Peak Homebuying Window

 People decry high interest rates, but buying a house after a long spell of high interest rates is actually amazing: Once you buy the price is fixed--but you can always refinance to a lower rate. Admittedly, when rates spike, the housing market shuts down, and no one buys anything. Housing prices are sticky, so it takes a long time for them to adjust to lower prices. However, high rates also mean inflation, which takes the sting away: inflation drives housing prices up, even as financing costs are trying to drive them down.

Housing prices aren't a measure of affordability--the monthly payment is. And there is a mathematical relationship between interest rate and the price of an asset. In Economese: "When rates rise, the discount rate increases, reducing the present value of future cash flows and lowering asset prices"

When rates are low, both building* and borrowing are easy. But when rates rise, it costs more to borrow money, raising the monthly payment for the same loan amount. But income does not rise with financing costs, so buyers can only manage a smaller loan, for a worse location. Less demand for houses in better locations, and with fixed supply, that should lower prices. But house prices are sticky--someone who bought a house for $500,000 isn't going to sell it for $400,000 (How would they pay off their mortgage?).

But while rates remain high, the value of the home has fallen. It falls to inflation to balance things out. Over eleven years, even at 2% inflation, values go up 25%, and some with a $500,000 mortgage can sell for $500,000.

The best time to buy a house is always when rates fall - homeowners don't mentally reprice their asking price, even when shifts in the mortgage rate radically affect monthly payments. For example, on a $300,000 mortgage over 30 years:

At 3%: ~$1,265/month

At 4%: ~$1,432/month

Difference: ~$167/month (or ~$60,000 total over 30 years)

If an income previously supported a $1432/month mortgage payment at 4%, and rates drop to 3%, that supports an additional $35,000 worth of mortgage. A change that realtors have long** been slow to price in.

The 'Golden Age' is when rates have been high for a long time (long enough for inflation to 'float' everyone trapped in by a lower rate mortgage) and then rates start to come down.

*Builders operate almost entirely using borrowed money. When rates rise, it affects builders first. Even after they cease production of new houses, it takes months for homes under construction to finish, so the 'pipeline' of new stock that affects supply takes weeks to run dry.

**Less true today, thanks to Zillow and similar services, which have a large customer base, letting them spread research and analysis costs over multiple customers, enabling level of home price analysis far beyond the historical norm. Realtors were long dependent on 'comps' (comparisons) for recently sold homes, which lagged market prices by months. 

Maintenance Crises are Emergent

Fascinating element of visiting the transit museum in NYC was learning that maintenance crises were a recurring problem. Politicians suppressed any increase in the transit fare, starving operators of revenue, resulting in deferred maintenance, until some tragic incident generated sufficient public outcry to support raising additional funding by raising fares. The initial five cent fare was just too low to support safe operations and raising it at a rate sufficient to keep up with actual costs (and inflation) has been a constant struggle. 

Source: Wikipedia, via Reddit r/nyc: NYC Subway Fare over last 120 years adjusted for inflation

Emblematic of infrastructure in America, really. We subsidize use by underpricing user costs. 

Six months of weekly posts in blog queue!

Six months of weekly posts in queue, so I'm going to start doubling frequency - Wednesdays AND Fridays.

In this house, we believe....

1.  Cars are strangling our cities.
2. Building more roads just attracts more traffic and makes things worse.
3. Freeways pull people and businesses away from city centers.
4. Limiting cars downtown would help cities.
5. Rail transit moves more people more efficiently than roads.
6. Good rail would remove the need for many planned freeways.
7. Freeways eat up valuable land and shrink the city tax base.
8. Public transport needs funding to compete fairly with heavily subsidized roads.
9. Driving is expensive for individuals and for society.
10. Urban freeways cost enormous amounts of public money per mile.

Single-family construction headwinds

I suspect that single-family construction will continue to face headwinds. Every location is a trade-off between transportation costs and structure costs, and the components of suburban transportation costs (cars + gasoline) have gone up a lot over the past year. Interest rates are up, and thus so are financing costs. Car insurance rates also up substantially. Cars are also becoming more capital intensive, due to vehicle electrification. People are bringing down their fuel costs by paying more up front but taking on more financing costs to be able to pay more up front.

Remote work won't save the single-family home market. The pandemic induced wave of remote work has crested and is receding. The tide is still coming in, but this particular wave is ebbing. And with it, the need for an extra bedroom to use as a home office. No one who bought a house during the pandemic is going to shift back to urban living, but the number of people making that transition is going to drop off.

The cost of reversing the transition from urban renter to suburban owner is forbiddingly expensive: Transaction costs of home purchase impose a financial cost, home improvement customizations create sunk costs, etc. But the cost of making that transition in the first place is also costly--a second car becomes a practical necessity.

Blight

Any town whose land values no longer support the rehab/renovation of existing SFD is in a bad way. If there is zero demand for existing housing that can be restored using sweat equity, there is zero demand for (new) infill housing. What could be saved is pretty much irrelevant. Non-market infill development makes things worse--competes with existing housing. New multifamily isn't feasible. NIMBYism preventing existing SFD from being converting into multifamily is making the blight worse, because rather than having duplexes you have abandoned and decaying single-family-detached.

Fighting blight through demolition just creates pockmarked areas. Demolition of blighted structures just changes the flavor of blight - from building to lot. The core issue remains - insufficient demand. You can't cure a lack of demand by adding additional supply. You can subsidize non-market infill housing in the name of 'neighborhood stabilization'. Which will work, but only by strengthening a political constituency capable of advocating for infrastructure investment near them, to the detriment of other neighborhoods, such as has happened in Chicago.

Sanitarium Architecture

Modernism is an architectural style based on Swiss sanitariums for traumatized war veterans, who found blank walls and empty spaces restful. It triumphed in architectural practice because simple geometrical models were more persuasive in convincing clients to build things than the 2D facade drawings of Beaux Arts that previously prevailed. It gelled with the 'out with the old' ideology of post-war building and pseudo-technocratic rationalism. And it triumphed financially because it was cheap to construct - concrete form work rather than carved stone.

When Robert Venturi's Post-Modernism arrived, and people were given an option, they took it.