Hacker News Reader

Comment by javiayala | Hacker News Reader

Hi HN, can someone please explain what are the implications here for the average-Joe?

The fed interest rate is the foundation for pretty much all loans, cars, mortgages, whatever.

Low interest rates are good for borrowers. I want a car, or a house, or a power plant, or a jet, or whatever. I want to spend some money that i don't actually have. This changes the economy because more money is moving around.

High interest rates are good for lenders. I've got this pile of cash that isn't doing anything. The higher the rate, the more likely i am to loan it to someone who wants to do something with it.

The higher the rate, the more sure the borrower needs to be that they can actually put that money to good use. Not only do i have to get you your money back, i have to get you all the interest as well. Lower rates mean more activity, more people borrowing and buying stuff. Higher rates slow things down, but bring more investors out.

Say the fed rate went up 5%. Yesterday i could give you a home loan for 5%, today i could give you a loan and make 10% instead. Since that rate is the foundation of everything, my risk stays the same, but it's much tougher for you, because you have to come up with a bunch more money. They made a tiny, probably imperceptible change to you and I, unless you're actively looking to take out a loan.

Anyway, that's the gist. Borowers need to be a tiny bit more sure they can pay the interest.

Here's one thing I don't get, pardon my fundamental lack of understanding of macroeconomics here.

How is there so much liquidity when fed rates are zero?

All the people/organizations that have extra money are incentivized to spend it instead of keeping it in banks as savings.

For lenders, low rates make it easy to borrow money to in turn lend to consumers. As the rate increases, lenders will pass the higher rate along to consumers, which in turn leads to lower borrowing by consumers due to higher rates.

Where else are you going to stash your cash? The likelihood of you losing it when your bank goes under is perceived to be higher than the US government defaulting on their debt obligations. US treasuries are the least risky assets out there, even more so that your bank account deposits for large amounts of cash.

Rising interest rates also mean that house prices should drop (or deaccelerate), right? If you figure a buyer has a fixed budget, the more they are paying in interest the less they can pay in principal. Not saying 0.25% will have much effect, but in principle don't they have that relationship?

Correct. Home prices should come down a bit as interest rates move up.

Eventually. Today, of the many houses sold, there's going to be .25% more people who can't get the loan they want. They're going to move down market, and buy a slightly cheaper house. The more expensive houses might lower their price, or take it off market or whatever.

It's like a distributed system. There's a bunch of complicated moving parts that all react to each other. There aren't that many knobs and levers to pull on. The fed can't tell home sellers to lower their prices, they can just fiddle with interest rates.

> there's going to be .25% more people who can't get the loan they want.

No. This is wrong. There isn't a 1-1 correlation between interest rates and the % of people who get the loan they want. That's nuts.

It's a mental model to highlight a point. if there were infinite mortgage applicants, and the fed change was the only change in the whole universe, there would be a 1-1 correlation. Lots of other stuff is going on, which pushes back.

No, that's wrong too. I have no idea why you think there would be a relationship like that. The two things you're trying to relate aren't even on the same scale.

> Rising interest rates also mean that house prices should drop (or deaccelerate), right?

Compared to without the policy change (not necessarily compared to before the policy change, though implications of the latter type are frequently treated as if they were of the former type) higher interest rates should mean (with the common assumptions about the dynamics of the rest of the market) both lower prices and fewer sales (buyers can afford less, but there's no reason for sellers to seek less, so the best any property can sell for will be lower and there will be fewer cases where any buyer will be able to offer what a seller would accept.)

I think the big question though is that in super hot markets like SF and the Peninsula, will the demand actually go down enough to slow things? There's a LOT of all cash offers still coming in from overseas. Sure they might have less competition, but I feel like the aggregate demand is so massive and available supply is so restricted (in large part due to Prop 13) that even higher interest rates wouldn't put a big damper on things.

> There's a LOT of all cash offers still coming in from overseas.

Not as many as you think. Saw this the other day:

The San Francisco and San Jose metro areas ranked ninth and sixth from the bottom, with all-cash deals representing only 28 and 24 percent of purchases, respectively. All-cash sales in San Francisco peaked at 36 percent in the first quarter of 2010, Zillow said.

http://www.sfchronicle.com/business/networth/article/All-cas...

(I agree that the dynamic won't change much though.)

That's really interesting, thanks for sharing your source. I wonder if that accounts for "offers" vs. "buyers." If you have the assets, you can make an all cash offer and come across as much competitive, and then switch things out after your offer is accepted to finance whatever percentage you want without the seller ever knowing. That's a fairly common tactic I've heard about and could definitely skew these numbers depending on what the data represents.

But the broader point of demand is obviously the bigger concern. What are your thoughts on the factors that would impact that? Personally, I see a place to live that has great weather, schools, people, food, culture, jobs, tech, and things to do. It also has proximity to eastern countries which makes it desirable to them. Given the finite land, building restrictions and Prop 13, I really wonder what it would take to have a significant long term hit to prices.

Some really interesting data here:

http://www.paragon-re.com/3_Recessions_2_Bubbles_and_a_Baby

Right, but 25 basis points is such a miniscule increase that it's not really going to do much. It's only a few hundred dollars to buy that amount in discount points.

Did you see that they anticipate to end 2016 at about 1.4% and 2018 somewhere over 3%?

My feeling is over the next 12-18 months, at least in markets that are already hot (SF, NYC, Boston, etc), you'll actually see house prices rise as the buyers who have been on the side lines are given a kick in the butt to get in the game for fear of losing out on the low interest rates.

One way this might affect ordinary people is the choice between investing or paying down a mortgage. The day you get the mortgage, it probably feels like a good risk-adjusted return to pay it down. "Risk-free 5% return!"[0] But if you have a low 30-year rate and interest rates rise enough, there might be low-risk investments that pay better than extra mortgage payments.

This is one doubt I've always had about Dave Ramsey-esque advice to aggressively pay down your mortgage: In every analysis I see the rate on investment is static, but we know that's not true, and for a long time it's seemed inevitable for rates to go up eventually.

[0] Not strictly risk-free if you wind up needing the cash or your house tanks in value, but that's the pitch.

I think if you don't make a whole lot of money (like retirement is going to be kinda scary) and you're living in the house you're planning on dying in, paying it down makes sense. it's a very easy way to hold on to some wealth and get to the point that you don't have house payments anymore. maxing out 401k is better, you'll end up with more money, but there's some real security in outright ownership.

Paying down the mortgage with the rates we have now, aside from personal security, don't make much sense to me. If you're in an ARM and the payment keeps creeping up, then yeah, it's a better move to pay down early.

> Paying down the mortgage with the rates we have now, aside from personal security, don't make much sense to me.

You must be quite young. The 25-30 year window most people are now taking mortgages out can cover dramatic economic swings. Thirty years ago mortgages in my neck of the woods were up around 20%.

Assuming that rates will be this low forever is like believing we were in a "long boom" in 1999.

My personal economist-on-twitter of choice to tune into around fed and other news is Justin Wolfers[1]. Your mileage may vary, but he's certainly willing to express an opinion in what I consider a pretty clear manner (not to say he isn't opinionated, I just find his prognostications and commentary generally compelling).

[1] https://twitter.com/JustinWolfers

If they have a variable-rate credit card that has a balance on it, they might want to start paying it down to reduce their interest costs (a good idea in any case).

If they have an ARM for their house they might want to look at what the lifetime interest rate cap is on the loan. Add that to the margin rate to find out what the payment could potentially go to. If they're not comfortable with those numbers, they might want to refinance now into a fixed-rate loan, or see how long they plan to be in the house.

There will be hidden changes as well, as businesses will be paying more for operating loans, and this increase will be passed onto their customers. So food, entertainment, etc. costs will all go up.

In short, pretty much everything you could buy just got a little more expensive.

Realistically, not much for a while. The FED still doesn't think inflation will hit its target until 2018, so low rates are here for the time being.

The two things you might notice:

- Slight increase in rates on CDs, money market accounts, and other short-term savings - Slight increase on car loan rates, mortgages, and other long-term consumer borrowing

Money becomes more expensive to borrow.

Harder to buy a house, rents might go up, etc.

Also, harder to raise capital for startups. Though that's probably a good thing that the bar is raised -- will be better in the long term for everyone.

No, likely easier. Think of it this way. Borrowing money costs you more, but makes the lender more money in interest. Lenders now have more of an incentive to loan out money, because they'll actually be earning more (eventually) on it.

But if pen2l was a marginal borrower before the rate hike, this might have disqualified him (without a bigger down payment anyhow)

Not really, any long term fixed rate loan had this priced in for months. In fact, the FNMA 30 year interest estimate is slightly lower now than when it opened, opened at 3.040% and is currently at 3.019% (sorry, no internet source available for that or I'd link it). The question this morning was if they were going to raise the rates today or next quarter and by how much, not if they were going to.

Edit: It's now moved up to 3.048%, but either way, my point is that whether you closed on a long term fixed rate loan yesterday or today doesn't really matter.

The fact that we can borrow at 3% for 30 years and we don't use this to invest in productive infrastructure assets is insane.

Who is we? The federal govt can borrow at far lower rates than 3%.

Not for 30 years. In fact, as of yesterday 12/15, the 30-year treasury rate was exactly 3.00%.

https://www.treasury.gov/resource-center/data-chart-center/i...

Great link, thank you!

We the people.

I was being a bit generous with the we bit since I am Australian, but the same thing applies to our government too. My state just sold off a hugely productive piece of infrastructure (electricity poles and wires) to pay down debt. The crazy thing is the infrastructure returned twice as much per year in dividends than the interest on the debt retired.

> Harder for me to buy a house. Bummer.

Yes and no. Yes because the monthly payment on a new mortgage for a given purchase price just went up. No because that payment went up for everyone by the same amount at the same time, so purchase prices will (theoretically) adjust downward.

Keep in mind that today's news means a bak will lend you money at 4% instead of 3.75%, so the effect is minimal.

Other factors that influence the housing market such as strength of the local economy and availability & quality of financing won't be affected unless we see substantial rise in rates.

> No because that payment went up for everyone by the same amount at the same time

The rate is more significant the more you borrow, and not everyone has to borrow the same amount to buy the same hypothetical home. Buyers who have to borrow more are less attractive to sellers, ceteris paribus, since there's a greater chance of the deal falling through.

But if we're talking about a .25% difference, it won't have a real measurable effect.

It is now marginally more expensive than "free."

An oversimplification: Interest rates are going up over the long run in an effort to keep inflation from getting out of hand (very generally, asset prices go down when interest rates go up). The risk is that it will worsen unemployment before we're ready for it.

The Average Joe's home loan just got a slight bit more expensive.

However, the cost of the home in many markets will have decreased slightly as a result.

Woohoo, that means that less people will be able to afford the highest prices, which means the bubbling up sales prices will go down, and those of us who have been saving up for a home will have a better shot instead of getting priced out by folks willing to take on extreme loans because of low interest rates.

Reply on news.ycombinator.com