Exactly. I keep reading articles about how home prices are "falling" or "plummeting". Yeah right. They are more expensive than ever, especially when you factor in interest rates.
Home prices need to collapse in order for the middle class to be able to afford them.
I keep track of my home sale price estimate on Zillow, not because I think it’s wholly accurate but because it gives me an overall idea of how the market is trending. At the beginning of the year my home value dropped significantly, roughly 10-15% in a matter of months. It’s since completely recovered. Of course this is anecdata, but it seems to jive with what I’m seeing in general.
Home prices (and thus rents) can be controlled with simple supply, independently of the Fed's changes to interest rates. If you're interested in lower house prices, join (or start) a local YIMBY-type advocacy org.
Do you have any evidence that home and rent prices can be controlled by simple supply, as opposed to new stock being purchased by large landlords and investors?
I'd like to see areas with chronic shortages implement vacancy taxes. A rental unit that sits empty for 3 months starts getting taxed at 20% of the fair market rent for the unit every month, and that percentage goes up 20% every month up to 100% after 7 months.
Real Estate prices are notoriously sticky. People can't afford to sell if the house goes under water, so they'll keep the listing at the original price up at the original price even if it realistically isn't going to sell.
The real rate is 0.86% according to the Fed, which is historically cheap. In other words, if people get a mortgage loan at 6% and inflation is running at 4%, they’re not paying that much.
If inflation drops, and the Fed lowers interest rates to follow suit, they’ll refinance, so the only real risk at the moment would be that the Fed squeezes by raising the real rate.
That washes out speculators and put pressure on home sellers.
Why are you looking at percentages? Percents don't matter... What matters is, how many monthly/yearly median wages does it take to buy a house now, compared to 30 years ago?
My mother is a part-time real estate agent (mostly for friends and family type work). She's got one house on the market now and having a hard time selling. If they don't get an offer in the next week or two, they'll be lowering the asking price.
Just one datapoint/anecdote, but it's a far cry from the last few years in my experience.
That seems much more reasonable than the status quo of houses being purchased for 10-30% above asking price, in cash, before an open house happens, sans inspection.
It's been frustrating seeing a few friends try to buy a home in the past couple years, but basically get steamrolled at every turn because they aren't willing to drop all their income on a home purchase sight-unseen.
It's hard to respond to that datapoint since we have no idea what the asking price is or how reasonable it was. The entire rest of the block has sold in 2023 and it's at the same price point? Twice that price point? Twice the price of 2021?
In my hometown prices doubled in the last few years. If someone still wanna sell at peak prices or offer just 10% discount from peak thats no wonder hard to sale in current environment where harder to get credit, people lost job or inflation reduced their money power.
Another datapoint: I listed my house 3 weeks ago and had 8 offers within 3 days, the highest being 10% above asking. Currently waiting on the appraisal but it seems likely that it will eventually sell for nearly double what I bought it for in 2017.
cf sibling's comment: You need to factor-in credit's price. I've been looking for a flat near Paris for 2 years, and sure the prices are lowering. But still, the cost (either total cost, or percentage of my salary) for me increased.
My mental model of housing in my area is that I have the n-th salary in that area, so I get the n-th best flat. The pricing will then be exactly what I can afford (which is legally 35% of my salary here). What changes is who gets how much, 3 years ago it would go at 95% to the previous owner, nowadays it's 70%.
The problem is many people have been priced out of home ownership. Heck, I could not afford to buy the house I live in currently if I were purchasing it today (and my neighborhood is not nearly as insane as many others in my region in terms of inflated home prices).
Asset prices (house prices, stocks, etc. ) are not calculated into inflation, nor they should be. Only rents, and costs of maintaining houses are a part general level of prices for goods and services.
With this logic we should also exclude prices of cars, computers because that’s also an asset that you can just rent rather than own.
Houses used to be included few decades ago in inflation calculation - this sounds more like trying to hide how much price increases.
Similar things happen in taxation. In EU in many countries you have Brutto salaries that includes employee contribution for healthcare, but most people don’t know that employer on top of that pays also another half.
So when people calculate their after tax salary they thing that only 35% is tax when in real life it’s 45%. Include VAT, duty tax, excise and easily you pay 60% taxes.
If politicians would make this clear with just one single 60% tax most people would be furious and go to street - that’s why they are using this salami strategy.
Here's a fun thought experiment - ask yourself what happens if the Fed drops interest rates to -1000%, and home prices & equities go basically to infinity...
Anyone who owned equities or houses before the interest rate move is set for life, anyone who didn't lost basically all of their savings.
It's interesting how many people try to explain away this with Fed-speak and pretend it doesn't matter.
So official inflation statistics should not be applicable to people interested in purchasing assets, such as land? I am not understanding the reasoning.
Since most goods and services flow through the largest publicly listed companies, I consider equity market indexes like VTI or VOO to be a better gauge of inflation over the course of decades. It has been my experience that the prices I pay for things like land, daycare, education, healthcare, and even services like electricians/plumbers/other specialized labor follows the increase in equity markets, at least in my high cost of living area.
Also, the government will backstop equity prices by reducing the purchasing power of the currency, so that also tells me equity prices are tracking purchasing power.
House prices are correlated to rent, because the higher rent you can get, the more the house is worth as an investment. So in theory they're not included... but in practice yeah.
If you think we should increase housing supply, allow people to build cheaper housing and relax building codes.
As it stands, home builders will extract all possible value from building a house and take it for themselves, building homes exactly as expensive as the current ones in the market.
I think at this point that would be catastrophic, the average persons most valuable asset usually is their home (for better or for worse). A all encompassing reversal would economically cataclysmic.
I would think we need better incentives for new market entrants (first time home buyers) and penalties for n-private home owners who rent out.
The only thing people use that valuable asset is to then sell it and buy a bigger house. If all houses go down in value then that bigger house is also cheaper now.
I never understood this mantra of why house prices _NEED_ to go up. They don't, the only people that benefit are investors and landlords, not people who actually want to live somewhere.
But what value does that asset (as an asset) for normal people (=with one home) actually have?
For "investors".. sure.. buy 50 houses, treat them as investments, with limited new construction, the price goes up higher than inflation, you can rent them out, etc.
For normal people? Price going up or down doesn't help them, because they still need a place to live. Can't rent it out, since they need a place to live. Can't really sell it, because then they have to pay monthly for the same thing, sometimes even more than before. Sure, some pensioners without kids might sell their house, ove into a rental for their last few years, and spend the difference on cocaine.. but that's not really a game changer for anyone.
The only problem are the banks, where lower prices mean a shitstorm of revaluating, recalculating morgages, refinancing etc. But for someone with a paid off house, that they live in, if the "global" price of housing goes up or down 50%, it wouldn't matter that much.
Everyone worries about falling home prices devastating the average retirement plan, but if you don't sell your home when you retire all that high valuation is going to do is add to your property tax expenses. And if the people nearing retirement with high value houses are all planning on selling their homes to downsize, well I think that is going to cause a lot of chaos and pain in the market anyway.
Make homes cheap and cheerful again and provide anti-poverty support for people that show losses in their home asset.
Penalizing landlords doesn't solve the problem that there are M people who want homes, N homes in places with decent job markets, and M > N.
Better transportation, more efficient use of scarce land, and more home building is needed. Converting rentals to non-rentals won't add a meaningful number of homes to the market.
What kind of metrics push prices to start falling? Just thinking as a service oriented business (say a salon or restaurant), why would I ever want to lower my prices if customers keep showing up?
Seems like there is a really long tail for prices to return to pre-COVID levels, if ever.
Specifically, the commonly cited "accelerating inflation" refers to the third derivative of price with respect to time. Interestingly, more physicists seem to understand this than economists: https://www.coppolacomment.com/2021/05/calculus-for-economis...
You're right that a business wouldn't lower prices if customers keep showing up. The basic causes of prices falling amount to two: increased supply, and decreased demand.
On the supply end, if competitors enter a given market and take some of your customers, you might lower prices to lure them back. And if people just can't afford (or otherwise don't want) to go to your salon/restaurant as often, then you might lower prices to lure them back.
As far as the current environment, we've got student loan payments restarting in a couple months after a three-year hiatus. A good number of folks who had some disposable income are going to have less. That'll impact the demand end of the equation. Won't necessarily cause deflation, but will at least lower inflation.
> why would I ever want to lower my prices if customers keep showing up?
I've noticed that restaurants that severely raised prices have gone from a significant wait time to being almost empty while those that raised them a more reasonable amount have gotten closer to packed. So I'm not sure I really agree with your assumption that customers are price insensitive.
Besides, it's pretty short sighted to talk about "still showing up". If you want to maximize profit, you need to guess at how many would show up with lower prices.
You don't need prices to fall. You can look at month to month inflation or month over month. Eventually May to May will be small b/c the shock happened and that level become the new normal, but the ongoing rate went back down. Inflation can be very low and never have prices return to pre-COVID. You would need negative inflation, and likely a recession, for that to happen.
Prices aren't going to return to pre-covid levels unless you see a sustained period of deflation. Central Banks have a mandate to keep inflation around 2% while keeping employment as high as possible.
The target is (and has been for many decades) 2% inflation, not 20% defaltion.
Are many prices really falling, other than some very specific goods that had supply issues? I thought the slow regression towards low inflation was just most prices stabilizing at a new (much higher) level?
And that's exactly what consumer staples companies like Proctor & Gamble, Kimberly Clark...figured out. "Why would I never want to lower my prices if people always need toilet paper"
Prices are much stickier for some products than others. There's a big difference between a lot of commodities being sold wholesale (oil or steel or whatever), products sold to consumers (cars or oreos), and services (especially ones with a personal touch or relationship like you mentioned).
I think it would take a lot of deflation for most salons to lower prices versus just delay future increases, but prices regularly fluctuate up and down at the grocery store or used car lot.
It'd take a very rare situation for a salon to lower their sticker price, but there are lots of ways to lower effective prices without lowering the sticker price -- sales, bundles, promotions etc. Inflation is calculated using baskets based on prices actually paid rather than sticker prices, so it mostly captures the effects of sales etc.
An increase in supply and/or a decrease in demand can cause prices to fall. However, falling inflation does not mean falling prices. If inflation is falling but still positive, then prices are still increasing, on average.
Inflation in the US as of 2023 is more like a choose-your-own-adventure than anything else. Depending on the channel or URL you tune into you and others just like you can extrapolate out corporate greed, federal reserve policy, federal government policy, tax cuts, tax hikes, covid restrictions caused it, covid restrictions actually helped, PPE loans, biden, trump, xi, putin, zelensky.
> Inflation in the US as of 2023 is more like a choose-your-own-adventure than anything else. Depending on the channel or URL you tune into you and others just like you can extrapolate out […]
Almost like modern economies are complicated with many feedback loops and a lot of interconnectedness between different factors that interact in possibly non-linear ways.
That's my point. It's complicated and measured in ways that the actual inflation numbers you hear from major media outlets are basically useless for gauging inflation and only seem to be used to further agendas.
I say: We already do, and it’s averaged out to 4.2% over the last 5 years. Saved $30K in 2018 to maybe get married and buy a house? It’s less than $24K now before even considering housing affordability. You paid a $6K wealth tax without realizing it.
A wealth tax is a tax on total wealth, usually kicking in at a certain (high) minimum level; you can’t dodge a wealth tax by, as most wealthy people do, keeping your wealth in forms other than currency or dollar-denominated assets.
Inflation is not, and does not even loosely approximate, a wealth tax.
Readit News
Home prices need to collapse in order for the middle class to be able to afford them.
Home prices are heterogenous; they can be stable in one place and falling in another [1].
> are more expensive than ever, especially when you factor in interest rates
Home prices can fall while the cost of a home, i.e., mortgage payment for a new-home purchase, rises. The latter is closer to what PCE tracks [2].
[1] https://www.newyorkfed.org/research/home-price-index
[2] https://www.bea.gov/sites/default/files/methodologies/RIPfac...
Tell politiciants to stop regulating the building market
If inflation drops, and the Fed lowers interest rates to follow suit, they’ll refinance, so the only real risk at the moment would be that the Fed squeezes by raising the real rate.
That washes out speculators and put pressure on home sellers.
Money is still relatively cheap.
https://fred.stlouisfed.org/series/REAINTRATREARAT10Y
Incomes increased 4.8% annualised; “the national average 30-year fixed mortgage APR is 7.19%” [1], making the real rate 2.4%.
[1] https://www.bankrate.com/mortgages/mortgage-rates/
Just one datapoint/anecdote, but it's a far cry from the last few years in my experience.
It's been frustrating seeing a few friends try to buy a home in the past couple years, but basically get steamrolled at every turn because they aren't willing to drop all their income on a home purchase sight-unseen.
My mental model of housing in my area is that I have the n-th salary in that area, so I get the n-th best flat. The pricing will then be exactly what I can afford (which is legally 35% of my salary here). What changes is who gets how much, 3 years ago it would go at 95% to the previous owner, nowadays it's 70%.
Perhaps give it some thought about what would happen if housing prices nationally dropped 20-30%.
My best friend might finally be able to buy a place?
Deleted Comment
Houses used to be included few decades ago in inflation calculation - this sounds more like trying to hide how much price increases.
Similar things happen in taxation. In EU in many countries you have Brutto salaries that includes employee contribution for healthcare, but most people don’t know that employer on top of that pays also another half.
So when people calculate their after tax salary they thing that only 35% is tax when in real life it’s 45%. Include VAT, duty tax, excise and easily you pay 60% taxes.
If politicians would make this clear with just one single 60% tax most people would be furious and go to street - that’s why they are using this salami strategy.
Anyone who owned equities or houses before the interest rate move is set for life, anyone who didn't lost basically all of their savings.
It's interesting how many people try to explain away this with Fed-speak and pretend it doesn't matter.
Since most goods and services flow through the largest publicly listed companies, I consider equity market indexes like VTI or VOO to be a better gauge of inflation over the course of decades. It has been my experience that the prices I pay for things like land, daycare, education, healthcare, and even services like electricians/plumbers/other specialized labor follows the increase in equity markets, at least in my high cost of living area.
Also, the government will backstop equity prices by reducing the purchasing power of the currency, so that also tells me equity prices are tracking purchasing power.
https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an....
As it stands, home builders will extract all possible value from building a house and take it for themselves, building homes exactly as expensive as the current ones in the market.
There's no incentive to lower the price.
I would think we need better incentives for new market entrants (first time home buyers) and penalties for n-private home owners who rent out.
I never understood this mantra of why house prices _NEED_ to go up. They don't, the only people that benefit are investors and landlords, not people who actually want to live somewhere.
For "investors".. sure.. buy 50 houses, treat them as investments, with limited new construction, the price goes up higher than inflation, you can rent them out, etc.
For normal people? Price going up or down doesn't help them, because they still need a place to live. Can't rent it out, since they need a place to live. Can't really sell it, because then they have to pay monthly for the same thing, sometimes even more than before. Sure, some pensioners without kids might sell their house, ove into a rental for their last few years, and spend the difference on cocaine.. but that's not really a game changer for anyone.
The only problem are the banks, where lower prices mean a shitstorm of revaluating, recalculating morgages, refinancing etc. But for someone with a paid off house, that they live in, if the "global" price of housing goes up or down 50%, it wouldn't matter that much.
Make homes cheap and cheerful again and provide anti-poverty support for people that show losses in their home asset.
Better transportation, more efficient use of scarce land, and more home building is needed. Converting rentals to non-rentals won't add a meaningful number of homes to the market.
Private sector wage growth is 5.8% YoY.
I can't see the Fed going another meeting without a rate hike with these numbers, especially the latter going up.
Deleted Comment
Seems like there is a really long tail for prices to return to pre-COVID levels, if ever.
On the supply end, if competitors enter a given market and take some of your customers, you might lower prices to lure them back. And if people just can't afford (or otherwise don't want) to go to your salon/restaurant as often, then you might lower prices to lure them back.
As far as the current environment, we've got student loan payments restarting in a couple months after a three-year hiatus. A good number of folks who had some disposable income are going to have less. That'll impact the demand end of the equation. Won't necessarily cause deflation, but will at least lower inflation.
I've noticed that restaurants that severely raised prices have gone from a significant wait time to being almost empty while those that raised them a more reasonable amount have gotten closer to packed. So I'm not sure I really agree with your assumption that customers are price insensitive.
Besides, it's pretty short sighted to talk about "still showing up". If you want to maximize profit, you need to guess at how many would show up with lower prices.
The target is (and has been for many decades) 2% inflation, not 20% defaltion.
“Prices for goods decreased 0.1 percent and prices for services increased 0.3 percent” in May.
I think it would take a lot of deflation for most salons to lower prices versus just delay future increases, but prices regularly fluctuate up and down at the grocery store or used car lot.
Presumably this is the qualifier that answers the question? That's a fairly large "if".
Deleted Comment
Almost like modern economies are complicated with many feedback loops and a lot of interconnectedness between different factors that interact in possibly non-linear ways.
Or you can just buy gold. /s
It really is a Rorschach isn’t it? :)
Their target is 2%.
I say: We already do, and it’s averaged out to 4.2% over the last 5 years. Saved $30K in 2018 to maybe get married and buy a house? It’s less than $24K now before even considering housing affordability. You paid a $6K wealth tax without realizing it.
Inflation is not, and does not even loosely approximate, a wealth tax.