[Cd00d]

Sorry, I think I'm not following.

I think you're saying that housing prices are too high. Then you're saying that if inflation continues housing prices will drop?

I totally get that most home sales are based on the monthly mortgage bill, so when interest rates are high, house prices are lower. But, if we have 7% inflation why wouldn't rates increase AND prices increase? I don' think the outcome is obvious when high inflation is coupled with high rates - though I'm sure there are several experts ready to jump in with information about how the US 70's and 80's worked :)

[adam_arthur]

It's a common misnomer.

Inflation is good for assets once those assets have been valued using an inflation appropriate discount rate. Housing rate now is priced based on a 2% discount rate, not 7%.

After the asset is priced appropriately for the current discount rate, then inflation is good for valuations.

Median wages drive home prices in the long run. It's possible home prices can be sustained if we see median wage rapidly gain over the next few years. Gasoline going up and driving CPI inflation doesn't make housing more affordable. Only increase in incomes/buying power.

Example: the 10y treasury was recently at 1%. If you bought that as an inflation hedge you would have lost a lot of money. Once people realize inflation is here to stay, they won't accept lower rates of returns.

Now it yields 2%, and soon likely 3%. Holding cash is better than holding a treasury during the repricing phase. Same logic applies for other assets.

Real home prices were super low in the 70s relative to today. Also wage inflation was very strong. I believe wages doubled over the decade. That alone implies a 2x gain in prices ignoring changes in discount rates. Not the same at all.

[UncleOxidant]

When the Fed starts raising rates to try to counter inflation we'll see mortgage rates follow. If mortgage rates go up to, say, 7% (pretty close to the average mortgage rate over the last many decades) that's going to impact the monthly payment. If people are just barely able to afford a house at a certain price with 3% mortgage rates, they're not going to be able to afford it at 7% - it all comes down to monthly cash-flow. As fewer people can afford to buy at current prices with higher rates that limits demand at those prices and something has to give - either prices will fall to accommodate, or the market will just stagnate. Even so, a stagnant market can only last for so long before some sellers start lowering prices because they have to.

This is essentially what happened in the early 80s when we had mortgage rates in the upper teens. If you look at home price sales history during that era there were some quarters where average selling price went down 10% or more.

[lowercased]

I vaguely remember knowing that we had a mortgage rate of ... 16% when I was a kid (we moved in 1982). But ... it was a direct note with the previous owner, and when rates fell, they wouldn't refinance at a lower rate. And it was hard to get a bank to lend because we were relatively close to the edge already, financially (it's been.. 35+ years - I'm getting some second hand stories through family). When I first bought a home in the late 90s with a mortgage, I think it was around 8% which - didn't really feel high or low, as it was my first. I just refinance last fall at 2.75%. Insane.

[adam_arthur]

It is crazy how much rates have fallen. But the historical average for mortgage rates has been around 5-7%. The 70s in particular had very bad inflation that was pretty abnormal relative to history.

Also important to note that rate only matters in the context of price. Rates by themselves don't provide you much info. e.g. 0% on 10 million is still expensive, just as 1000% rate on 1 dollar is pretty cheap

[UncleOxidant]

We'll find out in a couple of quarters or so if this inflation is "sticky" or just a temporary result of the pandemic. My feeling is that it's mostly the latter, but it's important to note that there were already inflationary trends in play prior to the pandemic - the push to return more manufacturing to the US and the resulting trade wars, for example, were going to lead to some inflation. If this inflation proves to be "sticky" like the 70s/early 80's inflation then we're likely to see some relatively high mortgage rates for a bit. Probably not as high as they were in the early 80s, though.

[adam_arthur]

We'll see. I was pretty sold on the transitory belief earlier, and while I believe there are transitory components, like car prices, I expect core/wage inflation to continue.

We had an almost 9% annualized wage gain last month using the MoM numbers. Unemployment is too low right now for core inflation pressures to abate, unless we have a recession or similar drop off in employment IMO. I think a lot of these core economic principles were forgotten due to how high unemployment went after GFC and how long it took to reach full employment once again.

It looks to me like we've entered a wage price spiral... but certainly it could play out in a number of ways. Perhaps the Fed will use falling nominal CPI YoY numbers to hide the structural inflation that has developed. That could keep rates artificially suppressed for another year, if they're able to convince markets of it.

Due to base effects, CPI is likely to peak either in Feb or March. But it would be premature to extrapolate a fall from 7 to 6%, for example, as evidence that structural inflation hasn't taken hold.

I expect inflation to persist around 4-5% longer term, absent intervention by the Fed... which still brings us to 6-7% mortgage rates.

[boyka]

Prices will stay high as long as buyers are not paying out of pocket. Once they have to pay more out of pocket with rising mortgage rates, they will notice that they weren't able to afford it in the first place and people will need to get rid of what they can't afford to keep paying.

[nly]

I don't know about the US but the next move in the UK is to deregulate lending criteria. Allowing more people to borrow 5-6x income with tiny deposits.

People have always over extended themselves here to buy property.

[adam_arthur]

They should tighten rather than deregulate. Tightening would result in lower prices as well.

If a 20yr mortgage suddenly became the only option, prices would decline in a big way. Of course, things might go the other way with 40yr mortgages etc