Quote:
Originally Posted by Hakkaboy
The point of contention isn't if massive supply increase will changes prices, it's whether or not the demand here was fundamentally sound in the first place. Supafamous seems to think it's sound (i.e. won't decrease) but I don't.
We are still very early and we won't find out for another 2 to 3 years. If prices are still the same at that time with interest rates being more normal (not sub 3%), then he will be right. I have my doubts though.
As for sellers not wanting to sell for a loss and will just hang on to their properties, that's very true. Until they can no longer afford the payments of course.
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I don't think the current prices are "sound", I think they're just a natural outcome of a very, very bad supply-demand problem. What's happened is exactly what happens when supply is constrained and the other externalities like foreign investors or people owning multiple homes etc are mostly distractions - they're easier problems to tackle but they don't really change anything and that's been the case ever since people started complaining about housing prices in the..................1950's.
Westopher explained it much better than I did - that it's an affordability problem. It's not the price of the house itself but how much it costs in total - I was wrong to simplify it to just price.
Example:
One year ago I could buy a $1m place at 1.2% interest - at 20% down ($200k) my payments would have been $2600/mo.
Today that $1m place with a 20% downpayment goes for $3500/mo at 3.45% (today's rate) so the cost of the house has actually increased ~25%.
For that house (haha, no, just a 2 bed condo folks) to have a $2600/mo payment would require it to drop in price to $800k (with the same downpayment, a $600k mortgage) - a 20% decrease in price.
At current interest rates the market would need to drop 20% in price just to stay level with what it was a year ago in terms of affordability. If the market does drop 20% it's a case of "nothing has changed" because people are still stuck spending as much as they can on housing (until they forced to spend even more).
Look at it another way: It's basically took a 25% increase in housing costs in the last 6 months to cause the market to almost grind to a halt. A house is the biggest purchase in someone's life so it should be fairly price sensitive yet it takes a huge increase to get people to bail - that says a lot about how desperate people are for a house.
People aren't paying a lot for houses b/c money is cheap, they're paying a lot of money b/c they're desperate.