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by jeffreyrogers·2y ago·view on hn ↗
Unless the housing supply increases this will just be a temporary thing. As long as people are able to make their mortgage payments they typically won't sell their homes at a loss (even if their equity is negative). Some people will always be forced to sell due to life events and that's what will set current market comps. Since mortgage rates have recently spiked upwards people who need a mortgage to buy a home can afford less, so they either aren't buying or are buying a smaller/worse home than they would've previously.

But since most people aren't forced to sell, the available supply will shrink, which will push up prices eventually, until people can sell at a profit again. The rising rates also make it harder for developers to get loans, and lower prices make development projects riskier, compounding the supply problem.

7 comments
> Unless the housing supply increases this will just be a temporary thing

I'll go a half-step further and say that unless this is a result of broad actions that have made home-building less costly, it will be temporary. Whenever house prices go down, home-builders become less incentivized to build new homes, and so less homes get built, and prices go up again. This will happen unless the price drop was a result of houses becoming easier to build

There are a record number of housing units under construction: https://fred.stlouisfed.org/series/UNDCONTSA/
If you look at the dip before now, it's because we're a record number of housing starts behind. We pretty much stopped building houses in 2008.
There should just be a pandemic or something that puts a lot of people out of work so that they have to sell at low prices so that large real estate companies can buy their houses and then rent them back to them. They can even have a reverse rental program that allows people to stay in their homes through the hard times and instead pay rent to the new owners.
Did that actually happen?
In so many words yes, it's just a little oversimplified for humor.
I'm afraid I don't follow that. House-sellers are generally also house-buyers. They move out of one place into another. It's neutral with respect to supply.

If there's a glut of people owning houses but not living in them and not successfully renting them, then that does reduce supply, but they're also suffering opportunity cost. If they're willing to throw away money like that I don't think increasing supply would help -- they'd just buy up the new houses as well.

If someone sells a house for less than they purchased it their equity available to purchase another house decreases. Since mortgage rates have increased that means they can only afford a smaller/worse house (because they have less money to make a down payment with). So why would they sell in that situation unless they need to? People sell when their homes have appreciated because they have positive equity and can get a new mortgage, so they can buy a better home by rolling their existing equity into the new home as a down payment (they also don't pay capital gains when doing this and the interest on the new mortgage is deductible, making it attractive from a tax perspective).

Edit: I think I see where the confusion is. You are right that the literal supply of houses doesn't increase or decrease unless people stop/start renting or new homes are built. But the supply of houses available for purchase depends on whether people want to list them right now or not. Which is influenced by current prices because most people won't sell at a loss unless they have to.

In response to your edit, what you’re still missing is that a household that decides not to sell (and thus withhold inventory from the market) is also a household that is not entering the market on the demand side.

So, to a first order approximation, there is no change to ratio of supply to demand. The absolute level or supply is irrelevant. The absolute level of demand is also irrelevant. What matters is the amount of supply relative to demand.

It does not matter to the overall supply and demand picture if someone “can’t afford to sell” because they also can’t afford to buy. People who do have to sell will get fewer offers, and so people who are still in the market to buy have less competition.

What really matters is how many renters are converting to buyers, how many owners are dying or moving to nursing homes, and how many investors are buying or selling rental units. Higher interest rates tend to have little effect on mortality, but do discourage first-time homeowners and investors.

Yes I understand all that. My point is that both supply and demand are low right now because you can't trade up in this market unless you can pay cash. But low supply eventually leads to increasing demand which pushes prices back up. It leads to increasing demand because it takes about a year to build a new house and it's likely that developers will start fewer homes in the upcoming year due to increased rates, which mean they can't make their required profit unless prices go up.

I also understand that current sales will sell for less because there is less demand. That's why I mentioned that sales comps will be pegged to the few transactions that occur. But you have to look at the number of transactions, not just the most recent prices. In real estate you have a price cycle but also a volume cycle. Fewer transactions occur at low prices because sellers don't want to sell when prices are low. The exception would be if many people are forced to sell because they can't make their mortgage payments, but that doesn't appear likely at the moment.

Is this true if the price of all houses fall? In that case it seems like it's easier to swap up.
I mean, you could sell for less than you purchased (say you put 20% down) and buy a new home with 5% or 10% down.. so you take a haircut and increase your mortgage. People may do this if they have to move for a job.
They probably wouldn't sell at a loss, but they would sell if their profit is bit less than when the market was higher.
I think "inventory" = "supply of houses available for purchase [or sale being processed]".
Depends on life stage and other circumstances. They may be moving in with someone else, for example - anything from marriage to getting roommates to moving back in with the parents.
> House-sellers are generally also house-buyers.

House sellers are generally those who have gone to meet the saints. They move from one place into another yes, but where they go they don't play any part in the housing market – I hope!

The census bureau estimates around 11% of houses in the US.
>Unless the housing supply increases this will just be a temporary thing.

The housing supply will increase dramatically in the next decade, not by building but by attrition.

More than 55% of all homes in America are owned by Silent Gens or Boomers[0]. That figure includes non-SFHs, of SFHs I've read they own >70% of (lost my source unfortunately). They are going to start dying of en masse within the next decade. That means A LOT of SFH are going to hit the market, all around the same time.

The share of millenials and genzers who are financially fit to even purchase a home are going to be far less than the amount of people who are dying.

For the non-believers, it's all written in the demographics. Unless we import a shit load of migrants who can also afford expensive real estate, or we print money so that institutions can buy these properties, the prices are going to sink like crazy.

[0]https://ipropertymanagement.com/research/homeownership-rate-...

Well their kids could live in them, or sell it and buy a different house to live in. Forecasting what the effect of that supply will be on prices seems hard to me. Housing units per capita is lower than it was 20 years ago[0] and I think if you could find a longer time series you would see the pattern continue back many decades. That timeseries also includes all housing, not just SFH. I think if you just looked at SFH the decline would be more dramatic.

[0]: https://fred.stlouisfed.org/graph/?g=j9kH

>Well their kids could live in them

Unlikely. There's a very high likelihood the house will have to be sold, either to pay off debts of the deceased (or bereaved), or because the children already have their own lives going, or because they don't want to assume the tax burden, or simply because each child wants their share to do with as they please.

>or sell it and buy a different house to live

This is what's going to happen. All of these property will be sold. A very small percentage will be assumed by the children because of the all issues mentioned above.

> The share of millenials and genzers who are financially fit to even purchase a home are going to be far less than the amount of people who are dying.

I don't understand this sentence.

The number of houses that get sold or transferred to living people is of course exactly the same as the number of houses vacated by people who died. It can't be anything else since houses don't evaporate when the owner dies.

Just because you die doesn't mean your house is paid off or you don't have some kind of reverse mortgage on it.

Just the yearly taxes on my home would be a significant burden to many.

> Just because you die doesn't mean your house is paid off or you don't have some kind of reverse mortgage on it.

That doesn't change anything with respect to the existence of the house. Someone might take a loss (the heir or a bank) but no matter, the house continues to exist and someone else will end up owning it.

> Just the yearly taxes on my home would be a significant burden to many.

If nobody can afford it that just means the price (and thus tax) will drop until someone can.

I'm a non-believer. Counter arguments:

1) Not 55% from your article. Youngest boomer is 59. That's about middle of the 55-64. So split the difference, it's 43.8%. Millenials are larger than boomers. Gen X is larger than Silent generation. If your thesis of them not being able to buy when they die off is correct, well, see #2 and #4 below.

2) People that inherit don't have to sell. Many will simply rent as it could be tax advantageous. Or they move in.

3) Construction costs (labor, materials) will inflate minimizing new supply.

4) The Fed has no choice but to bring rates back down and keep printing. National debt is $33T which is crazy but unfunded liabilities are 211T! We're well on our way to paying 1T in annual interest. 65% of spending is mandatory. Debt historically % of GDP is 46.9%. End of 2022 - 97%. [1]. Interest rates cannot remain historically elevated and the only way out of the debt load is to print print print. This helps assets and affordability (debt service) for investors and the genx, millenials to acquire. The US and world got drunk off a cheap dollar.

So I disagree on the macro of your thesis. Certainly some areas will be affected though with boomer/silent passings but that will be due to a demographic change in demand, gen x and younger not desiring those areas for numerous reasons.

I'll be holding assets as inflation continues, and probably rips again in the near future. It will be traditional inflation (actual economy) or inflation in the financial economy (stocks, assets). One or both have to rip from inflation. There's no way out of the debt load.

[1] https://www.cbo.gov/publication/58888

> Unless we import a shit load of migrants who can also afford expensive real estate, or we print money so that institutions can buy these properties, the prices are going to sink like crazy.

Likely the powers that be will print money to hand over to institutions to gobble up real estate who will then rent out the properties to the incoming mass migration wave into the US. Most of these new arrivals have a almost zero percent chance of becoming home owners with the current pricing and wage suppression going on.

It seems to me various real estate investment groups have essentially unlimited lines of credit to buy up properties. On the commercial side they seemingly can ride out many of their units being empty for YEARS.

>> They are going to start dying of en masse within the next decade. That means A LOT of SFH are going to hit the market, all around the same time.

80% of the silent generation is already dead along with 33% of the baby boomers. Between them, around 8,000 people die every day, and that has been going on for quite a while.

When do you expect this to start having an effect on prices?

Selling at a loss is dependent on your cost basis, and fortunately most owners didn’t buy within the last few years of dramatically overinflated prices.
Many people refinanced in the last few years to take advantage of low rates and take money out of their homes.
Note that baby boomers are reaching an age at which they're starting to pass away.

What else to do with an inherited house than either live in it or sell it?

I wonder if there is a difference, as far as housing market fluctuations go, between an aging person who passes away and leaves their home to their heirs and one who sells their home before they pass away in order to fund their retirement/healthcare.

Obviously the outcome for the family is very different and worth examining, but for the moment I'm considering the broader impact on the housing market.

I live in a place that has received awards as a retirement destination, IE: we have people in the scenario you describe... I don't really see a difference in these outcomes in terms of inventory. One observation I'd make is that many people who stay in their homes to the end often don't have the means (money, health, etc) to maintain their homes, meaning those homes are often in worse shape and thus a lower valuation. Often too if you think of a "last home" it is either going to be a "downsize" or it's a "dream home" neither of which may be appropriate for all segments of the market. This segmentation is something that gets overlooked when we talk about supply side problems. I have lots of houses available in my market, but they may not be the square footage or condition that all buyers are willing to accept.
Rent it?
Renting is not a new option, and it is not trivial. Is there a reason to assume a higher rate of inheritors to rent rather than sell?