Will low interest rates cause the market to crash upwards?
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesinterest rates are only one function of affordable housing.. the issue is many folks simply dont want to relocate to areas of the country that have affordable housing.
41 Replies
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesinterest rates are only one function of affordable housing.. the issue is many folks simply dont want to relocate to areas of the country that have affordable housing.
Quote from @Jay Hinrichs:
interest rates are only one function of affordable housing.. the issue is many folks simply dont want to relocate to areas of the country that have affordable housing.I think generally speaking you are correct but most of those places are affordable for a reason.
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesthats the entire point.. there is no affordable housing issue there is a where do I want to live issue. I mean your going to pay 3 mil for a home in Palo Alto Ca or the same size vintage etc in much of the mid west deep south or inner rust belt cities will be 125k to 250k.. why do people pay 3 mil in Palo alto ? it all comes down to Location location location this is the basis of 95% of real estates value.. Just sayin..
Quote from @Logan M.:
Quote from @Jay Hinrichs:
interest rates are only one function of affordable housing.. the issue is many folks simply dont want to relocate to areas of the country that have affordable housing.I think generally speaking you are correct but most of those places are affordable for a reason. - Right, cause no one wants to live there.
Quote from @Logan M.:
Quote from @Jay Hinrichs:
interest rates are only one function of affordable housing.. the issue is many folks simply dont want to relocate to areas of the country that have affordable housing.I think generally speaking you are correct but most of those places are affordable for a reason.
Quote from @Jay Hinrichs:
thats the entire point.. there is no affordable housing issue there is a where do I want to live issue. I mean your going to pay 3 mil for a home in Palo Alto Ca or the same size vintage etc in much of the mid west deep south or inner rust belt cities will be 125k to 250k.. why do people pay 3 mil in Palo alto ? it all comes down to Location location location this is the basis of 95% of real estates value.. Just sayin..Quote from @Logan M.:
Quote from @Jay Hinrichs:
interest rates are only one function of affordable housing.. the issue is many folks simply dont want to relocate to areas of the country that have affordable housing.I think generally speaking you are correct but most of those places are affordable for a reason.Flight to quality. Underlying value of land. This is how to invest nowadays. Not simply and only $200/mo cash flow.
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @V.G Jason:
Quote from @Jay Hinrichs:
thats the entire point.. there is no affordable housing issue there is a where do I want to live issue. I mean your going to pay 3 mil for a home in Palo Alto Ca or the same size vintage etc in much of the mid west deep south or inner rust belt cities will be 125k to 250k.. why do people pay 3 mil in Palo alto ? it all comes down to Location location location this is the basis of 95% of real estates value.. Just sayin..Quote from @Logan M.:
Quote from @Jay Hinrichs:
interest rates are only one function of affordable housing.. the issue is many folks simply dont want to relocate to areas of the country that have affordable housing.I think generally speaking you are correct but most of those places are affordable for a reason.Flight to quality. Underlying value of land. This is how to invest nowadays. Not simply and only $200/mo cash flow.
exactly in Palo Alto the ratios are inverted.. normally I look to pay 20 to 30% of a new build for the lot.. in Palo Alto or much of high priced areas you may pay 2 mil for the lot and 1 mil to build the house that is then worth 4 to 5 mil.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
@Jay Hinrichs
I agree 100%.
As you also mention interest rates are on component. If salaries in the next few years do not keep up it doesn’t matter if interest rates go to zero - there will be a point that it becomes over priced and people will not move - and investors cannot get rents to correlate to values.
That’s just one small cog - but I agree location is your best defense against pricing downturns. I live within the beltway of the DMV and we joke if your inside the beltway we are in a unpoppable bubble because of the federal government and restrictive zoning.
7e investments53 Reviews - 2yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
@Logan M.
I see demand for affordable housing increasing now that interest rates have leveled off and could go lower in the next couple years. We have a huge shortage of affordable housing already. If interest rates drop, demand will spike and prices will go way up. The fed doesn’t want this because it will cause inflation to go up again. My guess is we won’t see any rate drops in 2024 so they can keep inflation in check. And builders will continue to build more expensive homes that give them higher profits, which will cause a greater demand for affordable housing due to a massive shortage. Good for landlords due to higher rent. Bad for buy n hold investors looking to rentals since it’s hard to cash flow in most markets. And bad for renters. They’re stuck renting and keep getting hammered by big rent increases.
Quote from @Chris Seveney:
@Jay Hinrichs
I agree 100%.
As you also mention interest rates are on component. If salaries in the next few years do not keep up it doesn’t matter if interest rates go to zero - there will be a point that it becomes over priced and people will not move - and investors cannot get rents to correlate to values.
That’s just one small cog - but I agree location is your best defense against pricing downturns. I live within the beltway of the DMV and we joke if your inside the beltway we are in a unpoppable bubble because of the federal government and restrictive zoning.
I do agree that is it one variable but I believe it is high in importance because of how lending is subsides like FHA, VA etc
Historically, people will borrow as much as the bank lets them.
Quote from @Justin Hammerle:
@Logan M. - I cannot imagine if demand continues to increase relative to supply; whether it is interest rate induced or not. If it does, a bubble is almost unavoidable.
It's tricky to know when we are in bubble territory especially if we don't increase inventory and people have the ability to make payments. Either of those can change but I have been hearing bubble talk since I started in 2015.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes2y
Ok @Logan M. this may get a bit down the rabbit hole but much has been thrown out in this that I am going to try and tie together into a cohesive context.
Right now today we are in a phase known as "Pent up demand". People wanting to make a consumption action but are being restricted from doing such, in case of real estate it's mortgage approval via rate's impact at price level, and sellers unrelenting in conveying a price discount to offset rate impact.
Now, this is important because pent up demand has a sociological effect that creates actions when those blockades are removed. For example think of toilet paper during early covid days. When TP was running low, more people rushed to get it, but when it was out, creating pent up demand, the moment any stock came out people went bonkers on purchasing far beyond normalcy. Why? That sociological/psychological effect from pent up demand.
So what we can expect is if those barriers are removed to any significant degree, person acting in an over-reaction manner. It is a "FOMO" response.
So one action you will come to hear in headlines BEFORE such removal of obstacles is "demand destruction". Which is exactly as it sounds, an action to "destroy" a set amount of the pent up demand, to prevent the "FOMO" reactions.
So some mentioned demand being CREATED by adjustment in rates, no, that's not how it works, that won't create demand for housing, affordability can lead to demand interest but that requires more than just rates alone. Just because rates go down it doesn't "make" someone want to buy a different home and leave there current one.
When/if affordability is induced at a level where person can see an opportunity to upgrade, for an incentivized "swap up" of there home, THAT can induce demand, but notice it requires several factors not just 1 and it requires certain levels that are a lot more than just removal of barriers.
Pent up demand being "enabled" to action will certainly drive up volume in proportion to the size to which barriers are removed. Volume will drive up pricing in proportion to the relationship of incentivized sellers too buyers.
Which is to say, if sellers add inventory %, in matching size to buyers % added, we have net-0 change for most part. Double the buyers at net-0 to sellers, prices will be on a rocket ship up.
BUBBLES are simply when market action of transactions are occurring ABOVE sustainable market pricing fundamentals, without a change to the market fundamental basis. The lack of understanding this is why so many have incorrectly yelled "bubble, bubble" for the last decade plus. If you change the basis fundamental's. say normalize a 50yr mortgage and society adopts such as the "new norm", well now much higher sold prices have a new support foundation, it's not a bubble.
If you have "FOMO" buyers rushing out, buying on a short-term stimulus, say a stimulus that provides buyers a 5X of there down payment capital and let's say allows for a 5yr arm with interest only payment's, now that is a Bubble generator. People are purchasing a long term financial obligation on a short-term empowerment for such. The foundation did not change, it just got obscured for a time. NINJa loans did this on mass, and the result was unavoidable, because they were not sustainable from start.
So on bubble creation, it all depends on how the pent up demand is released, how fast, if available inventory adjusts as well, if there is any change to basis fundamentals, and so on.
All things remaining as-is and only change being to reduction in rates, yes prices will go up, it's simple supply-demand curve.
What's more likely to be seen is ever increasing migration. Affordability is a funny thing because in housing people don't act instantaneously, in general there is a delayed reaction and as affordability remains tight, people "throw in the towel" and migrate to more affordable locations. As time goes on, I believe we will see ever increasing migration of people to an ever increasing list of locations.
So in all likelihood going forward were probably going to see the biggest appreciation leaps in middle and small market's most have never even heard of, places such as SD areas, IA, WI etc., various "micro-markets" where significant affordability remains and it's just not popularly known yet, but becomes known/marketed. In this there is sizable double digit YOY appreciation potentials.
Especially in satellite market's, many of these are primed for such.
And of the "named" market's of extreme affordability issues, your San Diego's of the world, good chance's it's going to be a rough awakening to the reality things. Without doubt many will live in denial to the dieing $. Investors in such market's should be asking selves' what there price fundamental's are built upon, what risk exposure is, not just comp's but looking at affordability for the market price level's and where sustainability sit's.
- Investor · Fresno, CA · Member since 2016 · 222 posts · 237 votes2y
Quote from @Jay Hinrichs:
interest rates are only one function of affordable housing.. the issue is many folks simply dont want to relocate to areas of the country that have affordable housing.I agree with Jay here. We would probably all like to live in San Diego, but there is just not enough land or housing to make that a realistic possibility. Increased supply with steady or increasing demand drives prices up in a free market.
Or said another way, property is affordable. There is enough demand to satisfy the prices. It's just not affordable for everyone.
I do think rate decreases will put upward pressure on prices. However this will be somewhat counteracted by increased inventory (reduced lock in effect).
My crystal ball is telling me short term term boost followed by a longer period of moderate growth.
Just spitballing here, but in terms of the U.S. macroeconomic picture...has anyone considered that we're in a stagflation-like situation? Is it possible that % waffle yet trend (overall) upward? Could it be a long slow slog? IDK
Quote from @James Hamling:
…
And of the "named" market's of extreme affordability issues, your San Diego's of the world, good chance's it's going to be a rough awakening to the reality things. Without doubt many will live in denial to the dieing $. Investors in such market's should be asking selves' what there price fundamental's are built upon, what risk exposure is, not just comp's but looking at affordability for the market price level's and where sustainability sit's.
San Diego has seemed over priced for decades especially when accounting for our modest household incomes. Us Business news and reports recently proclaimed San Diego to be the most expensive city in the US. add this to our modest household incomes and we are likely by far the least affordable (cost vs income) city in the US. Would seem we are over priced.
Yet multiple sources have our YOY RE prices once again near or at highest in nation.
How? It is a supply and demand thing. The metro area is hard constrained on 3 sides (mexico, pacific, military base) and soft constrained (harsh environment) going east. There is virtually no infill. We have a crazy housing shortage.
Many people sacrifice to live in near perfect climate with ocean, mountains, and desert all available. Not saying it is perfect. crowds. Crazy left city politicians who want to provide everyone affordable housing (and I am a democrat, but clearly more moderate than our city council).
What I am stating is the supply is more limited here than any other market I can think of. The demand is high. So many people want to live in San Diego. Virtually the only reason people leave is affordability. When someone leaves, there is a plethora of people waiting for the unit.
I have a tenant leaving due to affordability and to be closer to family. I have not listed or personally told anyone of the pending vacancy but I already have had a handful of potential tenants express interest in the unit. These inquiries were without knowing the rent (we will be charging market rent as we always do when placing a new tenant, in this case $2750 for a 2/1.5 in more affordable area).
That is the normal of San Diego area housing. Supply vs demand just keeps getting worse so prices keep rising without regard for affordability.
Best wishes
- Few of us have been saying that for quite sometime here. We are in stagflation.
Quote from @Alan F.:
Just spitballing here, but in terms of the U.S. macroeconomic picture...has anyone considered that we're in a stagflation-like situation? Is it possible that % waffle yet trend (overall) upward? Could it be a long slow slog? IDK
- Agreed in bold. And I think we see the geographic trend follow that same way to what it was in 21-22. Sunbelt, west coast desirables.
Quote from @Timothy Howdeshell:
Quote from @Jay Hinrichs:
interest rates are only one function of affordable housing.. the issue is many folks simply dont want to relocate to areas of the country that have affordable housing.I agree with Jay here. We would probably all like to live in San Diego, but there is just not enough land or housing to make that a realistic possibility. Increased supply with steady or increasing demand drives prices up in a free market.
Or said another way, property is affordable. There is enough demand to satisfy the prices. It's just not affordable for everyone.
I do think rate decreases will put upward pressure on prices. However this will be somewhat counteracted by increased inventory (reduced lock in effect).
My crystal ball is telling me short term term boost followed by a longer period of moderate growth.
Quote from @V.G Jason:
Few of us have been saying that for quite sometime here. We are in stagflation.Quote from @Alan F.:
Just spitballing here, but in terms of the U.S. macroeconomic picture...has anyone considered that we're in a stagflation-like situation? Is it possible that % waffle yet trend (overall) upward? Could it be a long slow slog? IDK
I value your opinions/posts, could you elaborate on possible outcomes/strategies a little more? I do understand your standpoint on quality locations.
I know no one has a crystal ball but I learn a lot from all you guys posts. In fact I learn more here than from "experts"
Hoping Jay, James, Steve, Carlos etc opine too.
thanks everyone, from 1 of the quiet kids sitting in the back of the room ;)
- 2yBradley BuxtonBusiness MemberReal Estate Agent · NV · Member since 2023 · 1k+ posts · 717 votes
Quote from @Logan M.:
I have been seeing a lot of people starting to talk about rates coming down and prices shooting up.
Is this what 2024 and 2025 will look like?
I am very worried about affordable housing and what is going to happen if supply does not improve.
The Fed is unlikely to lower interest rates below 6% in the next two years due to the risk of inflation coming back as it did in the 80's.
However, popular places to live will continue to be popular despite interest rates. In the Lake Tahoe area, retirees are selling their California homes and finding that living in a resort town is affordable. In Reno, investors are buying deals now as more people from California will continue to buy because they see the potential for appreciation due to limited supply in the greater Reno areas.
- NH · Member since 2016 · 56 posts · 73 votes2y
Quote from @V.G Jason:
Few of us have been saying that for quite sometime here. We are in stagflation.Quote from @Alan F.:
Just spitballing here, but in terms of the U.S. macroeconomic picture...has anyone considered that we're in a stagflation-like situation? Is it possible that % waffle yet trend (overall) upward? Could it be a long slow slog? IDK
What is your definition of stagflation? Typically there is high unemployment, high inflation, no?
- .
Quote from @Alan F.:
Quote from @V.G Jason:
Few of us have been saying that for quite sometime here. We are in stagflation.Quote from @Alan F.:
Just spitballing here, but in terms of the U.S. macroeconomic picture...has anyone considered that we're in a stagflation-like situation? Is it possible that % waffle yet trend (overall) upward? Could it be a long slow slog? IDK
I value your opinions/posts, could you elaborate on possible outcomes/strategies a little more? I do understand your standpoint on quality locations.
I know no one has a crystal ball but I learn a lot from all you guys posts. In fact I learn more here than from "experts"
Hoping Jay, James, Steve, Carlos etc opine too.
thanks everyone, from 1 of the quiet kids sitting in the back of the room ;)
In reality, I think there's too many variables people are not use to that they must be equipped for:
1) High(er) cost of capital.
2) Higher barrier to entry(in almost any avenue, even going to your local baseball game)
3) Illiquidity in trades(plumbing, eletricians, etc.)
4) Scarcity in land
5) Technological improvements
6) Lack of family formations
Almost none of this stuff was present before 2008. Last fifteen or so years is not the next fifteen plus years. This is why I say history is irrelevant(almost always). Technology is usually the most transformative and the most rapid.
The way to invest can't be historical, it's almost inverse. For the person buying and "scaling", BRRR'ing & leveraging HELOCs to go from 3 properties to 7 the logic of doing is now contradicting. However, how many posts here do you see someone trying to HELOC their downpayment for another house? They are completely void of so many areas that made it made sense before; lower rates, higher cash flow, lower fundamental costs(house price & rehabs). The realization of most people takes usually 9-15 months for them to adjust. Some longer.The right approach is few(er) and more quality. Think about the 5 points above--remove family formations. Family formations, or lack thereof, is a huge proponent of quality which is linear with location. Everybody wants to live where the action is and are willing to pay premiums, have roommates , work remote & 4 jobs to do it.
If you want to be able to manage appropriately you need to be more positioned to weather downfalls(less positions that could be wiped out), keep up with expenses(less capex), and the bet isn't on volume of locations x cash flow it's on quality of location(parcel of land + cost to rebuild) x time. It is a totally different game.Lots of people see what others did and copy. Very few understand the core reason why. The reasons why are usually after the fact. Like Columbus folks. Stagflation is really why you must go this way. We'll be in it for some more time.
- We will see unemployment pick up. I know labor market shows strong, but trucking & tech got wrecked. That to me is worse than unemployment rising. Trucking logistics is fundamental to a spending economy and investments in tech growth is pivotal for the fastest way to get ahead. There is nothing like innovation(with proper regulation). Granted, lots of tech was fat trimming it's also prohibitive to (some) degree for growth. This is inherently regressive to the general economy(and world).
Quote from @Ryan Randall:
Quote from @V.G Jason:
Few of us have been saying that for quite sometime here. We are in stagflation.Quote from @Alan F.:
Just spitballing here, but in terms of the U.S. macroeconomic picture...has anyone considered that we're in a stagflation-like situation? Is it possible that % waffle yet trend (overall) upward? Could it be a long slow slog? IDK
What is your definition of stagflation? Typically there is high unemployment, high inflation, no?
Unemployment is strong at local milkshake bar lacking employees pay to provide $7 milkshake to dumb spender like me. So they must pay higher per employee, but scale elsewhere as in hire less employees and then create higher turnover. So now they pass $8.50 cost for milkshake to me. I continue to buy it.
This Q4 '23, top of Q1 '24 will truly test consumer discretionary. Black Friday & holidays is pivotal for consumer discretionary and retail shopping. All companies, like look at Walmart are bracing for a poor outcome. If it's poorer than expected, this is the first time in 3-4 years where retail employment will get halted(frozen) but I doubt trimmed. Meaning they won't replace someone who quits, but not actively fire.
It's going to be high rates, high(specific) unemployment, limited growth and a relatively flat outlook. I do not believe we'll see a major dip for sideline players. Quote from @Ryan Randall:
Quote from @V.G Jason:
Few of us have been saying that for quite sometime here. We are in stagflation.Quote from @Alan F.:
Just spitballing here, but in terms of the U.S. macroeconomic picture...has anyone considered that we're in a stagflation-like situation? Is it possible that % waffle yet trend (overall) upward? Could it be a long slow slog? IDK
What is your definition of stagflation? Typically there is high unemployment, high inflation, no?
That's why I wrote stagflation "like" lol, I figured this would come up. So I think inflation is a given currently. From my perspective im seeing Big inflation with costs like home/business/vehicle insurance. Some materials are still going quickly. Jan 1st utilities up another 22%, and labor is still inflating on My end. My brokers, vendors, suppliers etc. are telling me to expect more.
As far as unemployment, it seems people just pay attention to the U3 rate & not U6. I'm not even convinced that either are truly representative of unemployment, but still lots of labor shortage. I'm seeing quite a few businesses close, move or change templates. So it seems very stagflationesque (see what I did there)
I spend alot of time mingling with the masses in my day job. But my knowledge is still basically anecdotal.
I remember the 70/80's, it is burned into my memory. As I mentioned I was was looking to learn more, funny I'm answering a question because I really don't know.
Please share your thoughts.
Quote from @V.G Jason:
We will see unemployment pick up. I know labor market shows strong, but trucking & tech got wrecked. That to me is worse than unemployment rising. Trucking logistics is fundamental to a spending economy and investments in tech growth is pivotal for the fastest way to get ahead. There is nothing like innovation(with proper regulation). Granted, lots of tech was fat trimming it's also prohibitive to (some) degree for growth. This is inherently regressive to the general economy(and world).Quote from @Ryan Randall:
Quote from @V.G Jason:
Few of us have been saying that for quite sometime here. We are in stagflation.Quote from @Alan F.:
Just spitballing here, but in terms of the U.S. macroeconomic picture...has anyone considered that we're in a stagflation-like situation? Is it possible that % waffle yet trend (overall) upward? Could it be a long slow slog? IDK
What is your definition of stagflation? Typically there is high unemployment, high inflation, no?
Unemployment is strong at local milkshake bar lacking employees pay to provide $7 milkshake to dumb spender like me. So they must pay higher per employee, but scale elsewhere as in hire less employees and then create higher turnover. So now they pass $8.50 cost for milkshake to me. I continue to buy it.
This Q4 '23, top of Q1 '24 will truly test consumer discretionary. Black Friday & holidays is pivotal for consumer discretionary and retail shopping. All companies, like look at Walmart are bracing for a poor outcome. If it's poorer than expected, this is the first time in 3-4 years where retail employment will get halted(frozen) but I doubt trimmed. Meaning they won't replace someone who quits, but not actively fire.
It's going to be high rates, high(specific) unemployment, limited growth and a relatively flat outlook. I do not believe we'll see a major dip for sideline players.Thanks! I ment to mention above that yes... I see lots of discrentry spending still. So I guess the safest way to approach the future boils down to liquidity? Cash is king. To me the economy is tied to any and all investing. But that's just me.
- Real Estate Agent · Member since 2019 · 569 posts · 257 votes2y
I think the reverse market crash Is already happening.
Look at stocks and price of bitcoin. Almost 100-120% than the all time lows and support levels seem strong.
In addition, we are seeing real estate investors coming back to buy for tax depreciation purposes and 1031 exchange. I think the time to accumulate is ending since market direction is becoming more clear due to rising assets.
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