[chrisan]

> "The key word is, 'triggered,'" said JunJie Wu, an OSU economist and one of the authors of the paper. "This theory recognizes the role of subprime mortgages and lax lending practices as inflating the housing bubble, but high gasoline prices provided the trigger that burst the bubble."

Are we in another bubble? And if so what is the theory for why? I assume subprime and lax lending wouldn't be the cause after the lessons learned from last time

[treis]

Not a bubble because for the most part people are buying homes that they can pay the mortgage on.

High energy prices are also going to spike inflation which eventually means rates rise. If that happens owners with their 2.75% mortgages aren't going to be inclined to sell. Coupled with higher new construction costs the housing market probably continues to rise.

[throwaway0a5e]

They can pay those mortgages in the moment they sign for them.

They cannot necessarily pay those mortgages after inflation screws up the rest of their month to month budget.

People always love to circle jerk about inflation "inflating away your mortgage" but that's only if you manage to hold onto it.

Wages lagging inflation will still hurt a lot of people. "Just switch jobs" doesn't work in every industry and even where it does you're gonna stagnate in terms of skill/experience due to ramp up times in new roles so you're basically borrowing from your future earning potential by doing that. <Insert ye olde quip about "10yr of experience being a junior developer vs being a senior developer" here>

Unfortunately most people who championed the bad decisions that got us here are wealthy enough to weather the storm with little more than reducing their retirement contributions.

[FollowingTheDao]

It is also funny that people think banks do not want you to default on your mortgage. What did they learn from 2008? They can hand out mortgages ignoring valid economic signals that these people will not be able to repay it, they will then get your house and the government will bail them out and make laws against sleeping in a public place.

[CyberDildonics]

Houses are worth far less if they are foreclosed on or left without upkeep, so everyone loses money. There is no universe where banks want to take over a house and deal with the overhead of foreclosure and reselling instead of keeping the monthly revenue stream they signed up for.

[mumblemumble]

> owners with their 2.75% mortgages aren't going to be inclined to sell.

Or able to sell.

This is the other side of historically low rates pushing home prices up by allowing people to pay higher prices while keeping their mortgage payment affordable. If (when?) rates go back up, that may cause prices to fall. This could also put people underwater on their homes, and even trigger another (hopefully smaller?) wave of foreclosures if they suddenly can't make payments anymore and also can't sell the house at a price that will cover the remaining balance of their home loan.

[FollowingTheDao]

> Or able to sell.

This is crucial. Many people sometime need to sell. When people cannot buy it they lower the price. When they lower the price the valuation of neighboring houses goes down. If people also have less money saved because of higher oil prices, well, they another compounding factor.

Rates are going to go up, and it is much to late in the game for them to rise without serious repercussions.

[treis]

The "bid" order book is extremely deep though. Lots of people priced out that are willing and able to buy at lower prices. So it's unlikely the we get into a bubble popping situation. Worst likely case is static nominal prices while inflation erodes the real prices.

The only sort of cataclysmic risk out there is a change in government regulations. Zoning changes, Prop13, or some action banning investors owning SFHs. But none of that seems remotely imenent.

[mumblemumble]

In 2008/2009, there were also lots of people who were previously priced out, but that didn't help stem the tide of foreclosures. The depth of the "order book" is far from the whole story when you're dealing with an illiquid, non-fungible good that's also encumbered by a lien.

Here's a concrete example that I can take from my own life experience: there was a house we were quite interested in buying. The house's realistic value for the market at the time should have been something we could afford. But the owners simply couldn't let it go for less than about $50,000 more than that, because that was the price at which they could pay off their home loan. So, too bad, no deal. And apparently nobody else would buy it at that price, either. About a year later, this gorgeous, well-cared-for house was foreclosed on, and then at some later date people broke in and ripped out all the copper and whatnot, and so this house eventually got auctioned off as a rehab/teardown job for a (presumable) fraction of what we would have bought it for.

[Spooky23]

Gasoline is a big trigger because it's a variable expense for people living on the edge of what they can afford.

People are really bad at risk management. So when you have a couple pulling in $200k/yr with some crazy mortgage on their $800k house, commuting 30 miles in their 17mpg SUVs, each $1 in gasoline cost increase adds $150/mo in monthly expenses.

There are lots of people like this, many of whom are in weird stress situations already because of issues with COVID and school, etc.

[acdha]

> Not a bubble because for the most part people are buying homes that they can pay the mortgage on.

I think you're right that this won't be an exact repeat of 2010 — that era was just crazy for anyone who understands financial responsibility, more like a precursor to the cryptocurrency number-goes-up salesbros now than the current market — but there are some worrying factors I'd consider before buying. I don't think most of these are national in impact but I'd expect some big regional shifts which could be quite hard to handle for some cities, especially if they haven't been doing a good job on their finances already.

1. A lot of those high prices are anchored on demand in certain areas. If younger generations are successful in getting zoning rules changed to allow density, that can add a lot of competition and there are many hopeful buyers who would prefer, say, a new apartment/condo in a city with many things to do to an older (higher maintenance) house in the suburbs. I think this one is long-term enough that most buyers will be bailed out by inflation but it could at the least prove a major upset for the people who are skimping on things like retirement in the hopes that they'll get a massive equity boom like their parents did.

2. Remote work is here to stay — not 100% but enough to cause shifts in buying habits.

3. Most American home buying is predicated on cheap fossil fuels. If that inflation spike eventually leads to higher pay, this helps on mortgages but in the meantime it puts a lot of strain on anyone who can't just soak up their commute and heating costing a whole multiple of what they previously did. Expect a bunch of SUVs on the used market if the current spike lasts for very long, just like in 2010. That cuts down the number of buyers sharply for outer suburbs.

4. Climate change isn't going away: again, not a national bubble but there are areas (e.g. South Florida) with a lot very pricey real-estate which seems unlikely to be able to maintain that value. That includes things like flood insurance, coastal erosion, etc.

5. The classic suburban model isn't really sustainable: the initial work by developers and tax rates set when maintenance is the cheapest are going to require hefty rate increases as infrastructure ages or needs to be adapted for climate change, but the more people are paying for their houses the more they're going to oppose things like property tax increases or be unable to pay them.

[FollowingTheDao]

> 2. Remote work is here to stay — not 100% but enough to cause shifts in buying habits.

This is one thing that could start a collapse and it is why many real estate companies are pushing a "office work is needed for collaboration" narrative. The real estate market for offices

https://www.nar.realtor/commercial-real-estate-market-trends...

The commercial real estate market is recovering but remains weak compared to conditions before the COVID-19 pandemic, according to NAR commercial members who responded to the 2021 Q1 Commercial Real Estate Quarterly Market Survey and industry data.

[shawabawa3]

> for the most part people are buying homes that they can pay the mortgage on

The question is can they still pay the mortgage if cost of living goes up significantly (like it appears to be)

[PragmaticPulp]

The cost of living increases are heavily driven by housing prices, which they’ve already locked in for themselves.

Unless unemployment spikes dramatically (the opposite of what’s been happening) and they lose their jobs and they bought homes on the ragged edge of what they could pay monthly, this is unlikely to be an issue.

[Spooky23]

There's a delicate balance... if interest rates rise to control inflation, prices will drop and the 2008 crisis demonstrated that many will just walk away from their homes, which triggers another round of price drops.

[treis]

Inflation helps borrowers. They get to pay back their loans with cheaper dollars.

[ejb999]

>> They get to pay back their loans with cheaper dollars

but they also have to pay for energy, food and automobiles, all of which is going up much faster than the average person's salary.

imo, the first area that is going to take a hit is in consumer discretionary spending - people will hold onto their tv's, smartphones, computers and a lot of other things longer than usual, because the things they have to buy (food, energy etc) are all going up dramatically. An awful lot of people live paycheck-to-paycheck and spend at least 100% of everything that comes in each month. Where my spouse works, 2/3's of the employees are in a panic if their paycheck is a single day late; they just don't have a cushion to fallback on.

Consumers cutting back on the 'extras' will be the first domino to fall.

[FollowingTheDao]

This is very simplistic. If wages do not rise this doe snot help the borrower. And rising inflation will probably mean a higher risk of that same person becoming unemployed.

[andrew_]

makes me wonder if student loan default en masse could follow this time.

[chinathrow]

How would that work? I thought most US based student loan can't be defaulted on.

[sbelskie]

Defaulting just means you have not made required payments for a certain period of time (270 days for student loans), so anyone can default.

[jessaustin]

It can't be discharged through bankruptcy (thanks Joe!), but neither can we squeeze blood from stone. Debtors who don't have the funds to both eat and make their payments will not make their payments.

[mumblemumble]

I assume that by Joe you mean Joe Biden?

Student loans haven't been something you can discharge in bankruptcy since the 1970s. If you want to thank a US president (as opposed to, say, the legislature that actually passes these laws), you should be thanking Gerald.

[gizmo686]

They are probably referring to then Senetor Joe Biden and his support for the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, which substantially broadened the set of student loans that could not be discharged in bankruptcy.

[FollowingTheDao]

Bu Biden said he would change this. And he did not. And in fact he is actively fighting them in court.

https://www.washingtonpost.com/education/2022/02/17/biden-st...

[NhanH]

You can still discharge private student loan in bankruptcy until 2005, when a new bill pass to prohibit it. Joe Biden was one of the Democrats voting for it (as a member of the legislature that passed the law). The GP was probably referring to this

[jessaustin]

Joe Biden was a legislator for 38 years. He probably doesn't remember every bill he sponsored, but it's not as though he didn't choose to sponsor them.

[andrew_]

I'd really like to know why this is getting negged. Student loan debt is a massive number, and if significant numbers of people simply stopped paying, it going to have a major toll.

[namelessoracle]

Student loan debt has been in de facto default for awhile now in terms of collecting the interest payments. So we already "know" the impact that would have. It also CANT be defaulted in the sense of extinguishing the debt, because the government will just garnish future wages and earnings, including social security checks.

[andrew_]

Interesting. I wasn't aware it'd been in a state of default. What's a good resource to get up to speed?

[rossdavidh]

Well, house prices have gone up far faster than incomes, for years now, in the US and also several other countries around the world. One driver is the purchase of real estate as an inflation hedge.

This doesn't prove it's a bubble, but it sure does suggest strongly.

[panick21_]

A bubble is a purely analytical judgment in hindsight. Will at some-point prices be lower then now. Probably yes? Maybe in 50 years? Maybe tomorrow?

Many people have many theory why something is a bubble or not. And what time frame prices have to go down to call yourself correct.

Anybody that claims to know is a charlatan. Many of those get proven right once in a while.

[newsclues]

Canada’s housing bubble didn’t pop a decade ago, and continued to inflate.

[etimberg]

Housing in the Toronto area has been even more insane than usual the last few months. Houses an hour away from downtown that were selling for ~850k in November 2021 were selling for $1.05M in January and February.

[newsclues]

I live two hours from Toronto and a house in a bad area of town that I personally know was a crackhouse 2 years ago, sold for slightly under half a million and is getting gutted and renovated into a duplex.

Last time I was in the house, crackheads were shitting in buckets. Literally.

And there isn’t a lot of good jobs here!

[Ensorceled]

All of Southern Ontario really; prices in Midland, Owen Sound, etc. etc. are all much higher.

[abeppu]

Is there a convincing explanation of why the US and Canadian markets behaved differently? Were Canadian banks smarter about what loans were issued? Not being a Canadian, most of the stories I hear about Canadian real estate are about international investment by the global rich -- is that a large enough share of market to support prices even through a recession?

[newsclues]

Canadian economy is less diversified and overly reliant on housing as a component of GDP, so policy has been distorted by the housing market and the corruption/money laundering that goes along with it.

[namelessoracle]

Why wouldnt it be?