Secondly, the Bay Area is one of the markets subject to some of the more severe headwinds if remote work becomes the new normal, for the reasons you stated.
SF population declined ~7% over the past two years. https://www.sfgate.com/bayarea/article/San-Francisco-populat...
The concept of being forced to live in a hyper local area for work may be a thing of the past, which doesn't bode well for employment driven locales. NYC being another example.
Bay area is one of the last places in the country I'd want to own a home right now
I’d pick the Bay Area over anywhere else in the US, with or without remote. Judging by real estate prices after remote took off (ignoring condos) I’m guessing a lot of others feel the same way.
And if resale value then where will you live when you sell?
I don't know much about SF as I haven't lived there as an adult, but New York is an incredible place to live for lifestyle reasons too.
It has great food, a very high concentration of smart and highly educated people, great museums, great performance arts, etc. It's also an incredibly walkable city, which is rare in the US.
Hands down it would be my choice of city if I was a remote worker.
It's subject to debate which locales would stand to net gain/lose from WFH, but I'd pick NYC as a net loser. You gain some who enjoy the city life and amenities, but you lose more to lower COL locales.
Price will always be a factor weighed alongside amenities, even if one area is objectively nicer from an amenities perspective
Everything else pales compared to NYC.
This is far from an universal view - I live there (well, East Bay) and I think the weather isn't that great: too cold in summer, no nice evenings, never nice to hang out by the water. And I like cold winters as a contrast.
October to December are nicer though.
If demand plummets, of course prices will follow.
That’s the point folks are trying to make.
It doesn’t just magically appear.
It’s not driven by Fed policies around interest rates. It’s not driven by speculation.
It’s driven by people wanting to own homes. Period. The other factors are small.
That doesn’t create real demand on it’s own (as in anything that will impact a market). As any experienced realtor will tell you, every house is always ‘in demand’ by a near infinite amount of people that can’t afford it.
They have to be able to do something about that desire in a concrete way - high salaries count of course, but it’s always modulated by interest rates unless they are buying cash outright. Then it’s usually moderated less directly by other things they can be doing with that cash that are more interesting, and relative rents in the area.
But if it was "interest rates" driving everything -- then every area would be very expensive, not just the areas where there are high salaries and lots of inflow and basically zero new construction.
The Bay Area population grew 7.4% from 2010 to 2020 -- that's 614,901 residents according to census. New construction in that same time period was under 200,000 units.
So: where are all those people living? Many of them are living with roommates, etc., and because of the scarcity of housing, having your own place has become a luxury that costs extra money. If 600k people are complying for 200k units, prices will go up regardless of what interest rates do. Then, salaries rise in response where they can, because tech companies need to pay enough for people to be able to move here (always more expensive, thanks to rent control and Prop. 13, than already living here) -- which then pushes home prices even higher, because there still isn't enough housing to go around, and the 30% of people who can bid the most are the ones who clear the market. (And then, of course, everyone else who isn't pulling in tech salaries is just shut out of the market.)
Interest rates matter on the margin, yes, of course -- but the cost of capital is still low compared with availability. A couple making $400k combined is going to be able to bid more on a house at 3% interest than at 5% interest, but the only reason they're bidding so much at all is that there aren't enough homes to go around and they want one.
This tracks prices nationwide [https://fred.stlouisfed.org/series/CSUSHPINSA]
Everything else you’re talking about is from side effects.
But not every area is very expensive.
The fact that a house in SF that costs $2m would go for $500k elsewhere is not a result of federal monetary policy, and it is not a result of construction costs. It is a result of supply and demand.
If the house in the sticks is $500k and the ‘same’ house is $2m in SF, my point is that without the fed pump, that house in the sticks may be $200k, and the house in SF $800k.
Mortgage rates have been dropping pretty consistently since the late 80s but price growth isn’t super consistent: https://fred.stlouisfed.org/series/MORTGAGE30US
Money was super cheap 2008-2013 too but prices were down on that period.
They had started to raise rates in late ‘06 and ‘07, which ‘pulled the string’ and led to the explosion. (The tide went out, and it turns out a great many people were swimming naked, to abuse a Buffett quote).
[https://images.app.goo.gl/RXGY22drR2pfCXX68]
Real estate is highly illiquid and often highly leveraged. It often takes years for market changes to be visible in the data, and sometimes pricing signals get hidden entirely in many markets (you’ll see a backlog that can be years long, but no price drops - just no sales).
It’s also market dependent, but influenced by the larger market (so think of each specific market as a ship, floating on the overall tide which is ‘cost of money/debt’).
Agents tend to always be selling, and tend to hide bad numbers. The Economists working for realtors are especially bad for this.
Sellers tend to not want to admit they’re desperate, and can often hold out for years. Buyers always complain that things aren’t cheap enough, but
It makes for noisy data and sudden surprises.
The short sale I bought in ‘09 for instance, closed for 50% less than the initial offer AT THE BANKS INSISTENCE because of steady shifts in underwriting and appraisal standards in the approx. 5 months it took to close. It took another 6 months before that price signal got disclosed publicly.
Still, since we're talking about "solving the housing crisis", it's not clear how raising rates to reduce pricing solves anything, since this argument is somewhat circular: prices drop only because people can afford less, and if people can afford less, that price drop doesn't actually make housing any more affordable?
Again, am I missing something? If not I stand by my original "there's not enough supply to meet demand" observation and that "increase supply" might be an actual solution.
1) building more units/houses does increase capacity, of course. But unless capacity in a location exceeds the population of residents AND everyone who would want to move there (doesn’t happen in a desirable place), ‘empty’ units will be rare. That is assuming price based backpressure doesn’t exist of course.
It’s a bit like the freeway capacity fallacy. Adding more lanes to a freeway, until you exceed the capacity of anyone who would ever want or be able to use it, just makes traffic worse, as it becomes a more and more known artery and additional businesses/people start using it, which increases traffic.
NYC housing prices are still astronomical, for instance, despite them being on a housing building binge for at least a century.
2) since a ‘limited’ (non infinite supply, supply < available demand) housing location will generally have more than 1 person interested in every house for sale, and will always have a point where housing costs money, the gating factor for if someone wins a pricing competition for a house is their ability to pay more than everyone else.
That means more leverage allows people to push prices higher.
It isn’t just interest rates of course - underwriting standards play a part too. Someone who can’t document employment history can’t get a mortgage, for instance.
If you consider the ability to leverage a force multiplier - say 30x for someone who can get a 30 year loan, but It’s actually more, depending on downpayment requirements - then those able to use the leverage will outcompete those who can’t.
those who can’t meet underwriting have a leverage factor of 1x - they can only offer the cash they have on hand. No leverage.
If we wanted to make housing more affordable (but didn’t mind throwing the US and world economy into a black hole), we could for instance make it illegal to issue mortgages. Then as long as you could save money, even if you were a drug dealer with no documented income, you’d be one the same playing field as someone with the high tech salary. You might lose still of course.
When people had to pay cash for a house, the typical house was around 1-3x the typical personal yearly income at the time. The reality is that a ton of people still rented and were homeless though, but that is a different discussion.
As to why this means ‘cheap money’ vs ‘expensive money’ means there is a good/bad affordability impact, even when the funds rate should (in theory) just change some multipliers in a calculation, but not if someone can actually buy or not.
The part you’re missing is speculation, time, and cycles, which hasn’t come up yet.
When money is cheap, underwriting gets looser (but not loose! No one is writing a mortgage for someone homeless, even at the top of the boom without going to jail.). They do this because the loan originators need to compete for buyers.
When prices of an asset go up, and money is cheaper, there is an initial lag - people don’t think of the asset as a ‘sure thing’ because it hasn’t been growing year over year yet. They won’t lever as high. Underwriting standards are often still tight. They’ll be conservative.
This is when things tend to be more affordable/in reach.
If someone is stretching to pay at 15% interest, historically interest is lower than that too. So when rates drop, they can upgrade, and prices go up, so they get money off it too. They can get a bigger and better place. Or move somewhere nicer.
This starts raising prices, but it takes time.
As this starts happening, underwriting standards start loosening. After all, if prices have done nothing but go up the last 10 years, of course they’ll keep going up, right?
As prices show this upward trend, everyone starts speculating too. If money is still cheap and getting cheaper, they can use leverage effectively too. Why buy one house, when you can buy two after all? Especially when prices keep going up. You don’t want to miss out.
Some folks also start doing things like NOT selling that first starter home, and still buying the second home. And renting out the first one. They were able to refinance the first home at the lower rate after all, and are making more at work, so why not?
This decreases supply of for sale houses of course.
As things get hotter and hotter, the amount of leverage goes up. This prices out more and more people in the market, aka folks with less money and less ability to meet underwriting.
It doesn’t decrease demand though - there are more risk takers buying more, as they continue to escalate as they see their asset valuations ballon.
People start doing their forward projections using the last few years numbers, and holy moly. Let’s double down, we’ll get even richer!
Houses for sale get richer and richer offers, with fewer contingencies, all to beat the other guy and actually close the deal.
At some point though, something happens. It literally can’t go up forever, with ever increasing profits.
When that happens, folks start recalculating their projections using new numbers. Numbers that don’t show exponential forward growth.
And that often means all the deals that were happening only because people DID project that growth become untenable.
But sellers don’t give up that easily, and since they’re still cash flush and they’ll be rich if they can sell at the price they expect, they hold on as long as they can.
Which adds potentially years of ‘stuck’ prices. Depending on how wealthy the area is, it can be held up for 3-5 years, with zero volume closing, but lots of listings.
Poorer neighborhoods it’s usually much faster.
As things sell at less astronomical prices, that is a dip in the curve. If it’s short lived, it won’t change much.
But people after awhile start revising their projections. And a lot of deals stop making sense after that - for people and investors. When someone is going to stretch and be ‘house poor’ when prices are going up, they are very uninterested in doing that when prices are dropping. After all, they’re locked into that mortgage for 30 years, and can only refinance if interest rates are lower.
That pushes demand down a lot.
As mortgages written when money was cheap have issues (due to lax underwriting), and as dealflow shrinks due to overall shrinking number of actually closing deals, underwriting standards tend to tighten too, making it worse for new mortgages, and decreasing available leverage.
This takes years to play out however. ‘07-‘09 were strong contraction years, for instance.
Sellers start being interested in folks who aren’t levered so high (their deals will close). They might entertain contingencies, because they have to. They’ll have to drop the price, not sell, or be repossessed and have the bank take the loss.
All of these are great for sane people who can avoid being taken advantage of.
More supply from existing stock comes on the market, as it’s untenable to just keep it off hoping for gains. People who were previously making crazy living situations work stop doing so, moving people to less dense living arrangements.
Jobs start shifting around too, often to lower cost of living areas, as markets cool and it’s less worthwhile sticking it out in an overheated area.
The amount that can be loaned/supported by a given income, and hence a lot of underwriting standards, are based indirectly on the cost to service the loan relative to the income the person has.
The lower the interest rate; the bigger the loan someone can get if they shop around for the same income and assets.
This isn’t perfectly linear, as principal payments vs interest payments have different ratios based on interest rates, but it very much applies.
The market clearing price is also driven by these things.
But let’s be clear: the primary driver of sky-high prices in the Bay Area is (1) people moving here, getting well-paying tech jobs, and wanting to buy housing, and (2) not nearly enough new construction to meet that demand.
See the Case-Schiller index [https://fred.stlouisfed.org/series/CSUSHPINSA]
Changes in interest rates will be quite visible there, unless millions of people get ‘snapped’ and their houses remain intact anyway.
The most recent lull in prices correlated with a lull in rates, which kind of goes against your overall point of higher rates pushing prices down because the cost of capital increases? But maybe I’m misunderstanding your point.
I’m not sure why so many people believe that housing prices in high-demand markets are dominated by things like interest rates — there is certainly an effect, sure — but by far the predmoinant reason a 2br house on a small lot with a small yard costs $2m+ in Palo Alto is that there are thousands if not tens of thousands of well-off workers for nearby tech companies who would like to live there, there is not enough housing to go around, and $2m is the market clearing price.
The idea that the “demand” is being “driven” by some “cheap money narrative” is missing the forest for the trees. Low interest rates might be why that house is $2m and not $1.8m. But the narrative is definitely not the reason the median home price across the Bay Area is many multiples higher than the national average of $350k.
That’s pure supply and demand.