Comment by lsmeducation
2 years ago
I hear such conflicting information. For a normal looking new development, I hear that developers are looking to offload asap to recoup the investment. Certain markets in America make it almost seem as if these investors are willing to wait years for rates to come back up.
I don't think Powell gives two fucks about the inflation or unemployment rate. Think he's very interested in cost of living and rent more than anything else. Housing prices barely have moved down at we're on the wrong side over 5%. If housing just thinks its going to wait this wait out and emerge from all of this with this inflated money house has left in tact, while the rest of get slammed by the waves, well ... well I guess I've seen dumber stuff.
Housing needs to get hit for any of this to be worthing anything.
There’s no conflict. Developers are building and selling as soon as they can. That’s their job and that’s their business model.
The people withholding units from the market are your normal landlords and speculators who can stomach reduced rents in the income. They need to be taxed out of existence. LVT continues to be the right answer here, both for incentivizing development and disincentivizing speculation/holdouts.
The vacancy rate suggests most vacant units are in-between occupants, something you'd require for a healthy market. The vacancy rate should probably be double what it is -- it's probably at historic lows.
Edit: Yep, vacant units per capita are at historic lows. We have a construction problem not a vacancy problem: https://fred.stlouisfed.org/graph/?g=131FW#0.
That definition of vacant does not seem include empty units with owners elsewhere.
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We have both problems, but the issue with low construction is not developers simply deciding not to build and/or building but deciding not to sell.
The headwinds on construction are labor shortages, material shortages, zoning, and land prices. Zoning and land prices are both also alleviated by LVT.
Another option that I really like is forcing rent control on landlords who don't have at least 80% occupancy. Don't want to reduce your rents to market rate? Fine, the law will do that for you.
Places like Vancouver, Canada do this through a vacancy tax. It doesn't appear to do much as those leaving the unit vacant are the extreme wealthy and just factor in the tax to the cost of maintaining the house.
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Powell explicitly wants higher unemployment.
The feds actions show they want high asset prices relative to wages.
The plan is exactly as you describe. "Asset inflation good, wage inflation bad" is government policy at this point.
If you print a trillion dollars and give it to the lower and middle class, they'd spend a good chunk of it in a few days to a year(see covid checks and unemployment bonuses) eventually resulting in inflation that disproportionately affects the low income folks, so it's temporary relief which is great during things like pandemics. If the same money is given(or flows) to the super rich folks, they either save it or buy appreciable assets, since they already pretty much already have everything they need.
So the fed doesn't have any other good options. They cannot raise taxes on the rich or institute a wealth tax or 'take' the rich's assets. That's up to Congress. Blaming the Fed I think is unproductive because they seem to be doing their job trying to balance low inflation and a low unemployment rate as much as they can, within the limitations of only being able to change interest rates and quantitative tightening/easing(not to mention things like the war in Ukraine increasing energy prices which affect prices of almost everything). If you had the choice between high(or run away) inflation and slightly higher unemployment(which was historically low), what would you choose? Wage increases are eaten up by inflation.
Asset inflation at this point is a runaway process caused by companies raising prices to cover increased costs and adding a margin for safety because of volatility. Companies in one area raising prices has a downstream effect, both in raising costs for other producers, and in allowing other producers to raise prices because of people's expectation of "inflation."
> Asset inflation at this point is a runaway process caused by companies raising prices to cover increased costs and adding a margin for safety because of volatility
Aka profit inflation, instead of wage inflation.
https://www.youtube.com/watch?app=desktop&v=tU3rGFyN5uQ
You could use the same exact reasons to justify wage inflation while suppressing asset inflation lol. Of course, we know who has the power to get what they want. It's called capitalism for a reason.
> The feds actions show they want high asset prices relative to wages.
It’s an economic axiom that high interest rates mean lower asset prices.
So can you explain what you mean?
Also - as far as I know every us city except for Miami has had a decline in real estate prices - so again - where are you and everyone in this thread getting information? Anecdotes?
Asset prices have been skyrocking for decades. Interest rates remained low.
Wages finally start to creep up after decades of lagging behind productivity, panic, need to raise rates aggressively.
When home prices double in a decade there was no concern, when a burger king employee asks for a 10% raise its a crisis.
It’s an economic axiom that high interest rates mean lower asset prices.
If that is the case, why is housing so expensive?
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The Fed keeping rates too low for too long caused the asset inflation. That’s in the past though, what is the Fed doing now to cause asset inflation?
Seems like they're trying to balance out the other end of the equation by punishing labor through very high interest rates. My personal pet theory is that the fed wanted to raise rates enough so that the static interest rates on student loan debt didn't look so absurd when student loan payments came back online. Otherwise people would be demanding student loan debt relief. That ~7% doesn't seem so silly now, it's about inline with mortgage rates. But when mortgages were approaching 2%, that same 7% looked usurious.
He may want that but it’s going to be difficult to support with current demographics. Too many boomers left the work force and need services
Developers are not investors. They borrow money to build and hope to sell at a profit. It’s just like a new car dealership. The “inventory” isn’t owned by the builder or lot, it’s owned by the bank. The builder pays interest, taxes, insurance, every day a home sits unsold. They are motivated to sell and due to market factors they are starting to offer steep discounts. Now existing homes are a bit of a different story. There is a mix of owners and investors and they are likely locked in at a comparably low rate. If they bought in the last 2 years they may even be underwater. And if looking to move they may need to get a certain price to be able to get into their next home.
The investors keeping a building empty don't care about return on investment like most investors do they want to hide assests from their local government and possible have a place to flee to if things get even worse locally.
Investors looking for a return on investment want to rent everything. They leave property empty when remodeling, or when between tenants.
If property prices are going up 10% per year and price to rent is 30:1 (Vancouver) - to some it's not worth the risk of renting out the property.
You're just banking on leveraged appreciation.
Take a $2M condo. The rent is will be ~$60k for a year. The appreciation will be ~$200k, and the the principal (@ 3% interest - which they have if they're leaving it empty - is $35k).
You're getting an expected $235k if you leave it empty, and $280k (after vacancy and management) if you take on the risk of renting it.
Why go through all the hassle when the government is doing everything they can to pump up prices on leverage?
That depends on cashflow needs, and just how sure someone is that their spreadsheet (and expected future value) will turn out to be true. For property prices to go up 10% yoy credibly, property in that market has to actually change hands after all, and that requires someone spending cash or financing every year do the deal and to produce the data.
If that stops happening, eventually everyone has to adjust their spreadsheets/models, and all the sudden that model gets very grim.
actual cashflow is real/concrete and hence has a momentum and credibility that tends to reduce panic. It gives time to wait out market valuation issues, since there is money to pay the bills coming in.
And once the money changes hands, it also is ‘permanently’ the owners. That reduces risk.
Expected market value? Not so much, on any of those fronts. And at some point, all but the most die hard true believers are going to want to know why they’re dumping cash into finance payments (or keeping cash locked up) for property that isn’t worth it.
At some point with speculation, enough people blink that it collapses.
Or maybe not. At least that is what everyone in that situation tells themselves.
But it isn’t panning out for Chinese firms anymore like it used to.
This takes time to actually happen though, as everyone has very strong incentives to keep wil-e-coyote’ing once they’ve run off the edge of the cliff.
And somehow people always find reasons to not update those spreadsheets when the numbers are going down instead of up. For many of them, they ran off this cliff many years ago.
And it does work, as long as there are enough ‘greater fools’ around, and there are a lot of greater fools, or they can afford to wait.
Boomers here and in China can still go for many years before they have to sell.
In high demand metropolitan areas, I don't see how housing prices are ever going to take a hit. There are plenty of young, well-paid professionals interested in good real estate who are capable of and willing to pay high prices. Demand is severely constrained because interest rates are high. I can't see how the needle is going to move unless rates drop.
The market can stay irrational longer than individuals can stay unhoused.
Endure, they will cave eventually. They always cave.