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Comment by PragmaticPulp | Hacker News Reader

The average 30-year mortgage rate in 2000 was 8.05%. Given a $2500/month target payment and 20% down, someone could buy a $423,870 house.

The average 30-year mortgage rate in 2020 was 3.11%. The same $2500/month payment with 20% down buys a $730,892 house.

Ignoring down payments (which differ greatly between the two examples) and other expenses like property taxes, the 2020 mortgage rate allows someone to buy 172% as much house as they could in 2000. This doesn't translate perfectly to rental prices, but property affordability via low mortgage rates is heavily correlated with increasing rent prices.

Not a perfect comparison, but it shows how much mortgage rates are driving the housing price boom. Scary to think what's going to happen when (if?) rates start going back up.

Source for historic numbers: http://www.freddiemac.com/pmms/pmms30.html

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This is a really important point that more people need to think about. Sticker price and interest rate have an inverse relationship. But the price you paid is set in stone when you buy, though the interest rate can change over time.

For those who bought when rates were high and sticker prices were low, declining rates brought higher valuations. Additionally, the ability to refinance at lower rates meant that monthly payments were able to decrease along with total interest paid out on the loan.

For those who bought now (me!) at high sticker prices and low interest rates, the mechanics don’t work in our favor. Interest rates are only likely to go up, which doesn’t allow refinancing at a cheaper rate. At the same time, (inflation-adjusted) sticker prices will go down.

So while renting gotten ridiculously more expensive, home ownership also looks like an increasingly worse deal.

Half-facetiously, what about people who bought at (comparatively) low sticker prices _and_ low interest rates? If you had bought a house in (say) Austin 10 years ago, you would have gotten about a 3-4% rate, and the value of your house on the market today would be almost double what it was then.

It's easy to find individual markets (or time periods) where people have been lucky with overperforming house prices. I'm more concerned right now with what the future looks like for the median case.

Home ownership is still probably a decent deal overall (I bought two years ago). But home ownership was an incredible deal for boomers who have been able to refinance at progressively lower rates while seeing a disproportionate rise in home value.

Millennials now are stuck buying those homes with highly-inflated prices with not nearly as rosy a probable future. While it's certainly possible that housing prices continue to rise drastically, my own read of the available information shows that this was chiefly a side-effect of declining interest rates, which frankly can't get that much lower.

Interest rates can be negative.

Nominal interest rate (which is the rate quoted on your loan) cannot go negative. So your actual amortized payments for acquiring a home will never be subsidized by a "negative" mortgage APR.

Any reasoning you want to give on this? Negative nominal interest rates already exist in European countries as a counterexample.

For a consumer to borrow funds the nominal rate is negative? Where have you seen this? I'd like to see a citation.

The reason this rate cannot be negative is that demand will immediately fill it up and use it for arbitrage (shove the money under a mattress and pay back the loan later) before it can become negative.

>At the same time, (inflation-adjusted) sticker prices will go down.

Who cares about inflation adjusted price when you have a mortgage ? Your rate will be X for Y years, as long as your income keeps up with inflation you'll get a net discount. Buying a property with loans is a good way of betting on inflation - I don't know if it will happen but if it does you'll win.

Worst case scenario is recession, you have reduced income and housing prices plummet - I don't see this playing out, running low interest rates to high inflation seems likely to me.

> Worst case scenario is recession, you have reduced income and housing prices plummet - I don't see this playing out, running low interest rates to high inflation seems likely to me.

And the standard case scenario is rising interest rates, where your highly-leveraged asset drastically underperforms the market (and may even produce negative real returns, if it doesn't keep up with inflation).

Which only matters if you want to sell. So never buy a house you don't plan to live in for a long time.

I don’t know too many people who would be excited at continuing to pay off a $500k mortgage on a house worth $400k.

Also, the bank will ask you to post the difference in money ASAP. The bank never loses.

Banks in the US don't do this on mortgages.

Interesting, looks like you're right. Also looks like you can improve the home (even DIY) and use that improvement to erase negative equity. Though of course it has to be the 'right' improvement, like kitchens and baths.

With fixed mortgages this is true, but if you get an adjustable rate, you’ll need to refinance and that’s when you need to requalify and meet loan to value ratios.

Disagree, rising interest rates in this economy would lead to a recession - the worst case scenario.

I don't see realestate underperforming inflation without some massive changes either.

And in case of rising interest rates, the first thing I expect to pop is overvalued stocks and money parking commodities.

The FED and mainstream economists know that if interest rates will go up it will create huge deflationary forces (on top of existing ones) so they will do everything in their power to keep them low. I doubt we will see high interests for the next few years until debt ratios go a bit lower. The FED even mentioned that they’re willing to allow inflation to run higher for a while. That being said, it’s not a given that we will see inflation.

For debt ratios to decline, people have to stop going into debt as much. Or, they pay off their existing debts instead of using that cashflow to qualify for more debt. It's hard to imagine reducing debts unless you have a shock like '08 GFC, which changed the standards for acceptable underwriting.

> For debt ratios to decline, people have to stop going into debt as much.

Low interest rates and high perceived inflation causes people to take on increasingly higher amounts of debt. In some cases, it makes sense to borrow at 3-8% interest if you expect an ROI of 12-20% and you set aside 1/3rd of your gross return for taxes.

However this system has some positive effects. If you go out and build 3 homes and people buy them, you’ve effectively created 3 homes worth of wealth.

The long term historical trend is falling interest rates. So at least for the last 100+ years, the standard case scenario has been that your highly leveraged and refinanceable asset outperforms the market.

The 18% interest rates in the 70’s are frantically waving their hands as an exception.

I’m eagerly awaiting my refinance into an 0.725% rate mortgage.

> For those who bought now (me!) at high sticker prices and low interest rates, the mechanics don’t work in our favor. Interest rates are only likely to go up, which doesn’t allow refinancing at a cheaper rate. At the same time, (inflation-adjusted) sticker prices will go down.

This ignores the fact that, in some countries at least (e.g. Denmark), you reduce your debt if you refinance at a higher interest rate.

For example, if you financed your house with a $200,000 2% fixed-rate 30 year Realkredit loan, and the rate of interest increases to 4%, then you can refinance you existing mortgage at 4% but now you only owe $100,000.

This is how bonds work in general: a doubling of the rate of interest halves the bond price, and a halving of the rate of interest doubles the bond price.

I'm not understanding how this doesn't work out for you.

You got in at low interest rates. Why would you have to refinance? Why is not being able to refinance an issue?

>>Ignoring down payments (which differ greatly between the two examples) and other expenses like property taxes, the 2020 mortgage rate allows someone to buy 172% as much house as they could in 2000.

In nominal dollars this is correct, but the $423,870 2020-dollars is equivalent to $660,449 2021-dollars, or only 11% more house in "real" terms, not 72%.[1]

>>[...] it shows how much mortgage rates are driving the housing price boom

I think the dual combination of mortgage rates and inflation-adjusted real value caused the increase in nominal housing prices.

>>Scary to think what's going to happen when (if?) rates start going back up.

Given that lower mortgage rates were essential to keep affordability barely within reach, we are in complete agreement here that higher rates will be really ugly, even if they might be necessary/inevitable.

[1] https://www.bls.gov/data/inflation_calculator.htm

Framing it differently: I have $100,000 as a down payment for a $500k house. At 8.05% the monthly payment is $3,686. At 3.11%, it's $2,138. That's a savings of $1,548 monthly. 12 payments a year for 30 years that's a net change of $557,280.

You’re not considering that the market responds to these changes in affordability. If you can afford $3,186/mo today and the interest rate plummets, sticker prices will (over time, generally) track higher such that your monthly payment remains roughly the same.

It’s not a perfect relationship between the two—affordability does fluctuate, and the movements have a lot of latency between them—but on a societal scale the relationship holds.

A $423,870 house in the year 2000 is equivalent to a $654,070 in 2020 after inflation.

The point was to compare interest rates for a given monthly payment, which isn't influenced by inflation.

In the town where I live, a 400k house in 2000 would sell for around 2 million today.

It's not a $423,870 house in 2000. It's an 8% mortgage, and we're comparing what that 8% mortgage would get you in 2020.

Does this calculation include property tax (or home owner's insurance as another commenter mentioned)?

According to the US Bureau of Labor Statistics CPI calculator, $2500 in 2000 has the same purchasing power as $3800 in 2020. I believe that difference would be able to cover increases in property taxes and insurance.

"The average 30-year mortgage rate in 2020 was 3.11%. The same $2500/month payment with 20% down buys a $730,892 house."

Except what's happening I live is that now the $423,870 house costs $730,829. As well, for someone who doesn't already have a house, the down payment isn't something you can just handwave away.

Why would lower interest rates drive increasing rent prices?

Lower rates increase house prices. High house prices push buyers out of the house market and into the rent market. More renters increase rent prices.

> the 2020 mortgage rate allows someone to buy 172% as much house as they could in 2000.

You'd think so until you factored in vastly higher insurance costs - between 2000 and now.

source: five years of insurance increases more than doubled our 2000's monthly home payment

Dang, do you live in a flood zone in tornado alley? My property tax recently surpassed by mortgage payment but my insurance payment isn't close to either. I think it's around $1500 a year or so.

This is not a big deal as you make it sound. Insurance is like 1k per year these days on a $300k house. If it was $500 five years ago, this $500 increase is nowhere near as substantial as the interest rate change relationship described above.

My home insurance is ~$900/year for up to $750k dwelling replacement cost with $500k in personal liability, and my premiums barely went up over 5+ years. It might have been $850 per year initially. This is with Amica.

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