[andrewmcwatters]

I don't know what the risk calculus is for these home developers, but I do know that in particular areas of the US, you just straight up cannot afford a home anymore on median income (or even the top 20%ers looking for fair pricing!).

I anticipate that mortgages will continue to push past 30 years into a strange 45-year+ territory, and we'll begin to see Japan-like multi-generational mortgages. Actually, in reality this is already happening, because people buying homes past the age of 37 (think retirement at 67, but these people are still working and trying to figure out estate handling late in the game) are passing on their mortgage to their children. I am personally seeing this with my friends. No headroom for paid off inheritances!

Alternatively, if the federal government does not prevent it from happening, residential REITs will buy them all up and force people to rent.

[gnopgnip]

High prices in some areas is about the price of land and not about construction prices.

Residential REITs need to profit when they buy a house. An individiual homeowner doesn't, they can pay more if they want to. And individual homeowners get subsidized loans, and in many states subsidized property taxes, they can have a much lower monthly payment, and afford to offer a higher sale price. So for move in ready homes, the seller will almost always go with an owner occupant.

The real problem is with investors buying homes that aren't move in ready. Rehab loans are expensive and risky, individual buyers can't compete with investors, and the sellers are the ones with the short end of the stick.

[mlac]

Private Equity funds are using homes as a store of funds - to diversify their holdings and as a long term move. This can be in cash or financed, but they can afford to eat the loss because there is excess capital right now. It's been this purchasing for years that is contributing to the crunch right now.

From an article in September: "Blackstone Group, which blazed a trail for Wall Street in 2012 when it formed Invitation Homes and became the largest owner of single-family rental homes in America, has returned to a familiar watering hole." [1]

It's another way to milk the middle class.

[1] https://www.housingwire.com/articles/blackstone-gets-back-in...

[croutonwagon]

The Federal government has a TON of subsidies for first time buyes and even more for veterans.

The issue is part land scarcity driving up the cost of land and part the transition of our economy out of production and into consumerism.

Building has never been cheaper, and even quality has improved, including working through some pretty bad materials changes (like PEX plumbing, or chinese drywall).

We no longer really do nearly as much blue collar work as we used to, and many of the unskilled blue collar jobs have seen ridiculous wage stagnation. Companies have offloaded that to China, Mexico, Vietnam, etc, where they havent automated it.

Heck our population doesnt WANT those jobs. Theres a TON of demand for trades work and more are retiring than filling those gaps, but our society has pushed hard to posit that college is the only path to success and trades work is to be looked down upon.

Add to that our population has never been higher. In fact its growth has stagnated the worst since the Great Depression based on the intials of the 2020 Census, which is not a good omen.[1]

https://www.pbs.org/newshour/nation/census-texas-gains-congr...

[andrewmcwatters]

Total building costs are more expensive than ever. Regulations, IBC, and consumer feature demand dictate it to be so. I don't know what you're talking about. Quality also hasn't improved, only marginal cost of production of materials has dropped. The actually structural integrity of those materials has worsened over time.

[croutonwagon]

I’m sorry I’m gonna disagree.

Structure designs have improved allowing cheaper/more sustainable framing to be used that are stronger. Allowing a range of materials from simple pine framing, to block etc. modern wood framing designs can withstand a lot better storm ratings than even 20 years ago. Especially when you add things like hurricane straps in the south etc.

Roofing materials last longer and are cheaper and more sustainable able than old cedar shingles etc. modern sheathing instea of using massive 2x6 or 2x8, asphaul shingles instead of cedar etc. both better, cheaper and more sustainable.

Siding is better and cheaper and last longer. Again comparing any wood siding to hardy board over time. Vinyl in the right climate as well.

Electrical the same. Proper sheathed copper wire over shit like knob and tube or cloth insulated wire is cheaper AND a whole lot safer. Same with modern breakers, including afci and gfci.

Plumbing? Modern shchedule 40 pvc is a lot cheaper, and more flexible than copper. And even modern pex (when done right)can be even better and allow a single plumber to hump hundreds of yards of the stuff with one arm.

Drywall is better than that old plaster lathe stuff in most cases.

Insulation? Spray in cellulose and foam is infinitely better and cheaper, allowing much higher r values and a single guy to install over even the common fiberglass batten stuff of 20 years ago that was awful if you breathed it in or got direct skin contact.

Windows? Double pane vinyl with gas insulation is worse than the single pane blown glass? Come on.

Sure. Regulations and codes are higher and more strict. But that comes with the cost of most of the materials being better and easier to handle.

The fact that it’s cheaper is a testament to how houses in general are much bigger than they were in the 50s. But anything you build will always need maintenance.

[xnx]

This is a great summary of material and construction improvements over the past decades. I get frustrated that housing is not the same engineered quality and does not improve as quickly as consumer electronics, but it is improving.

[maxerickson]

I am under the impression that the change to PEX was good? It sure was adopted fast.

Do you mean it was a significant change?

[croutonwagon]

There’s been a number of lawsuits involving PEX over the years. Namely defects etc that are failure prone and once installed is a nightmare to repair/replace. And once failed is equally costly to fix.

[nradov]

Median incomes are irrelevant to housing developers. All that they care about is whether there are enough customers to buy their products. The developers typically don't lend to customers so the only risk is that demand might collapse in the middle of a project. A lot of small developers went bankrupt during the last recession because they had borrowed to build new projects and then couldn't sell the completed homes.

The federal government wouldn't really be able to prevent REITs from buying up homes.

[ericmay]

> The federal government wouldn't really be able to prevent REITs from buying up homes.

Why wouldn't it? If this was bad enough the government could just pass limitations on it. Hell, the government could probably ban REITs overnight if that was wildly popular.

[pbronez]

If you want to support individual home ownership against well-capitalized REITs, I think you basically need local governments to impose some kind of vacancy tax and/or an non-owner-occupancy tax. Otherwise individuals will never have the financial firepower to keep up.

[sokoloff]

If that's your goal, you should also support the mortgage interest deduction (to put owner-occupied borrowing on the same footing as commercial borrowing) and the deductibility of state/local real estate taxes on your federal return (for the same reason).

[throwaway0a5e]

Even if the industry is unpopular there's not that much appetite for legislatively killing it at the drop of a hat because everyone knows that's not a good precedent to set.

More realistic would be substantially increased taxes on non-primary residences.

[jgalt212]

> Median incomes are irrelevant to housing developers.

That's a bunch of horse hooey, as the customers in all housing markets (outside of a few global cities) are all local. Median income + credit conditions = how much buyers can afford.

> The federal government wouldn't really be able to prevent REITs from buying up homes.

Of course not, but no matter what kind of black magic Blackstone is weaving, they cannot get a more than a trivial number of people to rent a 3BR apt for $10K / month (approx price for nice 3BR in Manhattan). Once again, the population's median income is the driver.

[Workaccount2]

The financial/economic forest is way overgrown and no one wants to be the one to set it on fire.

[andrewmcwatters]

I agree. Politicians have weak incentive to push back I assume?

If you do, you put average people at REITs out of work. This isn't a terrible thing if you ask me, because not much of it is real estate specific. REIT HR people can find work at other companies, developers and salespeople, too. But it's not a good look, I suppose?

Real estate is a real problem that no one seems to want to touch. "The rent is too d*mn high!"

[toomuchtodo]

A fun question we kick around and model in a financial forum I participate in is, “How much insolvency occurs economy wide for every 100 basis points (1%) the Fed increases their interest rate target?”

If interest rates go up, real estate and equities prices come down, and US gov borrowing costs increase. Borrowing costs go up for zombie firms and they fail. How much appetite is there for any of that? The same as long term central back interest rate policy: zero.

[Der_Einzige]

No, if interest rates go up, the acceleration of real estate and equities prices will slow. There are too many real factors which are causing the acceleration of housing prices for interest rates hikes to totally cancel it out.

[reader_mode]

Interest rate hike would probably cascade to a recession blowing up realestate in the process

[tryptophan]

REITs are not the problem. Land speculation is the problem. Worst part is that the gov promotes this, and voters eat that shit up as well("Your mortgage is an investment").

https://en.wikipedia.org/wiki/Land_value_tax is the solution.

[forrestthewoods]

> but I do know that in particular areas of the US, you just straight up cannot afford a home anymore on median income

Correct. The national median income is insufficient to purchase a home in the most expensive cities in the country. That seems reasonable?

The national median household income is about $65,000. That’s enough to afford a mortgage of somewhere in the $300,000 to $350,000 range.

Is that enough for San Francisco? Absolutely not. But that will buy you a nice house in the vast majority of the country.

California has garbage housing policies. San Francisco is even worse. You can buy a lovely place in Dallas, Kansas City, Atlanta, etc on national median income.

[andrewmcwatters]

People have different definitions of "affordable." To me, a gross $65,000 household income, less after taxes, is not enough to be able to afford a home within that price range. It's probably closer to below $275,000.

I do agree with you regarding location, though.

[DavidPeiffer]

Completely agree. A lender in Iowa told us they approve up to 35% of gross income. Not certain if that was total servicing all debts, or their limit on the mortgage percentage payment. 65k could buy a ~300k house at a 3.25% interest rate.

I talked with an attorney from San Francisco on a plane once. When they bought their first house, 70% of their income was going towards the house. Raises helped that become a more reasonable percentage over the year.

Fast forward a few years, their family grew and they wanted to be further towards the edge of the city. They sold the house at a huge profit and put that money towards a bigger house further out. Different perspective in different markets.

[mlac]

That works until the bubble pops, and then really only for for families with high incomes. In your example, let's assume its 70% of take-home (it has to be after tax, or they would literally have nothing left). Taking home 300K, it's easy to live off of 90K. Taking home 100K, it's harder to live on 30K a year. Taking home 65 and doing that, it's not going to happen.

The cost of most household consumables is largely fixed, even as income scales. One can have expensive taste and increase that, but you can only spend so much on toilet paper and laundry detergent.

[busterarm]

You should never buy a home that costs more than 2x your yearly income.

So yeah, you should make at least $137,500 if you want to buy a $275k house.

[ineedasername]

You can easily spend more than the equivalent of 2x your annual income by renting, in terms of higher monthly cost, than by purchasing a home.

Take for example a $300,000 house w/ 4% mortgage. That works out to roughly $1,400/month. Even if you only make $75,000/year, it makes perfect sense to buy that house even if rents are a little lower than $1,400/month. (and current 30yr average rates bring that down to about $1225/month)

In my area, a small 2 bedroom house in a reasonably nice area will cost about $300,000, so the $1225 to $1,400/month rate applies. Renting a 2 bedroom apartment with less sqft for common spaces, in a similar area, will cost about $1800 to $2000. This is significantly more than is required to make up for property taxes levied on top of the mortgage when actually purchasing.

So I'm really not sure where you're getting your 2x figure. That's the sort of statement, absent context & explanation, that really doesn't add much to the conversation.

(On top of this, apartment complexes in my area have been nominally keeping monthly rates the same, but disaggregating utility costs from the rent, charging separately for heating, water, sewage, and garbage collection... at least for a year or two. After people get used to those additional fees, the complexes begin raising rents again too. I don't blame them too much, there's plenty of rental demand, but it changes the balance between renting & purchasing even more)

[busterarm]

Home ownership is more than just the cost of your mortgage.

And in many markets, especially in big expensive cities like NY & SF, it costs more money to buy than to rent.

[ineedasername]

Precisely, which is why the "don't buy a home more than 2x annual salary" doesn't seem like a good rule: there are too many variables. Where I am, total cost of ownership for a small two bedroom house is generally slightly less than the cost of 2 bedroom apartment that is also smaller, and comes with the benefit of building equity. A clear advantage (in my mind) if you're going to stay there for a few years because you'll build at least a little equity and average property values will increase at least a little bit. In my case I have a moderate sized home and pay about than 70% of the rent rates for anything nearby with the same # of bedrooms & about 500sqft smaller, even after property taxes, utilities, and average monthly maintenance costs.

On the other hand I have family that live in an area where apartment rents are much cheaper than the monthly TCO for buying, and even if you can afford to buy renting makes more sense (unless you need 3-4 bedrooms for a family) because rents are so much cheaper & it is better to put the difference between monthly costs into an index fund and build equity that way.

[smabie]

I mean that feels pretty simplistic. Like most things, it depends.

There are many things that I could know or believe that affect the calculus. For example I might get promoted next year and make more money or whatever.

[isbvhodnvemrwvn]

Or laid off, or get into an accident.

[ineedasername]

In which case the equity you've built up in a house can help serve as a cushion, either by obtaining a home equity loan or if circumstances don't allow that because you don't have a paycheck you can cash out the equity by selling the home. Absent on economic downturn, even if you sell within the first 1-2 years you should be able to roughly break even and then downsize to a cheaper apartment.

The only times I see renting as a better economic option is when the monthly mortgage + property & utility costs are significantly more expensive than renting, AND there's an excellent chance of needing to relocate within the next 3-5 years before much equity is built up.

At earlier stages in a career, somewhat frequent relocations are common. But for a large part of the population who, especially as they age into their 30's+, want to stabilize such things in the interest of staying close to family, or make their own family, a greater level of geographic stability is very desirable and can be achieved without much if any career sacrifice if the location is strategically chosen, and buying a house at that stage almost always makes economic sense in the long term.

Of course there are some people who will always want to periodically uproot themselves every few years to new locales, and there's nothing wrong with that either, but I guess my point is that these differences in lifestyle choices significantly change where the economic balance falls.

[Ancalagon]

by this logic like 99% of people would be priced out of purchasing houses in most of california...

[busterarm]

Yes, exactly.

California has the 10th highest foreclosure rate out of 50 states and Los Angeles is 5th for cities with a population over 1 million. NYC is in first.

[jbay808]

> Correct. The national median income is insufficient to purchase a home in the most expensive cities in the country. That seems reasonable?

It's not clear if the GP was referring to national median income. My interpretation was that they may have been referring to local median income. Is the median family income of SF ($136k, I think) enough to buy a home there?

[paulpauper]

if home prices keep surging on a real basis , a 30-year morttgage becomes attractive proposition, especially given how cheap it is to borrow .

[kokanator]

Does anyone remember this type of home buying craziness is what happened just before the bust of 2008?

[nick_kline]

It's different this time ;-) In 2008 there was a lot of new construction that wasn't yet sold, and people bought houses out in the boonies sometimes, but they got loans they could never pay for - expecting the house would appreciate and they justify a new loan, or sell it soon for more money. Prices fell and they couldn't get a new loan or pay their old loan.

Today there is a housing shortage, & that's driving up prices. I'm sure there are some people hoping to flip their houses, but all I read is there is much more stringent mortgage requirements than before and in hot markets at least there are multiple offers. So it's similar in a vague way, but it's much different in it's the housing shortage that is driving a lot of the price increase today. Still, eventually I expect the shortage to ease, builders will make more houses, so that should lower the pressure or lower prices, eventually, at least somewhat.

If people aren't buying so many houses they can't afford, then shouldn't the problem of mass loans going back to the bank be avoided?