Housing market

[Sigmapolis]

Re: 150 to 250 bp further rise
No serious people currently expect a further red rate increase of even 100 bp, let alone 150 or 250. You can pick whatever over-simplified model you like (Taylor rule - sure, why not), no one wants to see the rate that high. The markets seem to think the rate really won’t go any higher (https://www.atlantafed.org/cenfis/market-probability-tracker). We are already seeing signs that the labor market is slowing significantly

Re: inflation and low-income workers
In the past year we have FINALLY seen real wages rise for low income workers. This counters a trend of DECADES of income erosion for low wage workers, even in much lower inflation environments. IE there is no evidence this current bout of inflation is hurting the working poor, quite the opposite in fact!

Re: inflation hawkishness
We know the impact of fed rate hikes is significantly lagging. Inflation hawks are wanting to increase the chances that something in the economy fundamentally breaks and the causes a recession. Who gets hurt in this scenario? Certainly not people who are sitting in fat stacks!! I’d much rather let it ride with low skill labor-cost driven inflation that trigger a recession that will predominantly hurt the most vulnerable among us

I don't take the Taylor Rule as gospel. And Taylor himself wouldn't have argued that it was. Thought of in another way, the Taylor Rule (which isn't all that precise in the first place when slightly different inputs can yield outputs over a range of 100-150 bp) is meant as a guide as to if the Fed is playing things "loose" or "tight" at any given moment. I said they are playing loose... and I think they are. Maybe it's wise.

The Fed has historically played "loose" for a long time now... and I don't think that is a coincidence as to why we've had such a run up in asset prices in the past 25 years and now some inflation.

Inflation is much more stressful on low-income households than on high-income ones. This is very well documented in the literature. There's a comprehensive summary from the Dallas Fed --

https://www.dallasfed.org/research/economics/2023/0110

The fate of the working poor has changed greatly over the past few decades because of ebbs and flows in labor demand, demographics, and immigration. They are clearly benefitting from (and good!) a hot labor market right now, which is part demand but also part supply from the lower labor force participation rate after COVID (though this is slowly recovering but not quite back up to preexisting trends).

If you neutralize these fundamentals of labor supply and demand... you want low inflation for the working poor. Period. The labor market is strong enough to overcome much of that inflation right now, but put another way, the inflation is cancelling out a lot of potential gains they could be making. I don't think you would say their gains are because of inflation. They are in spite of that inflation eating at their income.

The last point is the dual mandate at work. We both want to keep inflation low (or so I would think?) to boost their real incomes but also keep the labor market robust to increase their nominal income. Trying to balance that is hard. We'll see how they do. But we're not "in the clear" and can only expect cuts from here. The probability model you linked does have some (modest) hikes in its cone of potential outcomes.

I will freely admit I underestimated the impressive robustness of housing prices, equity markets, and labor demand in response to these rate hikes. That's good -- less suffering. But at the same time, if you're not hurting those fundamental indicators... not a terrible idea to maximize your rate hikes to squeeze the inflation out once and for all and to give you more room to cut if and when there's another real slowdown.

 

[spierceisu]

Absolutely - supply isn't keeping up with demand, its pretty much that simple.

A LOT of that has to do with local regulations and restrictions. e.g. it's a lot easier to build in Des Moines than LA, for example. Some of that is simply land availability, but a lot of big cities (from London to NY to LA) have lots of restrictions and regulations that make building take longer, cost more, or just prevent it outright.

Economist article from 2020 highlighting 3 main drivers (rising labor and material costs, local regulations and NIMBYism, and builder consolidation)
Economist Housing 2020

And a much more recent Op-Ed from NY Mayor calling for (essentially) de-regulation to promote building.
NY Mayor Op-Ed

As an aside, I think one thing that would help in the US, is more acceptance of ownership of "flats" like in Europe. We have our townhomes here, but imagine a 4 or 6 story building instead, with a dozen or so apartments, but you OWN your own apartment and the HOA deals with the roof, maintenance, etc. That creates a lot more places to live, at a lower cost, and small enough footprint to fit into a city. We have them, but I think more would be useful. I suppose more of anything would be useful...

I am one that wants nothing to do with an HOA. It is getting harder and harder to find a house now a days without an HOA (even for single family houses). There are so many stories of the HOA mis-managing money so repairs and items you are supposed to be paying for not getting done. There is also pretty much no way to avoid them raising their costs to any level without you selling your house.

 

[drmwevr08]

I am one that wants nothing to do with an HOA. It is getting harder and harder to find a house now a days without an HOA (even for single family houses). There are so many stories of the HOA mis-managing money so repairs and items you are supposed to be paying for not getting done. There is also pretty much no way to avoid them raising their costs to any level without you selling your house.

People generally want amenities, common areas landscaping and parks that require an hoa. This is an issue similar to one raised earlier about no true 'entry level' homes being built.

 

[Gunnerclone]

I am going to sidestep the points about fiscal policy (TCJA, the various COVID relief bills) and concentrate on monetary policy *now.* Those fiscal measures (wise or not) are all water under the bridge.

I said 150 bp to 250 bp, so as much as 2.5%. Which, on the high end, would mean a ~45% increase in rates. Imaging taking a 30-year fixed from its present 7.23% up to 9.75% or so.

I agree with you an economy can prosper under different inflation rates. Heck, the British economy of the late 19th Century (and the U.S. one to some similar extent) grew quickly under strongly deflationary conditions as industrialization and increased silver production flooded markets with cheap products.

What makes effective monetary policy isn't as much the (somewhat arbitrary, more on that in a moment) target rate chosen. What makes it work is consistency and commitment to the target. Lenders and debtors negotiate terms with the knowledge they need to adjust nominal APRs to a real APR by subtracting the predicted inflation rate. When that target is known and adhered to, this is easy. When it is unknown, you leave room for a great deal of uncertainty about how these loans are going to work out and market efficiency would decrease.

Those markets work better when they know the real time-value of money.

As for the 2% target, I believe the idea was always...

(1.) Inflation is a regressive transfer of income. It is easy for the relatively affluent, college-educated professionals who post here (at least from what I've gleaned of CF's socioeconomics) to scoff at 2% versus 4%, but that a real impact when compounded for low-income people who don't have sources of income that are indexed to beat inflation (e.g., equities, real estate, etc.) the way the affluent can.

(2.) 2% is low enough to be "tolerable" for #1 but not so low it would leave the Fed with no room to maneuver if something disastrous (such as a fun pandemic!) were to inevitably happen.

I never said the Fed's job was easy. I'd be a bit more hawkish than they've been so far. And I think they will be come late 2024 and early 2025 (adjusting for whatever change in conditions by then).

There are plenty of people that don’t have to imagine that. Even I’m old enough to remember when my parents refinanced down to the 7’s and took us to Hawaii. Can’t remember exactly what year that was…maybe 1994?

 

[Jeremy]

I don't mind HOAs in principle as they "can" prevent properties from negatively impacting everybody else's property value or attractiveness. However, in reality there is little they can actually enforce and even less they try to.

 

[alarson]

I don't mind HOAs in principle as they "can" prevent properties from negatively impacting everybody else's property value or attractiveness. However, in reality there is little they can actually enforce and even less they try to.

This can vary wildly from HOA to HOA

 

[mynameisjonas]

It’s going to be a dark fall and winter in the housing market, guessing rates start to creep back down (marginally) starting in the spring.

 

[crs8975]

Part of the problem with house prices for new home buyers is peoples' expectations. "My starter home must have a 3 car garage, be less than 10 years old, preferably new build, with a big yard and at least 3 bathrooms." Note I said part of the problem. Couple that with greedy builders who have no desire to build smaller, lesser margin properties and boom, here we are.

lol. I live in the Denver Metro. I want my starter home to not be 575K and need god knows how much work to be decent.

 

[Cyclone06]

How is it greedy for builders to maximize revenue and profit?

Are we all angry GM doesn't build a Cavalier and it's all Tahoes and Pickups?

Their business is to make money. It isn't a public work to provide housing.

When huge parts of the population are unable to afford your goods that’s a problem. And when huge parts or your population over extend themselves to purchase your goods that’s a problem. Then the portion of the population that isn’t as greedy eventually has to prop up those that are.

yes, maximizing revenue and profits is very much a necessity but so is being a responsible citizen and community member. It’s a balance and, this country disregards its collective responsibility more and more everyday.

 

[Cyclone06]

lol. I live in the Denver Metro. I want my starter home to not be 575K and need god knows how much work to be decent.

Since you live in Denver your salary is likely 2x what you’d get in central iowa? If that’s not the case, that’s a problem. Always going to pay “extra” to be in the most desirable places.

 

[KnappShack]

When huge parts of the population are unable to afford your goods that’s a problem. And when huge parts or your population over extend themselves to purchase your goods that’s a problem. Then the portion of the population that isn’t as greedy eventually has to prop up those that are.

yes, maximizing revenue and profits is very much a necessity but so is being a responsible citizen and community member. It’s a balance and, this country disregards its collective responsibility more and more everyday.

But huge parts can afford what they're building. That isn't greed.

If you want to bring back the 60s era housing projects have at it. But to expect builders (and landlords) to conduct business out of the goodness of their hearts isn't logical

 

[Cyclone06]

But huge parts can afford what they're building. That isn't greed.

If you want to bring back the 60s era housing projects have at it. But to expect builders (and landlords) to conduct business out of the goodness of their hearts isn't logical

They can’t expand their product offerings to include smaller lesser profit margin options to meet a wider customer base? I know why they don’t. But they can.

And thankfully we now have 40yr mortgages so those huge parts can still afford.

 

[KnappShack]

The can’t expand their product offerings to include smaller lesser profit margin options?

Why?

You're asking a business to take smaller profits. Why would a builder pivot to build a product that makes less money? Why take on the cost of acquiring land, permits, materials, labor, etc. for a lower margin product?

Why wouldn't they continue to build the product that maximizes profit and provides a lower risk?

If the market or regulations change then the lower cost builds could make sense. But that doesn't seem to be their environment at the moment.

Builders try to make profit. No profit then fewer builders will be around

 

[Cyclone06]

Why?

Because financially prudent housing is unavailable for a concerning amount of the population.

But yeah **** the poors. Everyone else can worry about that. I’m good.

A civil, mutually beneficial society is a delicate balance. And that balance is closer to a tipping point than it ever has been. We don’t know the tipping point but we know we are closer than ever before. (See wealth gap statistics)

Keep in mind smaller profit (on some products, not all) does not equal no profit.

 

[KnappShack]

Because financially prudent housing is unavailable for a concerning amount of the population.

But yeah **** the poors. Everyone else can worry about that. I’m good.

A civil, mutually beneficial society is a delicate balance. And that balance is closer to a tipping point than it ever has been. We don’t know the tipping point but we know we are closer than ever before. (See wealth gap statistics)

Keep in mind smaller profit (on some products, not all) does not equal no profit.

Not sure your beef is with the builders. Looks like the politicians

 

[Cyclone06]

Not sure your beef is with the builders. Looks like the politicians

True, it’s all the politicians. Sorry for making you feel bad Mr. Knapp. Keep doing you, maximize all day!

 

[ISU22CY]

Because financially prudent housing is unavailable for a concerning amount of the population.

But yeah **** the poors. Everyone else can worry about that. I’m good.

A civil, mutually beneficial society is a delicate balance. And that balance is closer to a tipping point than it ever has been. We don’t know the tipping point but we know we are closer than ever before. (See wealth gap statistics)

Keep in mind smaller profit (on some products, not all) does not equal no profit.

Maximizing profit is the name of the game sorry that doesn't fit your world view but its a reality of this world we live in. I'm not taking a job that I'm going to make less money on over a job that I'd make more money. There are only so many hours in the day and only so much help. No way I'm tying either of those up for less margin.

Can you share your pay stubs and your donations to charity after each one? No reason for you to make any profit that goes toward your savings.

 

[BCClone]

But huge parts can afford what they're building. That isn't greed.

If you want to bring back the 60s era housing projects have at it. But to expect builders (and landlords) to conduct business out of the goodness of their hearts isn't logical

It's not just builders. There is a new development kiddy corner from me. It has specific regs on what can be built on the lots. I believe 1400 sq foot is the minimum. They have basically said we want a retirement village almost. Up until a month ago. The area had a Dr., retired physicians assistant, bank president, 2 retired farmers, a nurse practicioner, and someone who managed to grab a lot early and will routinely over extend themselves. Otherwise it is a lot of open lots since the codes are too stiff. They just relaxed them a smidge, not square footage wise, so one more is being built.

 

[BCClone]

Why?

You're asking a business to take smaller profits. Why would a builder pivot to build a product that makes less money? Why take on the cost of acquiring land, permits, materials, labor, etc. for a lower margin product?

Why wouldn't they continue to build the product that maximizes profit and provides a lower risk?

If the market or regulations change then the lower cost builds could make sense. But that doesn't seem to be their environment at the moment.

Builders try to make profit. No profit then fewer builders will be around

Until they run out of higher profit margins projects, they won't take on the lower ones.

 

[BCClone]

Why?

You're asking a business to take smaller profits. Why would a builder pivot to build a product that makes less money? Why take on the cost of acquiring land, permits, materials, labor, etc. for a lower margin product?

Why wouldn't they continue to build the product that maximizes profit and provides a lower risk?

If the market or regulations change then the lower cost builds could make sense. But that doesn't seem to be their environment at the moment.

Builders try to make profit. No profit then fewer builders will be around

One thing that also gets overlooked is that people are demanding they live in specific neighborhoods that are higher end also. If you are just starting out, maybe live in Sheldahl where housing is cheaper. You have to drive a little but with WFH being more common, it will be more than off-setting. You don't have to live in Waukee because that is "thee" place if your funds are tighter.