Hacker News Reader

Comment by 542458 | Hacker News Reader

I don’t disagree that house prices are too high, but...

House prices are up, but most people don’t pay the price of a house - they pay the mortgage on it. Because interest rates are rock bottom the inflation of the price of a 25 year mortgage is just about in-line with most other goods. If house prices increase by 100% while interest goes from 6% to 2%, cost of a mortgage only increases by about 25%. (One complication here is that the down payment is not affected by interest rates, as so is much larger today in real dollars.)

View on HN

You still have to pay back the principal though?

    Price per Unit | Interest | Annuity     | Duration [years] | Interest payed
    -------------- | -------- | ----------- | ------------------ | --------------
     100,000.00    | 5.0%     | 12,000.00   | 10.8               | 29,626.35
     150,000.00    | 2.5%     | 12,000.00   | 15.0               | 30,040.09
     200,000.00    | 1.0%     | 12,000.00   | 18.2               | 18,876.33

Unfortunately the increase in asset price is not covered by the decrease in the interest rates. And yes, prices here have nearly doubled over the last 10 years. And you could easily get a mortgage for less than 5% in 2011 here.

I was using the monthly cost of a 30 year mortgage. Monthly for 30 years a 500K mortgage at 6% is roughly 3K. Monthly for 30 years a 1000K mortgage at 2% is about 3.7K.

So a 100% increase in sticker price with -4% interest change yields an actual cost increase of 25%.

This comparison of an increase in price and decrease in interest rate is not useful because if interest rates come down, mortgages can be refinanced at the lower interest rate.

The 100% more expensive house actually costs 100% more (nominally).

Monthly cost of a house tells you very little about the "true cost of ownership" (a concept that I wish were taught more widely). That includes things like taxes, opportunity cost of capital, maintenance, etc. Doubling the price of the house will not quite double the TCO (because maintenance may not increase by much depending on various factors, and taxes can take time to catch up), but it will not be a mere 25% increase either.

That is true and means current prices may not be much higher, but it makes homeownership much more risky. If interest rates ever go back up, the price would go down and you could wind up owning a house where your principal is much higher than it's current value. This is ok if you don't want to move. If you ever want to move though, even to a house with an equal price, you may end up owing the bank a lot of money.

But what are the chances of the housing demand evaporating? In most cities where the housing bubble exists, it exists for a reason. The city is growing because all jobs are relocating to cities and universities located within these cities have growing student populations.

The demand is considered very stable so the risk of that happening is quite low.

And before anyone says it, I don't think we are going to experience a remote work revolution any time soon.

It’s not that demand evaporates, it’s that if you can afford $2500 a month mortgage, and interest rates at 2%, the value of house you can afford is much higher than at 4%. The limit on house prices is capped at what a family can pay per month combined with mortgage rate. So if rates go up, and you own a 800k house that is now 600k in resale because people can’t get approved for 800k mortgage now. So you are stuck and can’t move unless you can afford the loss.

My understanding of US mortgages is they tend to be a fixed interest for the entire life of the loan -- i.e. with a 25 year mortgage at 2% paying $2k a month, if interest rates went upto 10% in 2030, you'd carry on paying $2k/month.

In the UK the longest fixed rates I've seen are 10 years

Right but how much loan you can get in the US is tied to how much monthly payment you can afford. If interest rates are 2% the total price of the house can go up with the same monthly payment. At 4% you can’t afford as much house. Housing prices generally fall when rates rise. Once you are locked into a loan, you pay the same amount. But if you need to sell and you only put 5% down on an 800k house, and now the house can only sell for 650k, you would have to make up the difference on the note.

But you won't be kicked out of the house because the monthly repayment increased by an extra $1k a month.

I was in negative equity in the UK for nearly a decade after buying in September 2007 and seeing value collapse 40% pretty much the day after exchanging contracts (Northern Rock bank run). A new built flat was always going to deprecate a little, but when the flat directly below us told a year later for 60% the price we paid it wasn't fun.

Solution when I did need to move was to rent out the flat (which covered the interest payments and maintenence) and rent somewhere else until 2016, when the price had recovered enough to sell it for the price I bought it at.

That's a great point. I was curious about his as well so I did some simple calculations and wrote about it. Your intuition is correct, and if you look at median mortgage payment relative to median income, owning is about as affordable as its been since we started collecting data. There's a huge difference in mortgage payment based on interest rate:

> To put that into perspective, a $100k 30 year fixed rate mortgage would cost you $1,543/mo at 18.45% and only $442/mo at 3.38%.

Points up front is also lower now than it has been historically. I think low rates definitely fueled home prices and of course there are neighborhoods that are exceptions

https://mleverything.substack.com/p/buying-a-home-in-the-us-...

Reply on news.ycombinator.com