People who bought houses will be fine, since they secured low interest loans, and will hesitate to sell because won't get good interest on next loan.

This will cause low supply -> high prices -> people who didn't buy are very screwed: they will face high prices together with high interest.

You’re forgetting about the overpaid tech workers who are soon to be laid off, possibly underwater on their mortgages, and decide it’s time to downsize.

There are amazon, google, msft and apple, with almost $1trln annual revenue combined, they will continue paying to a plenty of workers.

Cool, I’ll let YC’s entire portfolio know there’s plenty of jobs at the big tech cos.

You are switching topics. The point is that there will be plenty of funds inflow to support housing market.

Would you like to place a wager? I bet that the median home price in tech-centric metro areas (seattle, sf/bay, la, nyc) will decline by 10% or more in July 2023 versus July 2022.

For many in tech metros their homes could decrease in value by 25% or more from their current values and the home would still be worth more than they paid for.

In any case they won’t want to sell for a mortgage that effectively costs the same over a 30 year loan with a higher interest rate.

My tech-centric metro area had price increases of over 30% in the past two years so a 10% correction just puts us back to prices 6 months ago.

10% is like small correction comparing to previous increase, and doesn't offset mortgage rate increase.

!remindme 2023-08-01

Those companies are not immune from cutting cash burn to protect their stock price.

They are all have very positive cash flow, so it is unlikely they will be cutting significant amount of fat.

They are not valued on a binary positive or negative cashfows. They are valued at NPV of future cashflows. You can justify a high burn rate with the expectation of earnings in the distant future. But as inflation/rfr goes up then then investors value money today more and more and money in the future less and less.

Overpaid based on what?

Overpaid in the same way publicly traded tech stocks and VC/PE valuations were grossly inflated. Salaries are going to come down just like valuations. As people generally won’t accept paycuts, it’ll come in the form of laying off 2 engineers and backfilling 1 of them at half the prior salary rate.

VC backed companies will start dropping like flies and the market will flood and salary requirements will drop fast.

Totally anecdotal, but I know a couple who are renting out their house they highly and renting a place to live because the interest rate they secured (2.75%) means renters paid their mortgage and then some (about 40% on top), so they basically make like $200/mo to live somewhere else as renters pay for their home.

This doesn't make sense or you are omitting key information.

If a homeowner rents their place for more than it costs them in mortgage + property taxes and makes $200 on top, that's fine and quite a nice deal. However you're suggesting they're also subsidizing their own rental and +$200.

That only makes sense if they're renting well below their means or in a different market entirely while their home is in an ultra prime location. If not the renter of their home should simply have rented out the place the owners are living at a substantial discount.

It makes plenty of sense, happy to explain.

New Orleans has wild real estate. It’s not San Francisco but it’s way above the average income here and swings wildly from neighborhood to neighborhood. Home prices flip radically even just a few blocks over. We’re talking $400k->$800k if you move 5, maybe 6 blocks. Sometimes fewer than that - saw a near-turnkey place go for $500k and another for $900k 2 blocks from each other right by me about 3 or 4 years ago (obviously the latter was very nice new construction, but you get the point).

They own in a solid neighborhood, one that was “up and coming” 5 years ago, and rent in an average one (it’s in a higher risk flood zone which factors in a ton). Irish Channel vs. midcity, if you know the area at all.

They don’t have kids and see their rental as a place to sleep. It’s small, barely what I’d qualify as enough for two people. But it works for them so power to them I guess. Making out like bandits.

I get why you’re skeptical but it’s not like I’m lying here. Not sure why I would? The whole point of this anecdote is to show how crazy these interest rates were.

Low interest rate doesn't mean low monthly payment

It means monthly payments are lower than if person would sell and buy with higher interest. It is very strong incentive to not sell.

But it also means that recent buyers might have stretched and won't be able to make payments. If stocks do badly or someone gets laid off they'll need to sell and downsize or rent

It depends on a recession and how bad it is. Even if you're locked into a low mortgage, if you lose your job, can't pay, and due to rising interest rates are now underwater 500K on a mortgage, nothing good happens.

Like it or not there's a lot of chaff to cut in software engineering. How many of these SaaS businesses can survive, and how many engineers bought nice homes with massive salaries that might go poof?

> are now underwater 500K on a mortgage

it will be very small fraction of homeowners: those who bought in in last 2-3 years. All others will be significantly over water, and may take equity loans instead of selling houses to preserve low mortgage interest rates.

Eventually and all sellers and no buyers market will catch up with prices. Matter of how long it can be bridged. Every equity loan taken out against higher values will shorten that bridge.

And then homeowner will have strong incentive to move to smaller rental unit and rent his primary residence, or maybe he will be able to find job in this few years secured by equity loan.

> Eventually

Eventually maybe. FED gave 20T free money to current home owners in addition to existing tax incentives, how long it will take to chew through them? Maybe generation?

>due to rising interest rates

I think most people are doing fixed rate loans in this economy, right? Genuinely asking. I think I might be misunderstanding this aspect of your point here.

Expect a steep drop.

Leverage is much more expensive (from sub 3% mortgages, we already have 5%+ rates), which means buyers can afford less, plus significant withdrawal of “cash” buyers from the market who were really just borrowing against their (now much smaller) equity positions.

I wouldn’t want to be in a forced sale position anytime soon.

5% for a 30 year mortgage is not really that high historically speaking.

The problem is more that prices are very high and supply remains very low.

Anything from nothing to a small correction.

Mortgage payments set a ceiling on how high property prices can rise. However, people seem to be willing to spend more on mortgage payments than they probably should, so it’s likely that this ceiling hadn’t been reached yet.

The other factor is simple supply and demand. A large factor in 2008 was a large inventory of housing that came on the market. As far as I’m aware, there is no current corollary in the US now.

I would like to qualify this. This is true in markets where labor is the majority purchasers. In markets like the sunbelt, where retirees are moving and buying properties with a combination of cash, previous real estate equity, and retirement assets, mortgage payments don’t restrict home prices. This crowds out anyone who does need financing to buy their home, especially as interest rates rise and inventory remains low.

It’s all a function of interest rates. We are seeing prices stabilize now after a couple years of meteoric rises. If interest rates really climb for an extended time then home values will fall.

The value of the house goes up. The value of the land gets wrecked.

If you are living in SF, this is bad. If you are living in the middle of nowhere, this is good for you.