From what I've heard there is a massive supply issue. Rates will only fall if supply increases or if demand drops. From what I've heard, the demand isn't expected to fall and there are limits in the supply side of things due to all sorts of issues many stemming from covid and the long recession we had on the housing market post crash of 2008.

Ideally demand will go down because things as it stands are just not affordable to most. The rent also is going way up, so that drives housing prices too.

We had an 'undersupply' problem in NZ until very recently. It seemed like it was all the media ever talked about. Then inflation hit, rates went up, and property prices started declining rapidly (current rate of decline looks like NZD5000/w on a median priced home over the past few months). Suddenly, the number of properties on the market is up 2-3x in the major cities and available rentals have doubled in places. Rents are falling even as commentators claim landlords will try to pass on their increased holding costs to their tenants.

Where have those properties all come from?

Consider that all properties are either investments or owner-occupied. By definition owner-occupiers don't keep empty (or underutilised properties - assuming second homes and holiday homes can be categorised as investments). Therefore, if there are more investors active (or more correctly, investment properties) in the market, the proportion of empty or underutilised homes is going to be higher. Investment activity in the market has undoubtedly been increasing for some time.

What appears to be happening is that our underutilised housing stock is now being revealed as investors panic. The same thing happened in Ireland during the GFC.

There are many reasons investors will leave properties empty or underutilised during a speculative boom (renovating to flip, on the market, good old fashioned landbanking, a convenient city pad or holiday home, etc). There is much more of this about than people realise.

I am very confident that rising interest rates are going to turn out to be a good thing for renters and first time buyers. It'll just take a bit of time and some economic upheaval.

There's a lot of flexibility in how much living space a person is using also, it's an order of magnitude difference depending on how much money they have.

People used to live a whole family in a one room apartment, and now we have single divorced boomers living in whole houses alone. I think people adjust a lot here depending on the economy

That's a good point.

It's interesting that for the past 15 years or so the average household size in NZ has remained at about 2.7 despite a housing crisis with more people living in cars, converted garages, etc. I always assumed that the more crowded households were 'balanced out' by an increase in the number of smaller dwellings with fewer people (specifically apartments) but it could also be an increase in the number of people living just 1-2 in larger dwellings.

Very true. California is an interesting one though with their occupancy rules. Very low density could reduce in a crunch but people who would go to the highest density are prevented from doing so by the landlord owned legal system.

My boss (not divorced or a boomer, but definitely single) lives alone in a 5,000 foot gorgeous home up in the hills. It’s crazy.

An alternative explanation would be reduced demand. If interest rates have been around 3% for a while and you’re now looking at 8–10% (and there’s some expectation that house prices will fall) then maybe getting a mortgage to buy a house isn’t such an attractive proposition. Lower demand over a reasonable amount of time should lead to more properties being on the market.

Demand is going to crash with many not being able to afford mortgage payments or rents this will result in prices tanking and people having to top up as property values will be lower than mortgages. I have a feeling commercial property values are being artificially kept inflated by banks, realtors as well as the city governments as lower prices are going to be very painful for everyone. But as defaults start snowballing we will see the dominos fall similar to 2007-8.

As a want to buy a home person... I certainly hope you are correct. As it stands now, it just doesn't make sense to buy a home.

There is no supply issue, only an active listings issue. Which is rapidly clearing up as purchase demand has fallen off a cliff.

People touting supply issues don't understand the difference between number of housing units and inventory.

The number of housing units per person is at an all time high

I can confirm this in the context of NZ.

During the past 25 years the number of residences relative to the number of households has increased substantially from roughly 3.5% more residences to something like 6.5% more. All while the number of people per household has declined slightly and prices have increased astronomically.

Very frustrating this past decade to have the entire debate framed around building more houses as the only solution to deal with this 'undersupply'.

In my opinion a speculative boom has created excess demand and increased the number of underutilised properties. Thankfully rising interest rates appear to be dampening that excess demand (to put it mildly).

What you wrote doesn’t appear to be true.

Divide columns B7 on sheets 2 and 3 in the NZ data (https://www.stats.govt.nz/information-releases/dwelling-and-...). The all-time high of 1.06 happened in 2012 and the ratio has since fallen back down to around 1.043, just a bit above the 1.04 value from the 1990s.

My prior is that there is an undersupply, signalled by prices, and I’m afraid this method tends to underestimate it. First, household formation (as in, moving out and starting a family etc.) depends in part on housing availability. Second, internal migrations due to urbanization cancel out in national level data – for every move to a city, there may now be an empty rural unit, and a crowded urban unit.

PS Remember too, that there’s a natural churn to housing – people sell/renovate/etc. on average once every X months – therefore we need at least 1/X of excess housing to smooth it out. This is an absolute lower bound that assumes people don’t differentiate between any two houses, but are willing to randomly swap e.g. a 120 sqm in the central business district for a 30 sqm in a rural area. This assumption is obviously wrong.

You are right. Those figures are off but they are based on the same dataset you are referring to (or at least an earlier version).

I notice that they have revised some of the more recent household estimates. I had 1991 at 1,307,000 private dwellings and 1,252,600 households. A difference of 4.16%. And 2017 (or rather Q4 2016) at 1,855,500 private dwellings and 1,734,800 households. A difference of 6.5%. This - at least a few years ago when I first looked this up - was the most recent period where both figures were available.

They have indicated the revision to the household data and I am almost certain that they have revised the dwelling data as well.

The long and the short of it is, we still have a higher ratio of dwellings to households than we did before this price boom started to take off.

If I am reading you correctly, and you are indeed saying that rising prices are enough to assume an undersupply, I would have to both agree and disagree. I think it is only enough to indicate an undersupply relative to total demand, but that demand is both for homes and investments. As interest rates fall, monthly mortgage payments stay roughly the same while the size of mortgages rises as people are able to bid more for a house. With rising prices comes speculation and extra demand. We are about to find out what happens when that type of demand is removed or at least severely curtailed.

Your point about churn is definitely true. I mentioned in another comment in this thread that 'on the market' is one of many reasons that a house can be empty. I take your point but also believe that turnover is more frequent when speculation is at play.

If you are interested in measuring supply/inventory/utilisation of residential property, I'd recommend that you look up the 'Speculative vacancies report' published by Prosper Australia, a Georgian group based in Melbourne. They have an interesting methodology whereby they gather water usage data and use that to determine if a property is underutilised/vacant.

I was just looking into this. Was trying to get a sense of the number of total US housing units compared to the number of households. And the number of extra units seems to have been fairly constant over the last 20 years (about 9% more housing units than number of households).

[1] Total US Households: https://fred.stlouisfed.org/series/TTLHH [2] Total US Housing Units: https://fred.stlouisfed.org/series/ETOTALUSQ176N#0

Yes, today there are roughly 1.1 housing units per household, which is exactly in line and consistent with history. This is also trending up, as population growth slows and rate of building increases

Shortage narrative is propagated by people who don't look at the data

It was reported that, in a major county near me, about 1 in 2 homes sold last year were to businesses. Individuals are being squeezed from participating in traditional supply and demand markets.

It doesn't really matter who buys them.

What matters is the fundamentals relating to number of dwellings vs number of people

Many people purchase properties through LLCs to protect their personal assets. The Blackrock style companies make up a very small percentage of the market.

It depends on what your time horizon is. If you look short term, then anything can be the case at any point of time. Short term is volatile and you can be up and down at any moment.

However if you look long term then housing inflation out paces interest rates. This is always the case. So taking a 30 year loan with low rates is a pretty safe bet that you will come out on top over this long term time period.

I thought home prices were high because new home construction fell off a cliff after the 2008 market crash and has never fully recovered - thus leaving a massive shortage of homes and the Millennials (i.e. Baby Boom 2) generation now reaching the age where they want homes for their kids. Low supply + high demand = high prices. Don't see that changing anytime soon. What we should expect from higher mortgage rates (what I as an old-timer would call "normal" mortgage rates) would be a cooling off on prices. We're already seeing that happening. That's an example of how high rates combat inflation. Your food and energy costs may be soaring but housing costs have just been brought in check.

If rents continue to rise home prices won’t fall substantially.

https://fred.stlouisfed.org/series/CUUR0000SEHA

There's no reason for rents to rise and I'd argue that even current rents are overpriced.

Urban offices aren't filling up and essential workers have less money than ever.

Rising interest rates drive up the mortgage rates. The vast majority of US home buyers have to finance their purchases, so an increase in mortgage rates is effectively an increase in the total cost of buying a house. The total cost of homeownership is correlated to rental markets, as we are talking about different ways of consuming the same good.

Interest rates have gone from 2.75 to 5.4%, meaning monthly payments on purchases have gone up almost 40%. Not all that will transfer to the rental market, but I be surprised if rents don’t continue to go up; barring a general collapse in house prices.

That is not how rent prices work. It is pretty much supply and demand. No one cares how much your financing costs. If people start losing their jobs because the FED induces a recession, that means less money for rent. Younger folks move back in with their parents. People take on an extra roommate or two. Demand for rental units goes down. Prices go down.

If a significant fraction of landlords have financing costs that greatly exceed rental income, that is their problem. They can't just pass that cost on to renters because they feel like it.

The supply of housing for purchase directly competes with the supply of housing for rent. If you can get a 2 bed home for $1800/month as a renter or $1700/month to own, most people will choose to purchase, forcing landlords to lower prices. Similarly, if you can get $2500/month in rent for a property that costs $2100 a month to own and operate as an investment people and institutions will purchase or convert units to rental properties.

Yes, they aren't 100% interchangeable (down payment requirements and transaction costs can change the equation renting all things being equal ) and some markets (the bay area in particular) seem to have a bizarre separation in the cost of renting versus buying, but in general this holds true.

> If a significant fraction of landlords have financing costs that greatly exceed rental income, that is their problem. They can't just pass that cost on to renters because they feel like it.

Purely anecdotally, a large proportion of the housing available for sale in Plymouth (UK) seems to be rental property. Tenants are being thrown out while landlords sell up.

I have been wondering if the drive to cash out at a time when holding cash isn't necessarily such a great idea is exactly what you suggest - that those with buy-to-let mortgages are looking at the potential of interest rates rising faster than rents.

Yes - but mortgage interest rates are key component of house prices. In home purchases the buyer is typically constrained by the limit of what they can afford to pay monthly. Higher rates make that go higher putting downward pressure on housing.

I honestly feel like rents are at the breaking point, it's ridiculous in California at least and people I know who rent are leaving the state because of this.

In 2021, Portland, Oregon saw it’s population decline for the first time since 2010.

This has been attributed to the high cost of housing. [1]

The secretary of HUD was here a month ago taking a tour, talking about affordable housing.

We started a family last year and despite needing to move out of a duplex, we would not seriously consider a purchase.

Prices and terms of sale have been outrageous.

Deciding our best bet was to rent, we found the rental market for single family homes a disaster.

The only way we found something was because we know a postal worker who saw a for rent sign while walking their route.

The place never hit the internet.

The house needs a ton of work and the only way it can be priced the way it is is because the market is so totally busted.

My wife tracked pricing and made a spreadsheet of comparable rentals when we signed the lease. I’d guess our rent was at least $400 under market.

I grew up in Portland. I went to a portland public school and college in Oregon. I had wanted to live here.

However, we need housing to show clear indications it will turn, an unexpected windfall, or we will move away from family here and toward other family in the mid-west.

Regular people are desperate here, valley folks are coming in doing the same thing we would do to wherever we could land in the Midwest.

Housing is broken.

[1] https://www.wweek.com/news/city/2022/05/27/new-census-number...

We need supply side solutions. The market would totally take care of demand if property rights were strong enough to allow folks to build housing.

We need to get a federal level right to build housing on your land. We also need to overturn Euclid v Ambler.

This year could possibly the worst time in a lifetime to start bulding a new home.

Until next year! It doesn't get better.

Well, consider that if you start building now, you're likely not done until next year, or maybe the year after....

I'm more than 2 years in and no physical progress has been made. "Local control" is a huge problem and it needs to go away.

The real question is how quickly is someone else renting their place after they leave.

I have also known quite a few people have recently left California. And not a single one of them left a vacant house behind.

Rents expanded quickly due to massive increase in disposable income from government programs leading to expansion of number of households.

Now that real incomes have been falling rapidly for months, we can expect household contraction and rent stagnation or decline.

Raising interest rates can increase the costs of housing. (Not the sticker price, the cost.)

Fewer developers will build new apartment buildings because financing is getting much more expensive. Fewer new apartments with a growing population means rents will not be getting cheaper unless we have a deep recession and lots of people lose their jobs entirely.

Same goes for housing -- fewer houses will be built by builders.

Existing housing prices will probably go down, but the people buying them with mortgages will pay just as much, if not more for them each month because debt is getting more expensive. But instead of that money going to the old owner, it'll go to the lender.

Interest rates always go down later. The reason older boomers look so good is they bought a house at 12% then refinanced later.

Yup. The key is to buy a house you want to live in for a decade or more.

Once I buy a house, I don't plan on ever moving again.

This is a new attitude. There used to be significant interest in upward mobility. Some folks still "buy up" frequently.

I couldn't handle moving that often, but there are folks who do.

Those who bought homes 2-3 years ago when 30 year fixed mortgage rates dipped below 3% have already seen their values go up like 30-40%. There is no reason to expect it to crash by that much in the next few years, if ever.

"Prices have skyrockets in the past two years, but it's impossible for an equal price change in the negative direction though"

Possible does not mean guaranteed. Yes prices could go down. But just because they have gone up x% doesn't mean they have to go down x% as well.

It's happened before and it will likely happen again, barring rapid and unexpected disinflation.

FL fell 60% in the 2000s, and I wouldn't be surprised to see 40% this time around

The Fed pushed a trillion or so of free money into mortgage markets. That is why house price went up. They have stopped. Prices will likely come down.

While there are likely supply constraints at the margins, the house price gains have been a result of the amount you can borrow at a certain monthly payment being abnormally high.

> There is no reason to expect it to crash by that much in the next few years, if ever.

Was there a reason to expect it to happen in the first place? Aside from ex post facto reasoning?

Housing is a tough market to crash because people need to live somewhere, so if prices fall people just avoid moving, and liquidity drops. For prices to fall substantially requires that people express a liquidity preference -- they'd rather have the money, even discounted, then keep the house. And the primary way that happens is that people can no longer afford to service their mortgages.

This doesn't happen easily, but when it happens, things can break very dramatically.

That depends on the fed. If they raise rates enough to kill inflation, we could have 2008 all over again, possibly worse. But if inflation remains high, the nominal price of the house may go up further.