Mortgage Rates Jump Above 6%, Putting Pressure on Housing Market
nytimes.com
nytimes.com
The bad part of this I think, is that valuations of long-term cash flows start becoming more and more sensitive to rates. The difference between a 2.75% mortgage and a 3.75% mortgage is bigger, relatively, than the difference between a 3.75% mortgage and a 4.75% mortgage; because people buy the largest, longest mortgage they can afford, small changes in small interest rates result in large changes in the monthly payment. I feel like this ends up making the whole housing market more volatile.
If you can assume long-term stable interest rates and have access to a 30-year fixed mortgage - the difference between a 2% mortgage and a 1% mortgage is the same as the difference between a 12% mortgage and a 6% mortgage.
Every percentage points that central banks artificially reduce interests by exponentially distorts the markets.
A 0% mortgage with a 1% property tax - theoretically - costs you -2% (x 5 for leverage per year). On a million dollar house - you'd get paid $100k per year to live there.
The effects of this policy have been a moral hazard unseen before, and if it ever has to end, we're in for wild times.
How did you calculate that?
The national median figures even lag CPI:
https://dqydj.com/historical-home-prices/
This probably manifests from increasing income/wealth inequality, in conjunction with inequality of how popular some places are relative to others. If your goal is to obtain housing that the top 20% or 10% are competing for, then you will experience prices rising much quicker than housing that the bottom 80% are competing for.
Here is another source showing the variance:
https://www.visualcapitalist.com/20-years-of-home-price-chan...
Maybe in the most popular areas, it would sell for 1.03^30 = $2.4M after 30 years, but in the vast majority of the US, that has not historically been the case.
> On a million dollar house - you'd get paid $100k per year to live there.
Average inflation for the last 60 years is 4.7%/yr.
https://dqydj.com/historical-home-prices/
https://www.visualcapitalist.com/20-years-of-home-price-chan...
>I do not think it is reasonable to assume a random piece of land will appreciate at 3% per year over a period of 30 years.
It seems very reasonable to assume that average real-estate will at least increase with inflation.
Your links show that average home prices have increased 100% in 20 years, which is a little over 3% per year during that period. They also show that prices have increased faster than inflation.
>Maybe in the most popular areas, it would sell for 1.03^30 = $2.4M after 30 years, but in the vast majority of the US, that has not historically been the case.
Your link literally shows that the majority of US homes doubled in price in the last 20 years, (which is even faster than 30).
Sure, This level of overperformance releative to inflation is likely unsustainable. However, it is reasonable and conservative to assume that housing and land will at least increase with inflation on average. Population keeps increasing in the US and land is finite.
are you saying that 3%/yr increase in price is too low, and the real number is likely higher? This is better supported by your data.
[1] https://www.visualcapitalist.com/20-years-of-home-price-chan...
Suppose I'm considering a mortgage of 100K.
If rates go from 1% to 2%, my payment goes from 322 to 370, an increase of ~15%.
If rates go from 6% to 12%, my payment goes from 600 to 1029, an increase of ~71.5%.
Massive difference in terms of affordability.
In the US, I think 90% of home mortgage loans are fixed rate loans, so borrowers do not have changing monthly payments. I cannot find an easy source for it, but I think I read it from an Ellie Mae report.
And ARMs come in 5/7/10 year, but the longest mortgages are fixed rate at 15/20/25/30 years.
This is surprisingly easy to explain: interest rates are a combination of the time factor of money (a dollar in hand is more useful than a dollar tomorrow) and the risk of default. Geopolitical stability and security has increased in the aggregate over the past few centuries, so it follows that interest rates have declined in aggregate.
Makes you wonder what the implications are, now that we've hit zero. ;-)
Same. I live in Wyoming. Our county has "workforce housing." It's exclusively for sale or rent to workers in the local area. (Versus remote workers or holidayers.)
I'm not advocating for this policy, though I think it's brilliant. But it highlights our desire, perhaps need, for non-market demand-side moderation. We presently put all the non-market moderation on the supply side. From the meaningful, like capacity, design and environmental reviews, to the useless: neighborhood bitching sessions and meaningless permits from every politician who needs petitions signed.
Instead, the Teton model points to a hybrid approach. Less regulation on the supply side. But more non-market requirements on the demand side. One approach is ring-fenced supply for groups the community deems desirable, like critical workers, disadvantaged groups, et cetera. We have good reason to be wary of this government-picking-the-winners approach. But if we want to maintain a community feel and keep housing affordable, the solution must be rationing.
Centralized rationing leads to patronage. (See New York City.) De-centralised rationing, where supply is held back for certain groups who have a market to themselves, looks more resilient. The process of choosing who's in the non-market group and how much of the market they get to themselves will be fraught. But it looks more plausible than convincing Atherton to build sky-rises or homeowners to accept rent and price regulation.
I share your wariness of government picking the winners, and posit that this Workforce Homes program appears to be maybe a slightly cleverer version of state-imposed price control, which does not escape the core fact that the in-group (those who qualify for the program) gets below-market price housing at the expense of the out-group (those who don't qualify for whatever reason) who either must bid higher than they would have without this program or are priced out entirely. And if belonging to a "disadvantaged group" is one of the qualification criteria, then I'm afraid that the underlying economic facts may exacerbate tensions along racial lines.
That said, this is only one person's opinion from thousands of miles away; and I can only say that I'm jealous of what must be the view from your window. :-)
It's code for maintaining low density. (Historically, and still in some places, it codes for race, too.)
Combined with supply restrictions, low density requirements mean (a) skyrocketing prices, (b) rationing or (c) more density. A lot of the conversation has been focussed on (c), which I approve of in e.g. Cupertino, where I grew up. (Turning suburbia into a city solely impacts human concerns in a way paving over nature does not.) But (b) might have more angles to it than the traditional public housing model. (I've also been a favor of public housing built to own, where the government e.g. builds housing and sells it to first-time home buyers at a subsidized price. This not only builds wealth and avoids the patronage problem, it also creates mixed-income housing of the type that's less noxious to NIMBY's than solely low-income housing.)
The town doesn't want to be all remote workers, or remote workers and $100 cocktails because that's what it costs to keep a bartender. Remote workers (like me) are welcome. We must simply pay market rate, versus having dedicated supply. This seems fair given, as remote workers, we have more choice with respect to which housing market we descend upon.
There are situations where this doesn't matter. Obviously if you bought with a lot of borrowed money, and home prices drop significantly, and you try to sell while still owing money you may be in trouble.
But if you pay it off (or didn't borrow) you will own the home free and clear. When you own one home free and clear, the price is almost irrelevant. If you measure your net worth in houses as opposed to dollars, you have 1. If you move you'll sell one and buy one at whatever the going rate is - unless you're looking to upsize or downsize the price is not relevant.
What if I held off buying until prices drop?!?! Well, if you borrow nearly the full amount, it makes little difference. Housing as a percent of income has remained unchanged for 50 years (I saw something recently confirming this). In other words, your monthly payments are determined first and then the bank tells you how much house you can buy - which is exactly why prices vary inversely with interest rates.
In the situations above, the biggest problems stem from rate changes during the course of a low equity housing loan that is paid off early. IMHO we need to get back to 10-15 year terms as the norm.
Still, IMHO it is a bad time to buy. Also IMHO interest rates need to be a LOT higher to fix our economic problems, which would mean big drops in home prices still ahead.
What does this look like in a state like California for property taxes? My understanding is, due to prop 13, your property taxes are a function of the initial price you paid and increase slowly (much slower than housing inflation in recent decades).
That suggests paying a lower price later could have long term impact on cost of ownership beyond just mortgage payments.
Apparently there is a prop 8 that allows the property tax to be reduced if the house value goes down. I wonder if this has actually been applied in practice (2008 crisis?), but the process seems to be a lot more bureaucratic (annual revision of home value) so I wonder if it's even feasible to do this in a down market.
EDIT: This [0] seems to be a concise explanation with an example. Essentially, if you pay P, that's the base value for property tax. On year k you will pay property tax as if the house was worth min(assessed_value, P * (1.02 ^ k)).
If housing prices go down, you may temporarily pay lower property taxes, but in the long term, if house prices keep increasing faster than 2% a year, your property tax will be tied to the P you paid initially.
[0] https://www.sccassessor.org/tax-savings/tax-reductions/histo...
This ignores opportunity cost. Moreover, depending on your community's funding model, your quality of life could be impacted by over-leveraged neighbors defaulting on their property taxes and/or being foreclosed on.
Historical evidence points to innumerable recessions and bank failures even after the advent of the Fed, so it's unclear if they add value above and beyond what the market setting rates would do, but I don't believe that I'll ever get to find out in person.
Are you actually? We recently bought a house pre rising rates. We got a great financing. And if we refinance now we immediately cut 10% of the debt. We don’t intent to sell anytime soon. Looking at the market, even with lower prices now, it would still have been more expensive to finance a purchase after interest increases.
From our perspective it looks like recently having bought is the best position you could be in, except of cause for having bought a decade ago or a decade before etc.
While your home might decline from $500k to $450k, when interest rates lower your home value will climb back up as buyers see lower monthly payments. If interest rates are permanently high, then you got to lock in an amazing rate that will effectively make your housing cheaper - even if your purchase price was higher. If/when rates come back down, your property value will go back up and unless you're forced to sell while rates are high, you won't experience anything bad.
Even if you're worried that maybe you could have gotten a better deal with a lower price and higher interest loan, I wouldn't be. Let's say you buy a home at $500,000 at 4% interest. Interest rates hit 6% and your home's value declines to $450,000. The person who buys at $450,000 at 6% will be paying $2,150 vs. your $1,900 ($250/mo more, 13% more). Let's say interest rates go back down to 4% in 2025. They can refinance at 4% and their purchase price was $450,000, but they've already paid $49,700 in interest. They'd have payments around $1,750/mo (assuming they did a 28-year term) which is less than your $1,900. Ultimately, they'd be paying around $641,000 over the life of the loan against your $687,000 so it's not really that different. Of course, that doesn't consider the fact that the other person would also need to pay the loan closing costs a second time and that if they sold the house after 5 or 10 years, they wouldn't have that 4% interest rate for as long. So you're probably still in a significantly better position financially - unless you're quite sure you're going to stay in the home for 30 years. If you're only going to be there for 5 years, you'd rather pay $1,900/mo ($114,000) than $2,150/mo for the first 2 years 4 months and then $1,750 for 2 years 8 months ($116,200).
Plus, because interest gets front-loaded, you end up with more equity with the lower rate. At 6%, you're getting 0.0008% equity per month instead of 0.0012% per month. With the 4% loan, you've paid off $38,210 over the first 5 years (9.5% of the loan principal). With the 6% loan, you'd pay off $25,004 over the first 5 years (6.9% of the loan principal). Even if you assume that the home is really worth $500,000 and not the $450,000 purchase price, the higher rate still means that you only own 26.9% of the home rather than 29.5% of the home (assuming 20% down). They've been paying a higher monthly and they own a lower percentage of their home!
Again, if you're going to stay for 30 years, buying at a lower price and a higher rate might end up better if you can refinance. However, it does mean that you end up with less equity (paying more interest) earlier in the loan.
Basically, you're probably in a way better position than someone buying at 6% while getting the benefit of downward pressure on housing prices.
<6% mortgage interest rates were only available for a short period of time since the 1970s; from 2010-2019 they were kept low because the federal reserve wasn't seeing the inflation it was looking for. We finally found a decade of inflation.
But 6% mortgage rates may be a best case scenario for the long term.
I entered into a 30-year mortgage at slightly above 3% last year, with a reasonable amount of money down, and my mortgage payments plus tax on a bigger and newer house are substantially less than what I used to pay in rent. Plus I deal with less traffic, I encounter more diversity in my day-to-day life, and people, even the less well-to-do, are happier here. The only real downside has been that overall the availability and quality of fine dining is less here.
Naturally, people don't move solely for the ability to buy a cheaper house, but it is something worth considering, depending on your circumstances. I was in a similar boat as yours before I moved, where I could theoretically have afforded a house where I was, but I didn't want to.
I'm having anxiety about moving from downstate New York to Lexington, Kentucky. I've spent time there, I enjoy the city and the surrounding area, but I keep coming back to "If I don't like it I can always move back", instead of "The upsides far outweigh the downsides. You'll like it."
Thanks for this.
Cincinnati is close and has even more amenities like Jungle Jim's (2x giant grocery stores, 100% go here), CAM, theme parks, Union Terminal and niche museums (Sign Museum, VOA, Air Force Museum in Dayton), various pinball arcades, and places like Microcenter.
Can you name the cities?
Either way, you still moved to a city, so the local politics aren’t likely all that different. Though you did make sure to mention it a few times.
2.6% interest rate.
1.2% property tax rate.
Look for deals; some places need work, or don’t have AC, but can be had for cheap. Most buyers in the GBA don’t want a house that needs even a new kitchen, much less some walls knocked down.
Like seriously.. replacing a countertop is not hard!
You can't really take the investment aspect or any of these others out of the analysis if you want to understand what's best for you. Particularly in countries with policies to encourage/subsidize home ownership the answer is often, "buy a place", but not always.
No tax benefits go to renters. That's one of many considerations here other than raw liabilities.
Agree a investment property is a whole other can of worms, but not really relevant on the "should I buy or rent, personally" decision. For that one, you need to compare to other investments, which is in many ways more straightforward.
Example scenario: New >$3000/mo mortgage, $2000/mo to interest and property taxes = $24k. Have a 5% state income tax?, on $60k, that's another $3k deduction.
I can tell you from personal experience that you are wrong.
This is only true if you assume the same housing at the same cost/mo (including everything). And assume timelines. Usually this isn't the case, so there are definitely scenarios where you are better off renting.
In any situation where the rental scenario results in extra cash flow that you then invest, you can end up ahead in total, sometimes significantly so. It's all complicated by the fact that you are rarely comparing rent vs. buy on the actual same property.
Remember also in the "buy" scenario you have to include closing costs etc. which can affect your timeline. Your 1yr is unrealistic, you'll eat 5-10% of sale price on just that, typically, which may be way more than rent.
The FED only has a demand-side lever, and "decreasing demand" is exactly equivalent to "reducing affordability".
It would be nice to see more attention paid to increasing housing supply, but that is a much more complex problem, so I'm not surprised that we see less emphasis on it.
I do love the US but so many of our cities really are garbage... they stink, buildings are dirty from pollution, roads are littered with potholes and trash, etc. I really don't get why people love NYC that much unless you grew up in the environment and view it as normal.
Indeed. The reason it feels so different in many European cities (and feels much better IMO) is that they are human scale instead of automobile scale.
See James Howard Kunstler's The Geography of Nowhere https://www.goodreads.com/book/show/125313.The_Geography_of_...
I don't think this is actually true. If you spend enough time on Nextdoor and read what nimby's complain about, the chief concerns are traffic, parking, and congestion (after crime and safety). Obviously, there are nimby's who are concerned with their property values, but the average 75 year old nimby isn't interested in selling/moving their property.
If you hate traffic, want more parking, or the like; the easiest way to do that is to just stop building housing, throw up your hands, and say the city's full.
But because doing that also makes your own property more valuable, both complaints are intermingled: people who want more money in their pocket can concern-troll about traffic to sound prosocial. In fact, this commingling has happened for so long that it is difficult to separate out the two concerns.
[0] AI ethicist jargon for "prerequisite you have to do to accomplish a lot of disparate or conflicting goals".
NYC is actually a really pleasant place to live in a lot of respects, and I've lived in several other places. The real problem here is that housing is so expensive. You could drop a bunch of 8-10 story buildings on corners near trains here and you wouldn't really even notice at street level but it would add a lot of housing.
That will really encourage development!
The biggest problem in the country is that investment capital is swooping in any buying any valuable property up and re-selling it for a lot more OR renting it out for a lot.
Because investment is just buying everything for cash, they don't really care.
We need a massive tax on investment property, something that'll require the house to become completely unaffordable to re-sell, so investing will have negative returns due to taxation.
Then suddenly a ton of houses will fly back on the market because investors will be trying to dump inventory.
ALSO property taxes can help: If you live in a house, your property tax is identical to today. If you don't, your property tax is say 10x'd.
Being a real-estate investor won't be very lucrative. Meanwhile this won't affect regular homebuyers since they won't have this tax.
Or far easier, just eliminate the Section 1031 like-kind exchange (U.S. tax provision that allows tax on realized gains on investment property to be deferred indefinitely). There's really no policy justification for it since long term capital gains already have a favorable tax rate, and in fact like kind exchanges for personal (non-real-estate) property have already been recently eliminated.
I don't agree this is the best way. Section 1031 benefits the usual homeowners as well as the investors. Do you own a primary home and want to upgrade? Too bad because when you sell, you will have less money to buy a bigger house. Most people will opt to upgrade when they can and rent out their old home, which won't solve the supply issue.
What does this mean? How would they be able to postpone paying capital gains tax if the government said they had to pay capital gains tax at time of sale?
How about eliminating it, removing an avenue for corruption and extra costs for auditing said avenues for corruption, and giving cash to someone if the goal is for the government to help someone?
https://www.propublica.org/article/billionaires-tax-avoidanc...
All I'm saying is that by eliminating the 1031 exchange, I suspect it'll hurt far more individuals and small businesses (resulting in stifled growth) and the "big boys" will simply use some other vehicle to continue avoid the taxes.
See, you're almost at the real problem: why is that a good investment in the first place? Because there isn't enough housing stock. If there was, investors wouldn't be able to leverage it like that.
Anything that "brings in more space" in any shape or form requires a really solid investment in rail. But unfortunately this is not something the US can do effectively.
[0]: https://mangomap.com/mango-chris/maps/11955/The-Buildings-of...
How about a big apartment building with 10 apartments on the floor, with at least one neighbor per weekend having a party, and half the people letting their doors slam whenever they come and go at night or early morning?
Folks, good news for you - one unit will be available soon, I'm happy to add a vacancy to this delightful city as I age out of it.
Density is not one size fits all. A walkable city guy my whole life, my mental health has taken a real beating. Density is for the young, that's the bottom line. Anyone who is a light sleeper or doesn't enjoy going out a lot at night is just taking one for the team.
I think it's clearly problematic for investors to be holding properties vacant as a speculative investment, and we should definitely tax that (probably at the local level) so heavily that the neighbors are happy to have someone contributing so much while not being a drain on services. It's not clear to me what % of housing stock is actually being held back like this though.
In the middle you have the house-flip; buy property, improve it, sell it for a profit. AFAIK most of the time this involves actually doing work on the property, rather than just sitting on it and waiting for the value to appreciate; in that case a real service is being provided, as many families don't want to buy a house and have to wait to improve it themselves. So again, if you don't target your proposed tax well enough, you might actually decrease supply at the mid-/high-end of the market and therefore put upwards not downwards pressure on housing prices.
To be clear I'm not arguing against making any investigation into the policy you propose, just suggesting that it's more nuanced than you appear to be stating.
so when house prices flat-line, their investment thesis is fried.
Obviously the clever PE funds have a way to deal with this. But not all of them are clever, and the question is which one(s) are going to blow up?
It isn't The Big Short, but there is a systemic risk from the PE investment
Mortgage rates are demand side. But rates also influence all sorts of supply-side inputs, from the cost of developer financing to the cost of holding inventory for suppliers.
See a completely plausible causal chain:
Inflation up -> Rates up -> Housing purchases down -> rental demand up -> rental prices up -> inflation up
People who can afford to pay $2K mortgage to live in a X percentile house will continue to pay exactly $2K to live in the same X percentile house. What does change when the interest rate varies is cap gains/losses for everyone involved. There are also some transactional fee variations, obviously a 3% real estate agent commission will be more on a $500K sale than a $250K sale, but the monthly mortgage payment will remain identical. Also fixed transaction costs (inspections, certain taxes and near-taxes) will be a higher percentage of the sale price.
My prediction would be the transactional fee middlemen will demand higher percentages to maintain their revenue stream as interest rates rise. They're certainly not providing any additional value, so I would imagine there will be more competition among middlemen, opportunity for startups to disrupt the market, etc.
A few areas have rent control, that's about it.
Bill Clinton, in particular, made increasing home-ownership a primary objective of his presidency [1].
Unfortunately, many of the Clinton-era policies, however well intentioned, ended up making homes less affordable due to greatly increasing demand for homes (by making it easier for more people to get mortgages), without increasing housing supply.
1: http://www.4president.org/issues/clinton1996/clinton1996hous...
The Clinton-era policies did seem reverse the trend in the 80s, so that's something. Hard to say if post-pandemic inflation will disrupt that though.
Affordability does not mean "owner occupied". People who mortgage 99% of the value of a home count under that category. Having a mortgage that will take you the rest of your adult life to payoff is not affordable under any real use of the word.
I have an uneducated hunch that due to houses becoming more of an retirement investment, older people with no dependants are not downsizing, causing downward pressure and not allowing younger people to move into larger houses to raise families.
Also, with the temporary (TCJA) increase in standard tax deduction, fewer people than ever get any tax benefit for their mortgage interest, not to mention those who don't have mortgages because they've lived there so long.
Move somewhere else! Tons of houses are constantly being built where I live, in a flyover state. Not everyone gets to live in San Fran or Chicago.
But hey, apparently the answer is to burn 10 hours of your workday instead of feeling 'entitled' to a modern, average-sized apartment while earning far above median. Next up, stop feeling entitled to a personal toilet and kitchen, middle class plebs.
The people screaming the loudest about the need to build are exactly the same people who recoil at the thought of living more than 100 meters from their heckin' microbreweryarinoes.
Life is all about tradeoffs. The United States is extremely large. It's not anyone's fault but your own that you, who can literally write adtech spyware for $300k from anywhere, refuse to entertain the notion of living outside the bugman bubble.
Remote work is definitely a thing now.
> where the climate sucks
Like Boston, Chicago, Seattle, and countless other hellholes that the Urbanite loves nonetheless? The weather sucks, in different ways, pretty much everywhere other than the California coast. Most parts of the Mountain West are much more pleasant than most cities.
> no interesting things to do outside
Good point. A postage-stamp-sized overcrowded city park with human feces and needles is definitely preferable to actual nature.
Unless your opinion is that it's a human right to be able to take free public transit 20 minutes to breathtaking mountains and 20 minutes the other way to pristine beaches and have it be 75 degrees and sunny every day, and everyone is paid a "living wage" no matter what they do?
Chicago is actually cheap because the city has historically allowed buildings. Huge swaths of the city are made of mostly 4 flats and 10+ unit apartment buildings, which means that my rent in one of the hotter neighborhoods is $1500 for a 3 bed.
Only saving grace is home prices are falling in my local market (Austin, TX) and builders are willing to negotiate more for inventory homes. But it's not falling fast enough proportional to the rate hikes.
I guess this is working exactly as designed for the Fed, but it sucks.
People definitely seem unsure. Funny, I remember the early 80s, when rates were around 18%. The house my parents bought back then was, in part, selected because the existing mortgage was transferable and at a lower rate (~9%).
The last decade of rates below 5% are an anomaly. Average over the last 40 years is somewhere in the 5-6% range with many periods well above.
I've never heard of transferable mortgages! I'm guessing they've been phased out due to changing regulations?
And if rates go down enough, refinance!
Even though 6% interest is still low by historical standards, today's home prices in my areas of interest are the highest they've ever been. However, I'm still interested in purchasing now because I don't believe prices are going to drop substantially in my area. There needs to be more housing in order to meet the demand, but Santa Cruz and Monterey counties (less so San Benito County due to the growth of Hollister) have historically not been keen on large-scale development. Thus, supply hasn't increased very much, while demand has been increasing, especially when the pandemic started when the prospect of working from home made commuting to Silicon Valley less of an issue.
Very negreated market. Everybody squeezing, everybody trying to corner, everybody seeking to conspire, everybody out to fuck you. Less so as you go inland, but to an extent still. Just considered easy money. You and me, anybody who hasn't bought in yet gets negreated. Anything but supply and demand. Dude that's why startups attempt to take on this kind of markets and always fail, that medicine and education, always nosedive, why? Highly negreated. Negreado, treated like a source of free labor, ie like negros especially bozales (direct from Africa) were exploited in Chile. It's supposed to be real estate agents just make shitloads of free money. Like three phone calls boom 60000 USD. No effort. Just sleazing. Connections. Access. So it can't be disrupted, really. The whole industry is set up as an economic army prepared for disruption with...with anything. Everything on the table. You think the entrepreneurs before 2006 couldn't see inefficiencies? Couldn't say hey I can do it better? Didn't have the internet? There were phone lines, there was fax, sneakernet, there was tons, and there was internet going back to the 80's. A professor told me of a spreadsheet business online in the 80's. Dude, the reason disruption can't happen is because everybody backstabs it right away. The industry is that. Also sometimes build houses, also sometimes prescribe some pills, also sometimes actually hand out sheepskins. But the intent is to deny, not supply.
Deny and demand.
And they are doing the same for everyone else who needs a mortgage to be able to buy. So, what's going to happen is that in a month or so, house sellers are going to realize that they can't get the same price now that they could six months ago.
Offer a price that makes your monthly payments comfortable, even if it's less than the seller is asking. If everybody else is in the same boat, and nobody else offers more, then the seller has a decision to make - your offer, or nothing. It can take a while for them to decide to bite that bullet, though.
Note well: I'm not a realtor, nor a real estate investment guru. This is just the way I think this plays out.
Exactly what my plan is. At least it's encouraging that sellers are willing to negotiate now.
You local housing prices are more of a function of local supply/demand which is partially disconnected from the national scene. So yes, national mortgage rates going high will knock out some potential buyers. At the same time (at least in my area)... rates have gone up... local inventory of available homes has gone down (people just choosing to not sell) and thus housing prices are remaining mostly flat even as national mortgage rates rise.
For those who are buying cash then it's great! Housing prices are falling!
https://twitter.com/wanyeburkett/status/1558489610304589824
The conventional wisdom is literally the opposite of what's been happening. The recent run-up is notable in that it wiped out a bunch of those gains and took us back to levels last seen in 1989. In other words, housing has been getting more affordable since 1989 -- again, literally the opposite of what people think -- and we've just now gotten back to those levels after a historic run-up in prices (and, of course, things were much worse before 1989).
Every generation thinks they have it worse than anybody before them, but you should always be extremely skeptical of such claims.
To add to that if you were a cash buyer, yes its cheaper than last year but I would probably hold because theres lots more to come out of this market as the rates go up and the sustained pressure of higher mortgage rates filter through peoples personal costs.
I'm just happy that people buying home property strictly for speculative purposes are feeling heat. I'm looking at REITs etc.
That’s at least 35k of interest alone if they they don’t buy a house and put it in a treasury bill.
If the interest rates continue to raise, which they might suspect or a recession happens, then house prices would drop and their 1M house may be a 950k house in a year. A net loss of 85k versus safe treasury bills.
Maybe if they rent they can only be out 50k in that scenario.
This isn’t definite but people comfortably sitting on piles of cash do have reasons to pause too.
(I’d love to be in that situation)
I don't buy your logic.
- On this day in 2021: $1,242/month
- Today: $1,818/month
- After two more rate hikes: $2,160/month
And looking at it from the other side. If your budget for a house (no T&F) was $1,300/month you could afford:
- On this day in 2021: $300,000 house
- Today: $210,000
- After two more rate hikes: $180,000
...what's going to happen when people who bought a house during the last 12-18 months need to move? Home prices haven't appreciated enough to offset the dramatic reduction in purchasing power, and rate hikes are dampening demand which will eventually put downward pressure on prices.
This is going to be a disaster.
Edit: Also, I don't pay for water, heat, or trash, so these prices with that in mind are a bargain in my opinion but for anyone else that isn't making my salary or similar it's still a pain.
They'll maybe need to rent out their houses instead selling; which might include them finding a smaller temporary housing.
But this should be a minimum exception of people, right? Sure, relative to the quick flips, 7 years is a long time, but the majority bought to stay, right?
Or, assume rates go up. Then you've borrowed money at 6% in a 10 or 12% inflation environment. That's not bad, either.
Personally, I'm not sure that I like "load up on debt" as a strategy, even if it makes sense financially. But it can make sense financially.
Note well: The hidden assumption here is that interest rates track reasonably well with inflation, and also that your income tracks reasonably well with inflation. The first assumption is probably reasonably solid. The second one... your mileage may vary.
Hosing prices have always been higher than I would like them to be. However, there has been no shortage of people willing to pay those high market prices.
At the end of the day, I had to ask if it was the market that was irrational or just me.
https://themortgagereports.com/61853/30-year-mortgage-rates-...
*Was still sort of true if you had a VERY expensive house.
My parents paid their house off after 7 years, but that is quite a lot easier to do with most of your payment is high interest rates and you have a much smaller principle to attack.
The house I grew up in is a raised ranch ("high ranch") in a suburb within easy commuting distance to Manhattan (Rockland County, NY). My parents bought the house in 1969 for $40K, which seemed high to them at the time. Right now it probably fetches $450K easily, in this arguably inflated market. But I remember conversations from the last '80s where the house was thought to fetch $350-400K. The price dropped a bit after that period, and then went back up.
Maybe my memory is faulty. But I do remember a period in the "go-go" days of the waning Reagan Era where prices in that area were quite high.
Somebody’s doing the subsidizing.
The rate of inflation 5, 10, 15+ years from now is what matters.
But if you think inflation really will be that high for so long, I got some TIPS to sell you...
Do you think I'm going to refinance today? No. The bank is stuck with 2.3% from me for the next 15 years. Its a bad deal for them, and a great deal for me.
As long as interest rates go up, there's no refinancing to occur. Its financially the wrong move for the property owners.
Inflation isn’t likely to stay 8% for long.
Do I love my 5br house in Seattle that I pay only $3200 a month for? Yes. Low rates and low prices made that possible for a brief moment in 2020.
Will we be here forever? No… I don’t think I want to raise kids in the city. Everything is densifying and that’s not for me. But as rates continue to rise, the financial cost of moving seems increasingly large. We might be stuck here for the entire mortgage term if prices drop below 2020 prices, which is feasible if rates continue to rise for the next few years. Payment a few thousand a month higher, purchase price a few hundred k lower.
I could always rent it out. I really do want to preserve this old house and it would need to go the right tenant that takes care of it, likely for a below market rent in exchange. However, given how absolutely unfriendly rental laws are in Seattle and how little choice I’ll really have in a tenant as a result, I’m very averse to that. Maybe I’ll just leave it empty once enough time passes for the payment to be inflated away to a negligible amount.
I suspect inventory will stay low for these reasons. People either can’t move, don’t have an incentive to rent out their place, or will rent and not sell to avoid catastrophic losses.
With tenants in the house, you'll be doing regular maintenance anyways, especially at turnover. You might find some damage once in a while and repair it over the years. This is damage you probably wouldn't find if you lived in there yourself, because you wouldn't have the "turnover" event triggering a deep check. But also, you might avoid the damage in the first place, who knows. Overall though, it's minuscule expense in comparison and it's not like the house will be ruined out of it. A decade or two later you'll want to do work on the house anyways before you move back in.
I think renting out is actually a lot better than you'd think. A good property manager will help you find good tenants and save you a whole lot of headache, save you from getting yourself into iffy legal situations, etc.
Additional legal protection for renters usually decreases the supply of rentals for this reason, and it's the exact same reason why unemployment rates are higher in countries where employees are very difficult to fire.
Now it seems that Seattle prices dipped (ignoring Queen Anne) and all the neighboring suburban towns skyrocketed: Carnation is hitting >US$1M? Monroe pushing $700k-$800k? Homes in Kirkland have always been high, but looking at $2M-$3M. Insane. I want a quieter neighborhood for my family, but doesn't look like I can move, ever. I feel trapped in, and if I'm not alone in my situation, inventory will remain low, keeping these prices high and unaffordable.
And likely renting is a hell you don’t want to get into unless you can basically rent to family. Landlords are not loved.
Given how bad the tech sector is doing now that the real world is back post lockdowns, I’m not comfortable taking on that much more of a payment.
Moving to a more expensive monthly payment in a school district where you don’t need to send kids to private school to get a good education can save thousands of dollars, for example.
But I know how it is. I had an underwater house in CA for 10+ years before I could refinance.
A nice middle class suburban house in Detroit bought in 1965 may have seemed like a safe investement. Today it could be worth nothing.
Who knows where the next Detroit will be?
[1]: https://www.realtor.com/research/us-housing-supply-gap-expan...
China has completely built out cities just waiting for hundreds of millions of people to move in, but we enrich boomers by subsisting and effectively subsidizing mortgages from the same suburbs built in the 60s and 70s.
No need for derogatory boomer comments - dates your comment and experience.
Add in landlord unfriendly policies, and rents go up even more. In some areas, these policies are driving out individual landlords, leaving only institutional investors who look for any excuse to raise rents.
Rents are expensive now with no end of increases in sight.
Modern civilization is extremely dependent on affordable energy.
Why?
If you are buying a new house, most construction materials (bricks, concrete, steel, ceramics) require huge amounts of energy when produced and therefore are now more expensive than before.
If you are buying an older house that needs renovation, you need to invest a lot more into insulation etc., lest your heating bills become terrible.
The price should not be a function of the interest rate, it should be an independent variable.
Little has changed from 2008.
And what should that variable be based on?
House prices = How much the buyer can afford (savings and income) - Cost of interest
You are saying that somehow we should ignore the cost of interest, but like, how???
If interest rates go up, House prices go down. Makes sense to me.
Your point that if the fed didn't control rates that somehow house prices would be independent of interest rates, but that's not how house prices work.
What are you seeing that I'm not?
For the vast, vast majority of homebuyers the only number that matters when purchasing is the monthly mortgage. If the totally monthly payments of a $550,000 house at 6% are the same as a $800,000 house at 3%, well, technically you can pretty much "afford" both houses. In the end, the total paid cost for the house after 30 years is more or less equivalent (assuming your rate is locked and you don't refinance ever).
I am not an expert by any means, and perhaps I am overlooking details.
Housing is currently viewed as an asset, however the system in place provides an asymmetrical risk/reward profile between buyer and bank. Whether a bank finances a house at low price/high interest rate versus high price/low interest rate is of little consequence to their cash flow, in the end, they will make the same amount on interest. The buyer will pay the same amount month over month.
Once the homebuyer pays off the home and owns it, when they go to rent or sell, do they benefit from a changing interest rate? No. If the interest rate is now higher, then their list price is now lower. If the interest rate is lower, then their house price goes up yes, but the buyer demand now decreases.
The bank has the interest rate as a tool to mitigate their risk, but the individual does not have that tool, so they are exposed to the risk of changing rates, with no upside.
If appraisal values were regulated from increasing rapidly, then the bank would be taking some risk away from the buyer. The home seller in that situation would sell for less, but the result would be smoother and more stable of an asset for all individuals.
In the current system, the individual is more at risk of over leveraging than the bank, who should know better. The risk of over leveraging should be shifted to the bank, as they have significantly more resources and wisdom to mitigate that.
Look up "appraisal gaps" in 2021 news. Appraisers and banks already try to curb this some - the bank doesn't want to loan more than they could get back if the market changes an over-leveraged buyer goes bust and they owe more than the property is now worth in a new situation - but guess what else happened recently? The stock market went up up up, crypto went up up up, etc... buyers had enough cash to cover the gaps.
The difference between now and 2008 is that people had much more numerically-sound financial footings to drive these bidding wars. So I don't expect it to implode without other things imploding first, this time around (you could argue that they had those sound financial footings because of inflation in other markets, like stocks, but the stock market has merely corrected to pre-2020 trends, not imploded).
You've answered your own question. The house is appraised high because homebuyers can offer a higher number on a house to win a bidding war.
price is not independent of interest rate, and no collusion is required. Only supply and demand.