In Jan 1980, the 30-year mortgage rate was a whopping 12.85%,
but the median home price was $63.7k, so
first-year interest payments = $6,548
By October 1981, the rate was 18.53%
And home prices had risen to $69.2k , so
first-year interest payments =$10,258 ← Wow! A whopping 56% increase in one year. That’s big!
Over the years, prices rose, interest rates rose-and-fell, but the annual interest payment always always always stayed between $6,548 and $13,000. (Even at the top of the circa 2008 housing bubble.)
Well, always always always . . . . until now.
Post pandemic, that number rose very quickly and currently sits at ~$24,409 a 4-year 208% increase. As you can see on the chart below, this time really is different. This has never happened before, nothing like this has ever happened before.
Homes now actually cost less compared to income than they did in the late 70’s and all the 1980s. What’s different now, is the suddeness of change and the fact that in those days, we were in a recession. (Does anyone wish recession conditions on their kids?)
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All of this raises two distinct possibilities
Either
a.) We had been doing it wrong (Fed kept rates too low etc.) for 30 years (1990-2020) and we are suddenly doing it right, now,
-or-
b.) We were doing it right all that time, we are now suddenly doing things wrong.
So basically… before 1978, a boy could drop out of high school, pick up a job in labor, and be a home owner by the age of 18 years old, driving himself around in a red Trans Am.
You know how I’m always saying I was born in the wrong timeline?
It’s ironic I am considered old money at 38 years old from some at work because I bought a home in 2010. What’s not funny is they are making six figures and say they will never be able to buy a home, times changed ■■■■■■■ fast.
The other important chart to consider is this one.
It does not include interest rates.
For a very long time home purchase prices, and home rental prices moved in tandem.
If you think buying is better than renting, well okay.
If you think buying an investment property is a good idea. Sure. I am not arguing
But “mean reversion” implies these two lines will meet again. Does anyone really think rents will rise that quickly?
Right now, the cost of buying is much higher than its long-term relationship with rent prices. (And if we added-in today’s interest rates, it would be much much higher than even this chart represents.)
Buying a house now, (even as an investor) = bad idea.
In fact, if a person can sell a property without upending his lifestyle,
he should seriously consider doing it.
If we look at the same chart from 1972 until the top of the housing bubble (circa 2006),
It looks like a relatively stabile picture. Mortgage payments were high vs incomes in the 80s, low vs incomes in the 90s, but the big gap between the lines did not become huge until the Fed responded to the circa 2006 crisis by (temporarily) making homes more affordable.
The FED, like all organizations, started with neutral intellectuals in charge, but once established, eventually ended up populated with partisans in charge, with their partisan political objectives driving decisions and policy.
That certainly appears to be the case, although I don’t know if partisan is the right word.
We typically associate that with Dem vs GOP, or Lib vs Con etc…
In the Fed’s case it appears that the Fed was relatively restrained 1959-2010
and then became completely unhinged money-printers circa 2011.
I do believe they went from intentionally trying to be non-partisan (non-political) to populated with those who let their personal political values drive their decisions.
That has clearly become the case at some of the lower echelons.
I am not 100% conversant with the Fed structure but when I see (on Twitter or on tv) that someone is a 'former Fed insider" eg Claudia Sahm, as often as not they are walking-talking political activists who either
once served with the Fed hoping to reshape it to their interests, or
once served with the Fed t pad their resume ultimately returning to their politically-oriented goals, career and lifestyle.
I attended a continuing training for Series 7 and Series 66 licensing that was provided by a very senior financial officer. As part of the training he gave an overview of the FED and how they used to work to avoid the appearance of timing decisions to influence elections. I haven’t seen the FED’s activities resembling the historic pattern he described in several election cycles now.
Perhaps,
but the bigger “partisanship” at the Fed (aside from the apparent rise of Claudia Sahm types) seems to be that it is thoroughly in the Keynesian/Neo-Keynesian school. No ideological diversity Uni-think.
