unclescrooge wrote: ↑Thu Mar 08, 2018 6:24 pm
market timer wrote: ↑Thu Mar 08, 2018 9:30 am
unclescrooge wrote: ↑Mon Mar 05, 2018 10:53 pmWhy would interest rates cause a decline in these markets? Buyers are making all cash offers. I would think their ability to afford the house has no relationship on interest rates.
Interest rates are the opportunity cost of capital. Higher rates means higher cap rates and rental yields. There's also a sizable contingent of home buyers who take out mortgages and would be constrained on a cash flow basis with higher rates.
I understand what you're saying, but I'm skeptical this logic applies to places like the Bay Area.
You can rent for less than you pay to buy a home in the Bay Area. People buying rentals in this market are probably looking for a place to park cash. They don't seem to be interested in making any actual returns. As evidenced in another post, a San Jose house just sold for $2.5M. I doubt it would rent for more than $3k/month. That only makes it profitable if you can redevelop it into apartments or a mcMansion...redevelopment isn't as dependent on interest rates as a first time home buyers are in the midwest.
Rental yields are low in markets with high expected capital appreciation. This is true around the world. Investors expect to receive more of their compensation for their investment in capital gains and less in rental income but they still expect overall returns. This is why renters can view renting in these markets as 'bargains'. I live in one of these areas outside the US, rent, and have no complaints. In stagnant markets, investors receive their investment gains through rental income alone which is why the rental yields are higher in those markets.
If they really wanted a safe place to park cash, they would buy treasuries. Instead, they are speculating on property. They are betting on the thesis that property has always been a great investment in this area and will continue to do so, particularly because of property planning laws (ie lack of 'space') and the economy (tech clusters). Under this thesis, even though rental income barely (or doesn't) cover expenses, their expected capital appreciation will more than make up for this shortfall. There's lots of stories, including here, about people that bought cheap and retired millionaires (or became millionaires in a few years) from their property portfolio there which fuels this trade. I'm not saying it's a bad thesis and there is real demand from very highly paid workers in the area. The property and general cost of living inflation fuels wage inflation which has the tendency to make companies look at expanding elsewhere in the long run.
If you're buying a house in cash (or anything else), you have to consider the other uses of your cash in terms of investments. Real interest rates do matter. Market timer got to that before me. Also, even if they're bought in cash, people often mortgage the house afterward to free up the cash because they want to use it elsewhere, diversify away from an area that both their property and jobs are in, or used short term/bridge loans (ie didn't really have all of the cash) to win the bid.