Home Prices Year-Over-Year
Let’s step back a bit to see when and how these bubbles started.
Home Prices 2000-Present
Note the acceleration in home prices that started in 2000.
It reflects then Fed Chair Alan Greenspan goosing the stock market over Y2K fears then accelerating the bubble with low interest rates fueling the housing bubble that collapsed on 2006.
Fed Chairs Ben Bernanke, Janet Yellen, and now Jerome Powell all employed the same tactics to goose housing and the stock markets.
In Search of Inflation
Powell wants inflation. He cannot see what is right in front of his nose. But the Fed does not consider home prices as inflation.
For discussion, please see Easy Money Quote of the Day: Fed “Won’t Take the Punch Bowl Away”
And as discussed previously, Inflation is Poised to Soar, 3% by June is “Almost Certain”
I will do a follow-up to this post calculating real interest rates which are behind the booms and the busts.
Mish
The Dems are talking about repealing the 2017 SALT tax, which limited deductions of state and local taxes on federal returns to $10,000 per year. In high housing cost states, that could have a positive upward bias on housing costs, as you can afford to pay more for housing purchases if you can deduct more of this from federal taxes.
Me thinks proficient bubble blowers are less inclined to be concerned when they pop.
Fed members = blowhards.
I’m sitting right on my stop on the gold fun trade, and looking for any good bounce to step out. I knew that technically there was a chance gold would drop back down and re-test 1700, but we are barely holding the bottom of the last daily cycle low…..if that …..it doesn’t look great to me.
I got back from vacation and got very sick. COVID test came back negative.Flu test came back negative.
Turns out I got a terrible urinary tract infection from sitting in the hot tub at the ski hotel. I’ve missed two days of work, which is more than I’ve missed for illness in 10 years. I’m very grateful to my wife and daughter for taking care of me.
I hate to think who was in the tub before you.
Especially since Eddie is a guy and it’s an awful lot harder to get a UTI as a guy than as a girl.
Guess all the cleaning being done is for Covid and not anything else.
Apparently hot tubs are a major risk. I’ve sat in some pretty sketchy hot tubs in my life, but this is the first time one ever made me sick. I’m guessing that the hotel traffic was low and the hot tub “looked” fine, and some employee failed to test the water. I can’t prove it, but I had no other exposure.
…Yeah… I should ve sold my yellow lumps at 2100, but ‘soothsayers’ predicted 5000 and more…so…. That being said , you did have your 2 shots already if I remember well, so why would you still worry about C19? The long term results of the insane vaccination ‘campane’ probably will be disastrous, in the meantime though, you and all other potentially asymptomatic carrriers will be fine, allowing the virus to become stronger and stronger, some scientists say. ‘ Hot tub at a ski hotel’ ? Luxury does come at a price sometimes, don’ t it 🙂 ? Wish you a speedy recovery anyway !
I stepped out of my fun trade. I think we could see gold go either way….but it depends on the dollar, which has been roaring. Gold did hold above the prior low, barely….so it could just be off to a slow start…..but I think the risk is high that gold will find a lower bottom than 1673 where it turned back up.
Looks like a decent chart to me. Basically one bad year in the last 20. Nothing ever goes straight up.
Over the last 20 years the median home price here has gone up 15%.
Real gains do occur, but the inflation multiplier makes them look small most of the time.
Real gains are happening here now, as land prices have gone up and material prices have gone sky high and demand has gone off the charts. If CPI is 3% and Austin home price is up 15%, then you can conclude that real gains over the past year have been roughly 5%…which is very high historically speaking. In more ordinary times I would expect inflation to push price up more than real gains. But both do matter.
If building costs go up a lot, and the number of buildable lots dwindles, and prices go up because of that, that is what I’ve been taught is a real gain. It costs more now to build that same median house than it did a year ago
But the real attraction of real property is the tax angle. For people with a yearly earned income of half a million or more, I don’t see any better asset to hold long term. You get used to the lack of liquidity. I’ve been doing RE as an investment since the mid-90’s. I’ve done three 1031 exchanges over that time, deferred the capital gains into perpetuity, and the asset value will convey tax free to my heirs.
When you add in mortgage leverage and amortization leverage, it’s so much better than any other tangible asset that I can’t imagine why more people don’t take advantage.
Correction: Meant to write that over the last 20 years the price of the median house in Austin went up 193%
You happen to live in one of the greatest success stories in America in the last 25 years. Austin has tripled to quadrupled in population since 1995 going from a sleepy college town to a burgeoning metro area. Probably less than 5 cities in the USA have gone from 500K to 2 million people in that time frame. So yeah, the price gains are real there and they are spectacular for you since you started buying right as Austin took off. It’s sort of like the people who bought Amazon stock in 2000 time frame talking about how great stocks are for investment appreciation.
Lots of other places though probably haven’t seen anywhere near the price appreciation that you’ve seen there. As a comparison I was evaluating my parents home in Canada on a 1 acre lot on the water. They bought in 77 when I was turning 13 for 85K and they think they could get 400-500K for it now 43 years later (small town, 50K population hasn’t changed by more than 5K in 40 years). It seems like a massive increase but it’s only about 3.1% a year and when you factor in all the money they’ve spent on taxes (not a write off there) and replacing a roof 2x, furnace, electric, ACx2, fencex2 and so on for a cost of ~200K they really haven’t made that much at all other than the benefit of owning and living there rent free.
Look at the math again. On an 85K property a 20% DP would be 17K. That is their initial investment, not the house price at purchase.
On investor properties, remember the rents have to cover that 100% and a bit more for cushion. I wrote a detailed explanation but the streetdotcom cat ate it.
That’s the basis. 17K…..At a 400K sale price at 30 years, the ROI on that is 2294 percent and change. Your parents made a much better deal than you’re giving them credit for.
I know they paid off a mortgage and tax. But had they rented all that money would have gone out the door anyway, and for naught.
Most Americans have half or more of their net worth in their house. This is why.
‘Since the mid 90s’ You nailed it ! Ever since then interest rates went south, and THAT s what pushed housing prices up, with natural cyclical economic downturns being interrupted and ‘rectified’ by big CBs since 2001, and most likely into eternity…. I rented out several properties years ago : pure disaster ! If one could fetch a healthy 8 %, like before, on savings and a investment portfolio in general, without running high risks like before, it would be utterly stupid to get directly and fisically involved in RE. Well that s my empirical opinion anyway, which does of course not exclude my respect for your views and obvious success in this regard…
“and the asset value will convey tax free to my heirs.”
I’m quite worried about this one esp if your death time frame isn’t in the next 3-5 years (I hope it’s not!). The Dems are making a lot of noise about forcing capital gains to be paid at death now by heirs so they can generate massive tax revenues to pay for their 4 trillion spending spree. If this passes it will obviously hurt a of people including myself who wants to pass on my assets to my daughter (likely in a trust but that may not avoid the taxes either).
it s about time isn’t ? WHY would capital gains on real estate be tax exempt in contrast to other asset classes ?
The 1031 tax provision has been around since 1921 if memory serves. I’m counting on the fact that many politicians have and will continue to take full advantage of it for their families. Like the mortgage interest deduction for homeowners, it’s become a sacred cow.
But the small amount of wealth that I have accumulated has a purpose, and that is to feed me in my final years and take care of the missus. If the 1031 gets taken away after 100 years, well then my kids can pay the tax and keep what’s left, if anything..
I am not, in general, in favor of inherited wealth. It just happens to be part of how 1031 works. The tax advantages of doing 1031 exchanges during my working years has been so immense that I can hardly overstate it. It helped me put 4 kids through college, buy them cars when they needed them, and all that stuff…..so my kids benefited indirectly when they needed help most. Now they don’t really need anything from me.
Correction:
“the rents have to cover 100% of the house payment, insurance, upkeep, taxes and bit more for a cushion ….. That’s all part of the cash flow model”
I wrote a much better reply earlier and it went poof.
Why is it that the Fed can generate increases in asset prices such as housing but the BOJ has been much less successful with far more firepower?
house prices in japan have been rising too
Maybe Japanese aren’t as stupid about spending borrowed money.
Just speculation here: About 30% of Japan’s population is 65 or over. This demographic usually has settled into the home they intend to dwell in permanently, so perhaps there are fewer buyers (less demand) in Japan. The comparable US figure is around 17% 65 or over. That being said @intelligentyetidiot stated that housing prices have been rising in Japan as well, so my theory may be incorrect.
Do you think that inventory might be having an impact?
link to 1.bp.blogspot.com
Home Prices never cause inflation.
They are a result or an indication of it.
Isn’t that true of everything though? Rising prices are always an indication of inflation.
The cause of inflation, well, we all know where that comes from.
“Rising prices are always an indication of inflation.”
This is not true. Rising prices can be simply a function of supply and demand and have nothing to do with inflation. Think about a crop failure (say Coffee due to some disaster) and the resulting increase in coffee prices. That has nothing to do with inflation.
True enough for individual things.
I was speaking of general rising prices but you are correct in pointing that out. Thank you.
So we’re back at 2005 levels?
link to calculatedriskblog.com
Real Prices are a sham when it comes to Real estate. In fact, real inflation measures are bullshit in general. Post coming up.
I would guess the vast majority of the housing inflation is in the suburbs. People are fleeing inner cities.
City prices aren’t dropping much… I investigated because I thought there might be an opportunity there, for those that don’t see Antifa in every shadow and run screeching away. Rents are dropping though, so maybe prices will follow.
Home Prices don’t cause inflation, not since 1983 anyway