Mortgage rates just hit 5%. Buying a home has become a lot more expensive
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Actions like this will unfortunately destroy a lot of older middle-class wealth in the short-term, but longer term it would hurt the upper-classes the most (and even short-term it’s not like the upper classes haven’t been winning every transaction anyway). And the longer we let this problem fester, the more lives we disrupt of the younger generations who have seen countless ladders pulled up in front of them.
And the current situation is already “destroying” peoples lives as their courses into “normal” adulthood are interrupted and delayed, so it’s somewhat a question of who feels the effects. The difference with devaluing homes is that people may lose some wealth, but they still have a home! Investments are supposed to risky, that’s why you make money off of them sometimes; so let’s make it that way for houses.
A land tax encourages building denser housing and therefore increasing the number of homes available to people, putting downward pressure on housing (and rent) prices.
A land tax does not go up if the dwelling on it go up in value/price. It encourages replacing single family homes with denser dwellings.
there's nothing wrong with being against densification. Cities like SF and Seoul would be a nightmare for me to live in because I hate cities and being around a lot of people.
With a land tax the taxes wouldn't increase if large apartment buildings were built on it because the tax amount is solely based on the value of the land and not the property on it.
>So while a land tax to punish the rich would help make people feel better, with what I see it will enrich some, but not benefit who you think would benefit.
First, people don't propose a land tax to punish the rich. Second, it's not about benefitting specific individuals (picking winners and losers). It's about benefitting everyone by ensuring the optimal use of the land.
After paying off the medical bills with appreciating uome ownership, your credit is still good, and you can eventually buy another house. All your land-value tax does is punish wealth accumulation. What is the reform you wish to create? How does this help anyone?
LVT doesn't punish wealth accumulation, it punishes monopolies
Using equity for cheap money to buy more equity makes perfect sense.
What a principal residence as an investment does for most middle to upper-middle class Americans is force them to save some money so that they have some amount of wealth when they retire. I don't know if that is important or not, since it's not very liquid and has dire consequences if you lose it.
1 - it lowers your monthly costs (no house payment/rent to pay)
2 - it provides some protection against inflation so even in bad inflation, your housing cost won’t change.
A real issue, but a bad example. Trump has never declared personal bankruptcy. A few of his 500 businesses have gone bankrupt, but all that happens when an LLC goes bankrupt is that the owners lose their investments and creditors take over the company.
You know what really killed the rich? SALT deduction limits in the Trump tax plan. That policy actually caused the rich to pay more in taxes.
That's why CA tried to work around it by trying to classify property taxes as a charitable donation.
Wait and see, the Dems will pass a new sweeping tax plan that won't include the SALT deduction limit and they'll claim that it taxes the rich more.
[0] https://www.washingtonpost.com/outlook/2021/11/05/salt-tax-d...
So until municipalities want to really study the overall capacity and exactly how it is being used, changing tax policies will be unlikely to address whatever the real issue happens to be. Our problem is not simply "supply and demand", it's more subtle than that.
If I were still in the multi-family residential marketplace I'd be buying and converting to short-term rentals in cute neighborhoods. It would be the highest and best use of capital deployment under current legal structures.
Wouldn't a SANKEY diagram showing incoming units and utilization of such units be a nice way of seeing the problem and making adjustments? Having such data would be fascinating.
Also now that overlapping showings are happening I spend nearly every viewing with 2-5 realtors who are showing over zoom to buyers looking to move from a HCOL to my city (Denver). I found it hard enough to make a major decision after a 20 minute viewing, but to do so over a poorly narrated zoom/facetime walkthrough? Can't imagine.
Plus stocks are almost immediately liquid and have almost no transaction and no maintenance costs and no annual property tax.
In Europe (at least the parts I'm familiar with), it's more common for mortgages to be on adjustable rates, basically the European Central Bank rate + a fixed margin. This has been an excellent deal for the past 10+ years, as the ECB rate sunk below zero.
(I have a mortgage in Finland that I took in 2011, and for many years I've paid zero interest on it because ECB rate + the loan margin added up to a negative rate. Sadly my bank clamps it at zero.)
Here you have your choice between a variable rate mortgage (floats at BoC rate +- some %) or a "fixed" rate on a term (e.g. 3% for 5 years) and then you renew at whatever rate is current at the end of the term.
In most western countries, fixed mortgages do exist, but the bank has to go out and buy the relevant interest rate swap in the open market, so availability fluctuates & is biased towards short term fixes. Most people are either on a variable rate or are on a short term fix that expires in a couple of years.
I remember when interest rates hit 15% in the UK in the 80s. My parents did worry they were going to lose our house!
Certainly that's how my wife and I have been, while everyone else has been partying and living potentially well beyond their means. Guess we're suckers.
In a place like California, that 5% change could be half of your salary. If the cautious approach is only buy a house if you can handle a 2-3X rate hike, then individuals would never own and perpetually rent from companies.
In reality, higher rates or the risk of them puts downward pressure on housing prices. A huge component of the price of homes comes from the easy availability of the actual product: housing loans. Almost everyone out there just gets the biggest mortgage that the bank approves them for. They go to the bank and say "what will you give me" and then go look for prices around that cost. Or get in bidding wars up to that level. And the banks are so underwritten by government guarantees that they're willing to take big risks here. It just drives prices higher and higher.
We never had the 2008 housing price crash that happened in the US, and things have just continued to climb. It's possible that we'll have a huge crash at some point, it's well overdue. But I've given up on waiting for that to happen.
If you're on a fixed-interest mortgage, you don't plan to move and you don't have a home equity loan, it seems to me that you don't need to care at all about interest rate and home price fluctuations.
There's a couple who live at the peak of the bell curve that defines your market. They can spend $X,000 per month on a house. 2.5% vs 5% just changes how much of their money goes to paying down principle vs the interest. With that the price of the house will fluctuate to account for this reality.
As others have commented, the rate increase in the US is nuts. People were paying the max monthly payments their income would give them in some markets (e.g. Bay area). With rates doubling so fast, I worry about fiscal solvency of anyone who did not get a long-term locked rate.
At once point in the not-too-distant past we had mortgages with 40 year amortization periods but they eventually pared that back down to 25 years - unless you put 20% down, in which case you can push it to 30 years.
Edit: actually the rule is 1% if principal to value is above I think 40%, so not even that is true. We are basically not expected to pay it off entirely unless we want to.
<5% of mortgages are ARMs in the US.
Obviously you’ll just refinance in a few years when rates go back down to zero or your house is worth 80% more /s
Being house rich on paper but not being able to afford groceries isn’t a trade off anyone wants.
As it is now, I could sell my little hobby farm here in Ontario and buy several properties in Edmonton where my family is and real estate is still a bit depressed (cuz oil prices were low for so long). But I'm tied down here.
https://www.brookings.edu/wp-content/uploads/2016/08/where_d...
Percent of income spent on housing for low income households went from 35% (1984) to 41% (2014).
So higher, yes, but it wasn’t “much smaller”.
Me? Trying to find a property to buy in Western Massachusetts that's affordable on one income. Not looking good.
Women entering the workforce happened mostly by the late 70’s.
Housing prices on the other hand - mostly stable until the 1980's, and then shelter became an investment vehicle: https://fred.stlouisfed.org/series/LNU01300002
The prediction is that we will have a period of monetary inflation to deal with the problem of asset inflation.
The real issue is people in HCOL cities think their experience is the same across America.
Plenty of places in the US where housing is still affordable.
I have a friend who has worked there for 20 years. He's not making Bay area wages, but he also bought his house for $150k a decade ago (houses are now ~$250k). Public schools are great.
There is no way to "have your cake and eat it too". Large cities are expensive because that's where people want to live and wages are high. In exchange housing is highly priced.
There are plenty of smaller cities with affordable housing. Sure, you might be limited to a handful of employers and yeah, your wages will never be at coastal levels, but that's the trade off.
And what's with buyer incentives? They are just a conduit from the taxpayer to Big Finance.
So the supply problem is not addressed.
Might make new construction cheaper though?
And we should be happy to have been born after others earned all the wealth.
Back during the housing boom, rates were 5-6%. So I'm not sure that this will cool the market all that much.
I'm sure - if allowed - we could see something similar. But IIUC this type of financing isn't currently plausible.
Plus, if you buy into the idea that interest rates dictate housing prices, then 5% rates should lower housing prices. I personally don't see this happening in our specific climate, but there's ample evidence that the two are negatively correlated.
The nominal rate should be important right now. The nominal rate in the before times was like 4% interest - 1-2% inflation. Now the nominal rate is 5% with 7-12% inflation.
Normal people are absolutely going to start factoring inflation into the equation. Especially if inflation continues to drive wage growth.
people that were using cheap mortgages to purchase additional properties with the aim of flipping it, who were also leveraged, are screwed.
the last bit of bad news is that property prices may not rise for people who buy the dip, we are entering into a global recession and the world's biggest real estate market have declined with no hope of making a comeback.
They'll convert to rentals and make back any acquisition overpayment over time. Even if we hit a recession, with so many people having left the workforce and continuing to leave over time through retirement, rental demand should remain firm.
If they refinanced in 2020 then they likely bought in 2019 or earlier. If prices fell to 2019 levels it would be a crash —- and probably merit all sorts of government response including lowering interest rates. No one that entered the market before 2020 is “screwed”.
Housing prices even in the markets hit hardest by 2008 recovered in ten years. You aren’t stuck living in your current home forever.
If you bought an investment property then relax, there’s no indicator that rents are going to decrease anytime soon.
Many young people put off home ownership specifically because we watched slightly older friends lose their shirts on their houses. I remember specifically one friend who had to save up to sell their house, not only was he selling for 20% less than he bought for, but he was making $20k in out-of-pocket concessions to the buyers. Popular opinion was that houses were too risky.
Plus, there was the issue of, we all either were laid off recently, or had friends who had been laid off. It's kind of hard to think about long term planning with that hanging over you head.
So when the house of cards collapses, young people won't be the beneficiaries. They will suffer long-term because they lack the experience and context to internalize concepts like business cycles. I remember my mom telling me to use the $8000 first buyer credit from the government to buy the house across the street from her for $78,000. That house is how worth a quarter of a million. But I didn't buy it because I was worried about layoffs or further market collapse.
not to mention 1 out of 2 GEN-Z and 1 out of 4 millenials are hodling crypto, the situation is far more bleak than ever before.
So yeah, just got footing as an adult, then bye bye economy.
the can cannot be kicked any more.
good
However it will likely keep going and then crash more than fizzle.
As long as the interest rate is below the rate of inflation, you'll make money by borrowing money and trading that money for something pegged to inflation, like a house.
This will work in the short term, and so I think people will keep buying.
Such events have happened in other countries, and if it happens here, home prices will keep going up, wages will go up, and folks will at best be able to afford the same things but most likely less.
I don’t think a crash will happen (maybe it’s going down, maybe not, but definitely not a crash) and I believe we are moving in a direction where less and less people will own the home they are living in. It’s sad really but this is what late stage capitalism looks like.
As for people that want to buy a home? buy one if you can afford it. don’t try to time the market, don’t worry about crashes and bad deals. Just do it. In 10 years what happens right now will not matter.
If there were a crisis in home ownership you'd expect it to be at historic lows.
This is what capitalism hamstrung by government regulation looks like. In many areas builders can't respond to demand and make a profit due to heavy regulation of construction.
as long as the rent isn't increasing faster than inflation, why should there be a problem?
You don't need to own the home to live in a home. And if you own the home, it doesn't mean the cost of shelter isn't paid by the owner (it's just more invisible a payment).
1. There is a fixed amount of realestate that must be shared by a growing population.
2. Inflation means the cost of everything is increasing. Why wouldn’t that provide significant upward pressure on homes?
3. Local governments spend a lot of effort maintaining high real-estate values. You can’t fight city hall.
If someone can just afford a $800,000 mortgage payment at 2% they won’t be able to afford $800,000 at 6%.
U.S. Population Grew 0.1% in 2021, Slowest Rate Since Founding of the Nation [0]
> 2. Inflation means the cost of everything is increasing
I agree on this one
> 3. Local governments spend a lot of effort maintaining high real-estate values.
Increase in total inventory increases local government overall income and solidifies the need for their own bureaucracy. (i.e. local government would love for their little kingdom to grow to the sky, in my experience... my experience being Morgan Hill, CA)
[0] https://www.census.gov/library/stories/2021/12/us-population...
Second home purchases in the reached historic levels over the last two years. There is a lot of inventory that could be listed quickly in comparison to owner occupied homes.
It's not clear that a correction will happen though, wage increases, in particular at lower incomes can sustain higher rates and higher prices for homes below the median. At the high end most buyers are likely asset rich and can also sustain higher prices. The price segment that may be most vulnerable due to higher rates is in the middle.
I can't see institutional investors selling. If house prices fall, they are going to hold on to houses to prevent the losses from being shown on their books. If rent prices fall, they are going to focus on appreciation to cover the losses (and taking advantage of favorable tax treatment that landlords enjoy).
Really, the only way it makes sense for an institutional investor to sell is if the prices reach so high, then plateau, such that even the most optimistic projections show there's not much money to be made in rents+appreciation over the next 10 years.
they sell if they see another, higher return opportunity.
And yet Zillow did the exact opposite of this very recently. Also, after Zillow did so, everyone on real estate forums seemed to explain that it's so so obvious that this would happen ("of course, with carrying costs, they had to sell")
It's almost like no one knows the future but backwards rationalizes whatever happens as obvious.
I wonder if rates readjusting pops the housing bubble though.
Interesting piece of information for tracking economic movements. I wonder what the ratio is on adjustable rate mortgages vs. fixed. If there are a lot of ARM out there then there might be potential for a bubble popping where people can't afford the mortgage and fixed rates are also higher where a re-fi won't help.
[1]https://www.cbsnews.com/news/mortgage-rates-4-percent-adjust...
Additionally, lending standards over the last decade were nowhere near as loose as before the financial crisis. Though apparently they were beginning to ease in Q3 and Q4 of last year. [2]
All this to say, I'm sure you're right, borrowers at the margins of lending standards will have a much harder time, and we'll see an increase in foreclosures. But it shouldn't the tsunami that we saw in '06-'09.
One does wonder though, with the trend of increasing economic headwinds (inflation, ongoing supply chain bottlenecks, etc.), how close we are to a recession.
[1] https://www.bankrate.com/mortgages/federal-reserve-decision-...
[2] https://www.pymnts.com/loans/2021/banks-loosen-lending-stand...
I hope this brings the price of housing back down to earth. A house is a depreciating asset in any sane world. It requires constant maintenance.
If more housing stock isn't injected amidst a housing shortage, raising interest rates will disproportionately affects Buyers who really need affordability. Crappy deal.
In cities like Seattle or Austin or Denver, 5% mortgage rates are unlikely to cool the market off in any meaningful way.
It's not clear whether they will succeed but should be enough of a threat that the only way to combat an attack on USD would be to raise rates significant enough on top of the pressure from inflation (nobody is buying that we have only 8% inflation, many economists are putting it at about 17%, which is absolutely unprecedented and we can no longer print money, somewhere around over half of the current USD supply was printed post 2020!!!! this is not sustainable!)
Recall that in the 70s, 80s, we had double digit interest rates.
14%: The GDP was 3.2% in 1979, unemployment was 6.0%, and inflation was 11.3%.
20%!!!!: The GDP was -0.3% in 1980, unemployment was 7.2%, and inflation was 13.5%.
In fact it took from 1979 to 2002 for rates to come low to what we have had
1.25%: The GDP was 1.7% in 2002, unemployment was 6.0%, and inflation was 1.6%. The following tables have data taken from The Federal Reserve.
0.25% !!!: In 2008, The GDP was 0.1%, unemployment was 7.3%, and inflation was 3.8%. As of Dec. 16, 2008, the target funds rate became a range, represented in the tables by the upper limit.
Source? I have not seen any place saying that besides garbage websites like shadowstats.
Few understand this.
Talk to a realtor in any U.S. locality (I happen to be working with a realtor in a mid-west state) and ask them how many homes are seeing all-cash offers.
I suspect it is also institutional/corporate buyers and people who cashed out of their home-in-expensive-region and are moving to less expensive communities.
I don't think there's any myth there.