What happens when housing prices go down?

This article is a mess. From the third paragraph:

> What happens when prices actually start to fall? Because that’s not just a hypothetical. It’s already happening in places like Phoenix, Atlanta, Miami, Dallas...

Then two paragraphs later

> In The Atlantic, Rogé Karma recently pointed out that housing prices are rising fastest in the very cities once seen as escapes from high-cost coasts, places like Phoenix and Dallas...

So which is it?

There is truth to the fact that the way the housing market is intertwined with the financial markets creates some risk, but those risks are manageable - a nationwide downturn in housing prices is exactly the kind of scenario addressed by the Fed's stress tests for banks.

The article is full of bizarre logic. An increase in housing supply leads to a fall in prices, which leads to a fall in supply? No, in fact the conclusion contradicts the premise. The author is making the classic econ 101 mistake of confusing the supply curve (which is supply as a function of price) and quantity supplied.

And finally the author explains his own solution which is... an increase in supply! But only the kind of supply he approves of ("small scale, incremental development"). Left unexplained is why this type of supply, if carried out on sufficient scale, wouldn't have the negative financial effects he worries about.

The whole article is a mess of basic misunderstanding and conflation of cause and effect and reasoning from a price change instead of understanding what caused it.

> When prices actually go down, builders get nervous, lenders get cautious, financing dries up, and projects disappear.

No, it depends on the causes that drove the prices down. Some of those will get builders nervous, while others will make them giddy.

> New construction has collapsed not because of a lack of land, permits, or even demand but because the financial risk has become unmanageable. High interest rates, shrinking margins, labor shortages, volatile materials costs… none of these are softened by falling home prices.

They are: if you can build a house in 1 day instead of 1 year waiting for some permit, your costs of capital goes down, so it can offset some of the other costs going up. If your permit doesn't force you to limit the size/number of units, you can spread your fixed costs over more units, raising your margins, which directly softens ... shrinking margins

Transpose the problem into a Taylor Swift concert and the problem becomes clearer:

Everyone* wants to go see Taylor Swift. She comes to a stadium and the sell out is instant, the aftermarket is bloody and ruthless. The stadium has 90,000 seats, 2,000 floor spots, and they are gone before you can reload the ticket page.

Taylor Swift is the embodiment of "good jobs". The stadium is the local housing market. Those VIP booths side stage with room to move around? The mega mansions. The lower tier seats? Upper-middle class. Nose bleeds? Upper lower class/bottom middle class.

Now solve the problem of the true value of these seats being so expensive. You can add more seats (this stadium happens to be extremely modular) but the experience for everyone becomes worse in a multitude of ways. You can add seats above the nosebleed, but it doesn't really do much to affect the closer seats.

So how do you solve this? How do you handle people who want to sell their ticket? Is it even possible to give people who can hardly afford nosebleed a shot at mid tier seats?

*Yes, I know you have no interest in seeing Taylor Swift.

> Price Drops Don’t Lead to Supply. They Kill It.

It really depends on how much you reduce costs. If you reduce costs enough, you can have increasing supply even in the face of falling prices. This argument sounds like one made by a hedge fund protecting its real estate investments.

The reality is that the housing market in the US (and most countries) is heavily distorted by government NIMBY regulations. Because of this, it's reasonable to expect that there is actually a lot of room to reduce the $/sqft if the market can build housing in general. Current costs are inflated by being forced into specifically prescribed solutions designed to grow the wealth of developers and landowners.

> When prices actually go down, builders get nervous, lenders get cautious, financing dries up, and projects disappear.

I think this is putting the cart before the horse. The entire reason that building/lending/etc should exist, it's raison d'être, is to make housing more affordable. If that is achieved - mission accomplished? I don't care about these parties otherwise.

While there is a problem in how we treat shelter as a financial product, the basic thesis (lower prices aren't allowed to happen) is incorrect, at least in some states. Florida and Texas (including Austin, my hometown) already have prices going down, substantially. Colorado and California seem to have started to follow suit. This did actually happen post-2008, nationally. There are places where we don't let housing prices drop, but there are plenty of others where we do.

Housing prices will not go down due to inflation, unchecked immigration (ie, demand++), degrowth policies (supply--), and years of ZIRP. Be glad you got in when you did.

Where i live, NIMBYs just killed an ADU ordinance and were screaming just as loudly and about all the same things they would have if you were replacing their grandma's cottage with a high rise.

They can't be rationed with.

Social housing is the only thing that will really work.

> Price Drops Don’t Lead to Supply. They Kill It.

Is anyone arguing that price drops "lead to" (i.e. happen before) increases in supply? It seems to me that it's the other way around: supply increases "lead to" price drops. This is what supply advocates hope to see in HCOL cities with expensive housing.

The author is concerned that builders will stop building when prices fall, but that's rational. Suppliers should respond to changes in prices.

Other policy goals are possible. For example, instead of "affordable housing", your goal might be to help the home building and financing industries never experience a down year.

Ultimately, there is no solution in which the core groups will all be appeased:

* If prices keep going up, then home ownership remains a luxury of the wealthy and an exploitation of the poor. Asset holders will be thrilled with returns, but the majority struggling to get or stay on the proverbial property ladder will grow increasingly angry at sky-high rents and prices with stagnant wages

* On the other hand, if prices come down then the broader economic engine will grow ornery and stagnate. Large home builders will cut back on builds, purchases, and labor, in an effort to push margins back up. Existing asset owners will be angry at losing (illusory/on-paper-only) money, and cut back on spending, purchases, or renovations until they see their valuations rise again. Only a small subset of prepared buyers will be able to take advantage of these lower prices before investors snatch most of them up and raise prices again anyway.

Housing is not a standalone crisis, but a symptom of a larger dysfunctional economic engine that simply does not work for the majority. Higher prices on core necessities should be met with a mixture of rising wages and price controls to reflect broader economic growth or support, but neither happens because of monied interests: if wages rise, companies will outsource and the problem perpetuates, while price controls prevent asset holders from maximizing their return on investment, a sin equivalent to murder in the eyes of the propertied class.

And so we have a group who benefits from nothing changing (asset holders, mega-builders, financiers), and a group that benefits from an all new engine design built for modern problems (the working classes, smaller employers, and - increasingly - insurance companies), fighting for the next century of housing policy.

I’m hoping the latter wins, despite the pain it would cause the former. Housing is a necessity first, and an asset class last.

> The theory says we should be celebrating and accelerating home production even more to get prices to levels that would actually be affordable. The reality demonstrates otherwise.

Reality demonstrates the well known - the people who celebrate house prices going down don't have a loud voice in political circles and are ignored. Almost by definition they're going to be representatives of the world which doesn't have vast amounts of money and influence.

> Price Drops Don’t Lead to Supply. They Kill It.

And I love this one, it is the inverse of "nobody goes there any more, it is too crowded". If the price is low that means there is more supply than the market thinks it needs and more people who want a house are finding a house to live in. That may well cause less new builds, but more builds probably aren't necessary if the price is dropping. More people are being homed. At some point prices drop low enough that new builds should cease altogether.

This is because the overtly stated goals and the actual incentives are not aligned at all, they're closer to diametrically opposed.

The stated goal is "build more housing so everyone can have a place to live", but the current incentives are "bundle these materials and labour under guise of another product so you can sell it for a profit".

Of course developers walk away when prices drop -- their objective is to make money, not housing. The fact that they build homes people live in is purely incidental.

I usually like Chuck Marohn, but it is a glaring problem when you claim that housing prices are falling in Dallas, and then talk about housing prices skyrocketing in Dallas, within a couple of paragraphs.

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You know what always happens when the status quo everyone is depending on to get money changes? People freak out and they overreact. Everyone loves it when they can keep doing the same thing and make money and they hate it when it looks like that is going to change. You what what always happens a bit later? They adjust to the new normal and make money slightly differently and then get used to that and don't want that to change.

The sky is not falling. Let's keep moving towards what will benefit everyone and not get distracted by the totally predictable reactionary market signals.

As long as people are willing to pay above land cost + government cost (taxes,...) + material cost + labour cost, houses will be built.

Land and government costs are well.. decided by the government, some by regulation (where can you build, what can you build there) some by direct taxation.

Material + labor costs depend on the labour and material markets directly.

Everything else is just excuses not to build more housing, that would bring prices down.

Yes, the financial markets and investors may suffer, but that their problem. Sadly, (at least over here in a small EU country) the government is focused on them.... the solution both banks and parts of our government see is based on getting easier credit and not bringing the prices down... but the problem is not in "It's hard for young people to get loans", but that the apartment that was 120k eur 20 years ago is now 450k eur, and that young people don't need a 70k loan anymore but a 350k loan (with a higher deposit).

> You’re not the homebuyer; you’re the mortgage payer. The product that matters isn’t the home; it’s the decades of payments you have promised to make.

A very succinct way of describing the actual relationship. New homeowners are not "buying a house". This is a misconception. They are agreeing to pay _double_ the home's present value for the next 30 years and then get it.

If cities won't make themselves more affordable, then people will simply stop coming. Maybe that's the goal. Who wants immigrants, right? Not gonna be so great when large companies decide that SV and NYC are no longer worthwhile to expand in, compared to Bangalore or Poland(sound familiar?). Prices must come down, and we've seen places that have successfully done it. Just because red cities are now falling into the same trap as blue cities doesn't mean that supply / demand doesn't apply. Yes people tied into the financial system will be hurt, but that's a price we need to be willing to pay to keep our economy healthy.

We all know it’s just a big game of lies and charades in which the winners keep winning and control the message and the policies.

Without renters there would be no housing Ponzi scheme, so gotta keep the renters renting.

"If “build more” was going to bring prices down and stabilize the system, we wouldn’t be seeing these mixed signals."

Where have we seen anything close to 'build more'? Regulations in many major cities have prevented building more for decades and I haven't seen any loosening of these regulations (they were only increased during the Biden administration).

"Prices are softening. Delinquencies are rising. Builders are walking. And instead of asking what this reveals about the fragility of our system, we’re preparing to paper over it—again—with liquidity, leverage, and euphemisms. "

This is the plan from the potential future mayor of New York: Builders and investors will flee as a result of price controls and home value will plummet.

Detroit is a good example of what happens in the long term when investors and businesses flee the city. I lived there for 20+ years and it still has never really recovered.

> What Happens When Housing Prices Go Down?

Government bails homeowners out and prices go back up.

There’s no such thing as “demand” in housing.

Only supply.

Housing has its own economics in which supply is the only solution ever put forward.

Not a single politician or economist ever says that most dreaded and awful word “demand”.

Property developers, politicians, economists, demographers, real estate agents, landlords all agree that supply supply supply will …….. errrr it will…… ummmmmm more supply will definitely……. something.

The problem can not be solved by trying to manage supply or demand. We must ban the concept of the landlord entirely.

https://www.theguardian.com/lifeandstyle/2024/mar/19/end-of-...

A landlord gets a loan from a bank to develop a residential property. That loan is paid by the tenants who live in that property. At the end of the day, the landlord owns the property. This is fundamentally unjust. If the tenant paid off the mortgage, they should own the property, or their portion of it.

Can you imagine this for anything else? Imagine I got a loan to buy a television. The television is yours in every sense but in the legal sense. It is in your home. You are the only person that uses it. Over time you pay me back the cost of the TV, and some extra for interest. Yet, even after you have paid me back, you have to keep paying. It’s still my TV, and will be forever. If any month you don’t pay, I can come and take the TV away.

Another way of looking at it is that a residential development in a high demand area is basically a guaranteed money-fountain. Banks buy them and gift them to whoever they choose. They always choose people who are already wealthy and low-risk, causing an increase in wealth inequality. A bank could choose a homeless person instead for such a low risk project.

Another idea is to only allow renting when it is rent-to-own. A developer may build a large development, but over time that development will eventually become a co-op.

Remove profit motive from housing entirely. When the only interest someone has in a home is living in it, prices will make sense.