except not really:
Buyers don't care that much about home prices. They care about monthly payments, and since mortgage interest rates have been falling so have monthly payments. If you look at the 30-year fixed monthly payment on a median home, it's still lower than it was in 2018. There's nothing really surprising going on.
"They care about monthly payments, and since mortgage interest rates have been falling so have monthly payments."
Yes, and no.
In your model either you pay rent on a house (owned by someone else), or you pay rent on money (owned by the bank). The difference in the second case is supposed to be the appreciation in the value of the house, which compensates you for the risk of buying, the hassles of owning, and the opportunity cost of not putting your money in a different investment. If that breaks down (ie the prices do not continue to rise -- not necessarily year to year, but over a decade) a whole lot of people's plans fall apart...
Ultimately, of course, that would be ideal -- building life and society plans on an assumption of endlessly rising housing costs is crazy, and that wasn't the way things were done before maybe the 60s or so. But the US did not step back from this mania even after all the flashing lights, warning signs, and trauma of the 2007 recession, so apparently it won't step back until something even bigger than that happens.
I agree with most of this, but another way to look at it is that home ownership lets a person take on a lot of debt that they can depreciate through inflation, which changes the calculus somewhat for renting vs. buying.
In a low interest rate scenario buying is still probably the right play as long as the value of a house basically stays stable or even decreases a little in real terms, because mortgage payments are fixed for the term of the loan. This lets you lock in a stable monthly payment rate that compares increasingly favorably to market rent.
All of that obviously is wrong if the value of the home plunges by a lot for some reason, but if that happens there is also a good bet that your alternative investments are also going down, etc.
Mortgage interest payments account for inflation.
It's theoretically possible that the market isn't correctly predicting future inflation and that mortgage interest rates are absurdly low, but it's not really the way to bet.
Buyers don't care about home prices, only payments? Don't they care about down payments, which are affected by the sales price? A $500K home purchase with a low interest rate may have competitive monthly payments as a $300K home with a very high interest rate and a big balloon, but the difference between a 10% down payment ($50K v. 30K) or a 20% down payment ($100K v. $60K) might be something a prospective buyer cares about. And the down payment affects loan to value, which affects the interest rate, and points to be paid.
No one does 20% down, and haven't since boomers bought houses. Look up FHA.
This is simply not the case. Banks are still looking for substantial down payments, esp. for the many Americans with less than perfect credit.
Lenders still incentivize 20% down.
This kind of thinking (all that counts is the monthly payment) really marginalizes us old farts who pay for the home they buy on the day of the closing. We pay 100% of the price, plus the closing costs (fortunately, that doesn't include prepaid interest or points), plus the costs of any modifications and/or repairs. We have no monthly payments, but we do have one recurring payment--taxes--which also tends to go up with rising purchase prices.
So thanks for the "conventional wisdom," Kevin, but I probably won't be hiring you as my financial advisor on this one.
Ok, but the number of old farts like us (I'm blessed to be in the same situation as you) is miniscule compared to the total home buyer population. So most people have to factor in monthly payments and down payments and so on. The lenders of course know this and prey on the less fortunate. May they burn in hell for what they do.
Who has enough money to pay the lump sum?
Old rich people? Why would I care about old rich people?
Older buyers are likely to have bought a couple of homes in the past, going back to when they were much less expensive. Over a long enough period of time (a commodity that older buyers may have) it's possible to have enough equity to buy the next house for cash, especially if you're downsizing and/or leaving the Golden State (so-named because you have to have a vault full of gold to buy anything).
I don't know what median home price values this chart is using, but they're not nationwide median home prices, which are significantly less than what this chart seems to represent. (Current US median home price is $341,600 which isn't very good, frankly and should be higher.)
Uhh... the median home price should be 10x the median gross income?
Another factor with a down payment is that if it's less than 20% of the purchase price, then the buyer probably will be required to pay for Private Mortgage Insurance (PMI) - https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-122/
The cost "ranges from 0.58% to 1.86% of the original loan amount per year, according to Genworth Mortgage Insurance, Ginnie Mae and the Urban Institute." That's **per year**. (https://www.nerdwallet.com/article/mortgages/pmi-calculator )
And, obviously, the higher the cost of a house, the less likely that a buyer can come up with a 20% down payment. So no, the monthly mortgage payment isn't everything that a buyer will be concerned with.
And buying where they want to buy rather than where can afford to buy.
Housing prices in some areas may be in the oven, and in the freezer in another, but in average all is well…
My in laws were complaining their property taxes had skyrocketed.
It is a cash boom. Real prices will probably lose 10-15% by the end of the decade.
Houses in my neighborhood (Fairfax, VA) have gone from the low 500,000s in 2007 to 725,000 and up for smaller models that aren't updated to mid 800s for larger updated models. The houses were built in the 1960s, used to be a less favored school district but apparently not anymore, the location is now red hot with bidding wars.
I don't think you can look at this from a national perspective, it's thousands of local markets some red hot, some healthy and some not so much.
This. That people in cold markets are fine has no influence on people chasing work.
500 to 800 in 14 years. That's about 3.4% per year.
Can you post this chart with a longer time series, please? Even without it, the spike at the end is well-defined.
Also, I assume this is a national perspective. Real estate is all local. You have to look at it locally/regionally.
Nobody cares if prices are stagnant in places where people aren't buying/moving to, and that's the point. Prices ARE skyrocketing in places where people are moving to - because of the very reason you've posted a chart about before, which is that the number of new housing units has lagged extraordinarily far behind population growth since the bubble burst in 2008.
There's as inverse correlation between mortgage rates and housing prices, as your commentary points out. If you're buying on a mortgage, you look at how much you can borrow at a rate you and the bank are both comfortable with. Lower rates = more money to spend on a house.
Yes, there are very hot markets in places, especially those people on Twitter complain about. But even in my neighborhood in Brooklyn, where the value of my apartment doubled over the last 20 years, it comes out to about 5% per year.
The median monthly mortgage payment is basically constant because median income is basically constant. You aren't taking into account the quality of what is being paid for. Is the square footage the same? Are the appliances just as old? What about the roof, paint, carpeting, tile, cabinetry?
Also, median monthly mortgage payments are slow to respond to rising prices. Rising prices affect the small percentage of homes being sold. The mortgage paid on the bulk of homes doesn't reflect the latest price increases.