I think we're seeing the culmination of a long-term trend of declining interest rates. Interest rates have been declining for 400 years, and have finally reached the point where they bottom out at 0. (or even negative interest rates, in European bank policy!).
The bad part of this I think, is that valuations of long-term cash flows start becoming more and more sensitive to rates. The difference between a 2.75% mortgage and a 3.75% mortgage is bigger, relatively, than the difference between a 3.75% mortgage and a 4.75% mortgage; because people buy the largest, longest mortgage they can afford, small changes in small interest rates result in large changes in the monthly payment. I feel like this ends up making the whole housing market more volatile.
If you can assume long-term stable interest rates and have access to a 30-year fixed mortgage - the difference between a 2% mortgage and a 1% mortgage is the same as the difference between a 12% mortgage and a 6% mortgage.
Every percentage points that central banks artificially reduce interests by exponentially distorts the markets.
A 0% mortgage with a 1% property tax - theoretically - costs you -2% (x 5 for leverage per year). On a million dollar house - you'd get paid $100k per year to live there.
The effects of this policy have been a moral hazard unseen before, and if it ever has to end, we're in for wild times.
I'm guessing it's offsetting the mortgage and property tax with an average inflation calculation. If money gets 3% less valuable ever year and you only pay 1% on top of the value of the home (property taxes), you're effectively paying 2% less every year on the principal, IIUC.
Considering the Fed single-handedly controls the value of money and demands that it declines by 2%+ per year, and home values have outpaced money devulation for the last 50 years - this seems like a reasonable long-term assumption.
This probably manifests from increasing income/wealth inequality, in conjunction with inequality of how popular some places are relative to others. If your goal is to obtain housing that the top 20% or 10% are competing for, then you will experience prices rising much quicker than housing that the bottom 80% are competing for.
I do not think it is reasonable to assume a random piece of land will appreciate at 3% per year over a period of 30 years. Not to mention the maintenance and renovation costs on a $1M home.
Maybe in the most popular areas, it would sell for 1.03^30 = $2.4M after 30 years, but in the vast majority of the US, that has not historically been the case.
Doesn't matter what a random piece of land does; the $200k you owe on your house is $200k more money you have to do other things. If the value of that money goes down by more than 1% per year, then the person with the 0% mortgate and 1% property tax is better off using any money in pocket for literally anything other than paying down the mortgage.
That is exactly how it works for millions of people who bought or refinanced with record low rates. If you borrow $1million at 2% interest, and inflation is 10%, you are profiting $80k/yr if you put the money in an asset that goes up in value with inflation.
Maybe I dont understand your central point, but your data seem to agree with me.
>I do not think it is reasonable to assume a random piece of land will appreciate at 3% per year over a period of 30 years.
It seems very reasonable to assume that average real-estate will at least increase with inflation.
Your links show that average home prices have increased 100% in 20 years, which is a little over 3% per year during that period. They also show that prices have increased faster than inflation.
>Maybe in the most popular areas, it would sell for 1.03^30 = $2.4M after 30 years, but in the vast majority of the US, that has not historically been the case.
Your link literally shows that the majority of US homes doubled in price in the last 20 years, (which is even faster than 30).
Sure, This level of overperformance releative to inflation is likely unsustainable. However, it is reasonable and conservative to assume that housing and land will at least increase with inflation on average. Population keeps increasing in the US and land is finite.
are you saying that 3%/yr increase in price is too low, and the real number is likely higher? This is better supported by your data.
Sorry, you are correct. I was reading the graphs on mobile which are cut off, and I did not check the x axis and thought the graph showed 50% increase in 20 years.
That's more or less what the data you linked to[1] demonstrates: a us average 3.5% increase per year. Not a median though, a mean. The median increase is probably more like 2% per year, but a lot of that seems to be localized to areas that didn't recover after 2008. If your area recovered after 2008, we can assume it's in demand and likely to continue to appreciate faster than the median, or closer to the 3% figure.
> because people buy the largest, longest mortgage they can afford, small changes in small interest rates result in large changes in the monthly payment. I feel like this ends up making the whole housing market more volatile.
In the US, I think 90% of home mortgage loans are fixed rate loans, so borrowers do not have changing monthly payments. I cannot find an easy source for it, but I think I read it from an Ellie Mae report.
And ARMs come in 5/7/10 year, but the longest mortgages are fixed rate at 15/20/25/30 years.
> Interest rates have been declining for 400 years
This is surprisingly easy to explain: interest rates are a combination of the time factor of money (a dollar in hand is more useful than a dollar tomorrow) and the risk of default. Geopolitical stability and security has increased in the aggregate over the past few centuries, so it follows that interest rates have declined in aggregate.
Makes you wonder what the implications are, now that we've hit zero. ;-)
The bad part of this I think, is that valuations of long-term cash flows start becoming more and more sensitive to rates. The difference between a 2.75% mortgage and a 3.75% mortgage is bigger, relatively, than the difference between a 3.75% mortgage and a 4.75% mortgage; because people buy the largest, longest mortgage they can afford, small changes in small interest rates result in large changes in the monthly payment. I feel like this ends up making the whole housing market more volatile.