U.S. mortgage interest rates jump to 7.16%, highest since 2001
reuters.com
reuters.com
I don't think most people who invested in housing in the last couple years, are ready to believe that yet.
Current renters will have lower potential to save on a monthly basis, only to get 30-40% off on their first home with a >7% interest rate. If you sum the lost savings from rent plus the additional interest payment, it is uncertain whether that is the best strategy. That is also assuming real estate prices in certain regions wont hold stronger value, which they probably will. Some areas in the South East, Midwest, and Front Range will likely not see such a drop in value with respect to interest rates and mortgage payments. The demand is just too high.
Not to mention that rent is collected by people who are now in a better position to purchase newly discounted real estate without loans, further fueling price demand by competing against each other and shortening supply.
Not just that but looking further out at retirement, downsizing and staying in the same area is not looking possible. The house might be worth $X on paper at that point but if you sell you are then thrust into a market where everything is much higher. Its financially more palatable to just stay put even if you don't need the space. I imagine people within a couple years of this decision are staying put right now and this will keep demand up regardless of rates.
Most people don't plan on selling their house when they buy it. Life usually forces you into the situation.
I mean, most of us aren't even able to afford to buy a home, let alone casually upgrade to a "forever" home. In my high COL area, even starter homes are only affordable for top 20 percentile earners. Everyone else either lives with roommates or parents and rents.
https://www.zillow.com/homedetails/319-N-11th-St-Nebraska-Ci...?
$125,000 -- 4 bd, 4230 sq. ft.
https://www.zillow.com/homedetails/31237-County-Highway-62-U...?
$80,000 - 4 bd, 1547 sq. ft.
https://www.zillow.com/homedetails/711-W-North-St-Norton-KS-...
$149,900 - 5 bd, 1980 sq. ft, on 10 acres
https://www.zillow.com/homedetails/N4675-State-Highway-52-Br...
$104,900 -- 4 bd, 2300 sq. ft.
https://www.zillow.com/homedetails/316-E-Franklin-St-Clinton...
$55,000 -- 6 bd, 2198 sq. ft.
https://www.zillow.com/homedetails/4554-Holly-Ave-Saint-Loui...
Zillow links don't prove whatever point you were trying to make with the low effort post.
> In my high COL area
Yes, it is a problem that Millenials refuse to live anywhere other than Instagram-worthy locations. God, what would Becky think if I posted a TikTok from flyover country? And imagine shopping at Walmart, I would literally die frfr no cap.
How we could ever solve this vexing self-inflicted problem, I have no idea. What a quandary.
> seems like a very outdated concept
Yes, much like the outdated concept that building tangible wealth in underpriced assets is worth the cost of a slightly lower number next to the heart icon. Fucking boomers, amirite?
Probably because I don't even use Instagram, so I wouldn't know what it looks like to be in one.
> And imagine shopping at Walmart, I would literally die frfr no cap.
I'm glad you were able to find Urban Dictionary on the internet, and not get lost. If only I was such a digital native like you.
> Yes, much like the outdated concept that building tangible wealth in underpriced assets is worth the cost of a slightly lower number next to the heart icon. Fucking boomers, amirite?
Yes, you are right. Not sure what about, though, since I'm not going to waste any effort parsing your word salad.
Frankly, I'm vexed by the trends as well, but from the opposite direction - I liked when South Texas was the backwater and Austin was a weird little city, but I don't think there's any going back. My property taxes sure aren't. I'm just hoping that I can make enough to retire somewhere cheaper and cooler in the summer eventually.
It's cheaper to rent than to buy in many markets and if you own you have to factor in maintenance, property taxes, and insurance. It's definitely not as black and white as you're making it out to be.
Around here, if you rent, your landlord factors those things into the rental price. Admittedly not necessarily the insurance; that typically is just a requirement of the lease.
If this keeps supply low, why does anybody have hope housing prices will fall in a meaningful way over the next 3 years? (aka, people on the sidelines waiting for a pullback)
One way to look at this is to ask people what they plan to do. Another way is to look at what they've done.
According to this article, the average length of time spent in a house is 8 years:
> https://www.thezebra.com/resources/home/average-length-of-ho...
So unless those people you know just moved in, they're X years into a average 8 year occupancy.
>
> https://www.thezebra.com/resources/home/average-length-of-ho...
Okay, using your own reference, they also say that the median was 13.2 years.
Anyway, from that article you cited, a stunning 76% of homeowners stayed longer than 8 years.
It seems what more than 3/4 of homeowners do is simply live in the damn thing.
There's so many predictions but my take is simple, the only thing for sure is that prices are not going up anytime soon again.
I'm still renting as I moved around a lot for jobs. I've saved hundreds of thousands of dollars, and intend to strike in 2023. I'm still looking for deals in the meanwhile, but most of these sellers are bitter that the market from even at ~5% in the summer is gone. And by and large the buyers disappeared in March in my region.
At a certain point, prices do have to match the cost of borrowing money. That's the trap of cheap loans. Those that got ~3% loans are stuck in whatever home they chose without a loss. They can't sell because most used that cheap money to pay ahead on decades of gains. Finding a sucker at 7%+ is going to be impossible, because short-term minded people simply don't have the money or means. And there's only so many generous and wealthy fathers to go around. Even those dads or investors don't want to take a risk in a market that hasn't bottomed out yet.
Once again, as always, cash is king.
But taking it at face value, selling when prices are high is often a net-zero since you have to buy back into the same hot market (likewise, selling in a cold market can make sense if you want to upgrade into the same cold market). Selling in a hot market is only a net win for investment properties or second/third homes, and those people often can wait out cold markets (but sometimes they are leveraged like crazy and can't!).
As long as there's someone in the vicinity selling at a lower price your house would lose value either way. And there's always someone selling.
Your second statement I wanted to agree with but you never really win with any mortgage (other than getting a home, which is important).
You'll pay for any house at any rate 2-3+ times over if you just pay the minimum payments. When you go to sell it at the end, your home will not have doubled in value or more. Not for anyone born after 1980 at least.
The only way to win financially is to pay off the house, or beat out usury by producing reliable market gains or other income to outpace it. Easier said than done, I would just pay off a home as fast as possible.
Maybe that's the problem - making only the minimum payments?
The people making only the minimum payment due would probably have screwed themselves in other ways, financially, even if interest remained the same.
I bought my house in Dec-2016[0]. My outstanding principle owed to the bank right now is just a hair over 17% of what the original principle was when I was granted the loan.
Whenever my circumstances improved (wage increases due to moving jobs, cash bonuses in employment, etc), the extra money each month always went into my mortgage, despite complaints from my wife that we could do with a nice holiday in some other part of the world (or that she could do with a new car[1]).
That's basically 6 years. Now perhaps there are people who did not have their income improved over 6 years, but I don't think that the majority of borrowers experienced no income improvement[2].
The real problem is that borrowers have been making the minimum monthly payments, and spending the increased income elsewhere (new iShinies, new cars, new furniture, expensive holidays ... whatever).
People underestimate just how much inroads they could make into their principle if they didn't have high monthly car payments, or "need" a 24-month cell plan that basically sells them the phone at twice the price because "Look, I get all these minutes and data for free each month".
[0] I'm not in the US, although in the country I am in, I'm in a fairly middle-class and desirable area
[1] As someone who can rebuild just about anything in an ICE car, I keep her car running just fine, even though it's a 2011 hatchback.
[2] I admit, I experienced drastic income improvement (roughly 40% increase) when I switched from being an embedded developer to a backend developer. Completing an MSc didn't hurt either.
Maybe not at 7%. Maybe not at 3,5% either. But at 1-2% fixed for 10-20 years and you don't have to refinance, you win. So your statement is a bit broad.
I think it's a good exercise to compute the total interest over the time of the credit and relate that to the cost of renting.
If you do sell, and the prices are higher, then you have won.
If you do sell, and the prices are lower, then you have lost.
The risk here is a home's value dropping a lot, putting somebody underwater, and then life circumstances forcing them to sell. That's bad. But for the rest of us that happily make our mortgage payments it doesn't mean a thing if the spam emails from Zillow show a new number.
So it really depends on how large the amount of people who don't want to but have to sell is compared to the amount of people who are looking to buy.
1) Mortgages dropped below 3.5% in ~2019. The median duration of home ownership in the US is 8 years. So: asserting that "most people I speak to who have locked in <3.5% are not planning on selling in the next 10 years" is kind of like... That's normal. Statistics assert they weren't going to sell independent of rates.
2) People severely underestimate how many houses in the US have no mortgage against them. Its somewhere around 35-40%. That's oftentimes because: the typical home seller in 2021 was 56 years old. The friends you queried are (probably) an anomaly in the market.
3) The reasons cited for why home owners sell their properties is far more varied than financial. The most typical reasons are: current home is too small, want to live closer to friends or family, moving for work, the neighborhood is becoming undesirable, and... death. Even in lower interest rate environments, most of these reasons would have resulted in a higher monthly payment; that's reasonably normal. The monthly payments today are, well, much higher; but the fiction that "I'm not selling because I'll end up paying more" doesn't really have basis in the core motivations for home sales (they might in the absolute pits of a recession, but that doesn't usually last long; certainly not as long as elevated interest rates; and even if they did, plenty of people end up being forced to sell because of money; but they're not going to go buy a new home in this market).
4) Happening simultaneously with rising interest rates is: the largest transfer of wealth in the history of the united states. Boomers are dying. Its estimated that, as their deaths accelerate over the next ten years, $30T-$60T in wealth (most of it in: real estate!) will be inherited by younger generations. Those numbers are mind-boggling. Its estimated that millennials, as a generational cohort, currently hold something like $10T in total wealth.
Point being; there's a lot going on right now. Its really difficult to draw single-post conclusions about any of it.
https://fred.stlouisfed.org/series/MORTGAGE30US
https://www.thezebra.com/resources/home/average-length-of-ho...
https://www.forbes.com/sites/brendarichardson/2019/07/26/nea...
https://www.nar.realtor/research-and-statistics/research-rep...
https://www.forbes.com/sites/josephcoughlin/2021/11/16/mille...
Doesn't help if rent eats all your paycheck, but if people are able to save they should be rewarded for doing so, and allowed to use that for a first home purchase.
https://www.investopedia.com/ask/answers/081815/can-i-take-m...
That said, both of those generally sound like poor choices, but if you truly need it they are options(if your company allows loans). Saving for retirement is really meant to help you in retirement.
The conventional wisdom that borrowing from your 401k to buy a house is always a poor move seems... overly reductive and a bit patronizing.
If someone isn't able to fund their 401k and save for a down payment, who am I to tell them that using a tax advantaged vehicle is a bad way to become a homeowner?
Mortgage rates, local rental prices, local home prices and inventory, living situation and likelihood of moving, tax situation, etc. all impact, and I don't know anyone's situation.
Besides, who wants all the money in the world if you have to spend most of your life living in a place you hate?
Even if they stay in their home, people over-levered on their fake housing equity through HELOCs are in trouble.
Wolf Richter shows some nice graphs in the article linked below. He states that mortgages in Q2 were $11.4T and HELOCs a mere $320B.
https://wolfstreet.com/2022/08/04/trip-back-to-reality-start...
Don’t forget there’s a small but still notable number of homeowners with ARM mortgages.
This also ignores the fact that the Fed's stated goal with raising interests rates is to increase unemployment to slow inflation. You are already seeing the results in quarterly financials. Once layoffs start happening people won't have an option but to sell when they can't make payments
Yes?
Why wouldn't you?
It seems pretty short-sighted to just put your arms in the air, give up, get foreclosed on, lose your home, and have your credit be absolutely wrecked for the next 7 years.
Just keep making your payments and ride it out. The market will eventually recover.
I think the only reason to give up is if you fell for the scam that is an adjustable-rate mortgage and your payments are skyrocketing and you can't afford it anymore.
"Eventually" is doing a lot of work in your comment.
Buying a house is akin to putting your retirement into the stock of a single company. In that situation, it doesn't matter what the S&P500 tends to do on a long enough timeline.
1. People that buy a house will stay in it for 10+ years. This assumption being wrong means you're more likely to be affected by market swings.
2. Market swings won't be massively significant, for some definition of "massive", and I consider 275k -> 115k massive. Meanwhile, the Z-estimate of my house peaked at $618K this April, and is now at $561K. I would not consider that one massive.
3. That people stopping making payments because it's underwater, and not some extenuating circumstance, like losing your job and being unable to afford payments, or having a need to relocate that is unrelated to your home being underwater.
But it's #3 that really gets me. I fail to understand the "My mortgage is underwater" -> "I should stop making payments" logic jump.
I think it's because I do not see my house as investment or even an "asset". It's my HOME. I agreed to pay $338K in 2015 to have a HOME. If there was a real estate crash immediately afterwards and I was underwater, my only regret would be that I could have bought the house cheaper if I had waited a little longer. I would not in any way feel incentivized to stop making payments and walk away, because not only would that mean I would still owe the bank money, but I wouldn't have a home and my credit would be destroyed, making it hard to get another mortgage.
That being said, I don't expect 2022-23 to be like 2008-10 for housing.
Is that part repeating now too?
Your second question is interesting, I really don't know whether the securitization of mortgages is still happening today at the same level it was then. I would presume so? With a different risk model being employed to assess those mortgages, maybe?
Your comment misses what created the popping of the bubble. The sibling comment talking about sub-prime mortgages talks about them, and I think they're right.
I was always under the impression that the crisis began with people that couldn't pay their mortgages because banks were handing them out to people that couldn't afford them. This created downward pressure as foreclosed houses flooded the market, and irrational people decided to abandon their mortgages because they were underwater, exacerbating the problem.
> Perhaps you're too young to know this story, but this is what happened.
I'm 40, if that helps. Though in 2008, when I was 26, I was managing a Subway restaurant for $10/hr and living in a $650/month apartment (Which is now a ridiculous $1,300/month, literally double), whereas now I own a house and work in cybersecurity for an order of magnitude more.
Well, you could ask the very large number of people who defaulted on their underwater mortgages in previous housing crashes.
Does everyone do it? No.
Do a significant number of people do it? Absolutely.
As a relatively new first-time homeowner (a year), do you know whether a mortgage lender requires higher or additional insurance coverage for an underwater property?
If the loan goes underwater later, usually because of market conditions, maybe because of creative loan features, then the lender has no leverage to require anything.
You are required to have insurance when you have a loan on a property. The insurance rates could actually drop due to lower cost to replace your house.
Underwater property just means you owe more than it is worth. However, if your interest rate is low, you might be paying less than someone who is not underwater.
Because it's upside down? You can buy another place and owe less on it?
(not legal advice, educational purposes only)
Apparently, there are only 10 non-recourse states as of 2009: Alaska, Arizona, California, Hawaii, Minnesota, Montana, North Dakota, Oklahoma, Oregon, Washington, and Nevada. The tricky thing is that only the initial mortgage is non-recourse. A refinanced mortgage becomes recourse, but interestingly, they don't seem to be required to disclose that in the disclosures.
Washington isn't really non-recourse, lenders have the option of recourse or non when pursuing foreclosure, non-recourse is significantly faster and is predominantly chosen; but if it was known you had assets, they might choose to go recourse.
Yes? Our home keeps the rain off our heads. I’m not going to risk that by not paying my mortgage just because I couldn’t sell my house right now for enough to cover the mortgage.
The payments might be comparable to if they got a current rate mortgage at the current value.
There's reasons it would be nicer to have a lower loan balance at a higher rate and the same stream of payments, but it's probably not worth the cost of moving and a foreclosure on your record.
This means that prices are more likely going to be determined by the supply-demand balance between first time buyers, investor activity, new home builders, life events (death, divorce, etc...) and immigration vs emigration. I personally think that if employment holds steady, we will see more of a sideways market with some regional variances, but if employment starts going down then do does housing.
And a lot of people end up having to sell.
As someone who was too young to climb aboard the price bubble of the last 5 years: here's hoping.
Now it we are facing truly cataclysmic long term situation down the road never ever seen before (or at least comparable to 1929) that's a different story, but few insiders believe that now.
In other words, there aren’t enough homes and corporations sitting on some percentage of them is making the situation that much worse.
So those who have recently bought a property, even corporate buyers, are far far more likely to keep a property occupied than most landlords.
This caused management funds, BlackRock Berkshire etc, to start purchasing the homes as investment vehicles. These vehicles then will either sit on a house or simply rent the house out at a rate that makes fiscal sense, regardless of the economic realities.
This artificially restricts supply as they take these houses off the market, they don't care if the house sits empty for years as long as they can sell it at their target price, and then at the same time causes rents to be raised as the rental prices are set by an internal ROI formula and not what the local market can bear.
But I can not for one moment understand a cooperate buyer not renting it out; they have more than enough capacity to rent out homes, they can spread risk across lots of properties, and any time not spent renting is merely money left on the table, which would come back to bite any manager that is leaving a lot of money on the table.
SFH are a pretty insane choice of RE investment for institutions because they are so incredibly inefficient compared to apartment and office buildings.
Private owners would also sit it out if they can. Unless they can't. You think that's better? People having to sell at a big loss?
I think a far bigger concern is shortages of housing as individual homeowners and landlords act as a group to suppress local supply of housing. Local city councils tend to be controlled by such real estate interests. Corporate purchasers can piggy-back on that sort of regulatory capture without expending a single dime.
But the same people that are usually against corporations buying properties, are usually against new home development and increased housing density. I saw many housing activists in the Bay Area who were against new housing at market rates and thought all new housing should be at below-market-rate prices--which simply isn't possible.
Sounds like a supply issue.
Because it isn't going to happen. The people who invested in houses years ago locked in a low interest rate, and will happily just rent them out to cover the cost until they appreciate again.
Employers are having trouble finding labor, the government has its foot on the neck of the non-green energy sector, the world is not producing like it used to when prices fell in the past.
The price at the margin will never exceed what the marginal buyer is able to pay, regardless of supply.
What you get in a case like thiswhere even parts of the middle class may be essentially homeless, is widespread social unrest. At that point, expect regulators and governments to take measures to make sure the supply of housing becomes big and cheap enough for at least the lower middle class to be able to afford a place to live (even if they have to rent). Unrest is more damaging to them than some unhappy homeowner lobbyists.
And by cutting the red tape, it's possible to make housing MUCH cheaper than it is today (at least per housing unit, if not by area).
I'm not at all following why it's obvious that mortgage payments will have to be the same for the same house as they were at ~2021 for rate hiking to stop.
If you "invested" in housing, you get what you deserve.
My house serves a functional purpose. It is not a status symbol, it is not a means of extracting rents from others. It shelters and operates as a home base for my family.
Real estate "investors" who lose everything in this next cycle will elicit precisely zero tears.
Housing prices are determined largely by what payments people can manage to make.
At 3.22% (the approximate rate on Jan 1 2022) A $2000 payment can finance $462,000. At 7.7% (what google says is the current average rate) it would only finance about $280,000. At 12% (my personal guess at where rates will peak in about 18 months before quickly returning to around 7% for several years after that) it will finance $195,000.
Additionally, there are very ignorant people that took out ARM loans even though interest rates were historically low. Those people will almost all face foreclosure in the next few years, very few people can afford to make a mortgage payment that is 3x what they signed up for.
Would you share some of the thought process for how you arrived at that guess? This is not at all my area and while I can understand how someone might guess "rates will continue to rise for at least a while longer" I don't really have an understanding of how / with what information someone would arrive at such a specific, multi-stage prediction (i.e. you picked a peak, when it will be reached, and what will happen after).
Secondly, we've seen rates higher than 12% during periods of much less inflation and a greater ability for the fed to curb inflation via interest rate increases (specifically the early '80s).
A terrible time to be looking for a house.
All it will take is one more economic blip and your 2nd scenario becomes true. Which I've read a recession is to be declared before the end of the year and it's a sure thing.
We're already have improved conditions for home buying unless you're cash poor. I know I'm in a better position than I was in March of this year. I've been working these sellers hard and they're powerless. By January through the rest of 2023, they're going to be completely at a cash buyer's mercy.
The zero-savings lemmings are out of the market. The ones that foolishly drove up their own prices, instead of pocketing the savings on 3% loans.
I'd bet on Powell fulfilling his promise to correct real estate prices to affordable levels. It's nowhere close to being done yet, so everyone that bought a house with cheap money better like what they purchased. Probably not, since in the 3% era you had about 30 minutes to decide if you were going to buy the home or not.
A lot of folks think that higher interest rates are going to result in more people sitting tight which will lower inventory, which in turn will keep prices high. But for most folks, when they sell a house, they are also buying a house. Their net effect on supply/demand washes out. The market is going to be determined by the balance between first time buyers and investors, home builders, sellers due to life events etc... More people sitting tight due to interest rate increases isn't going to save the housing market from price declines.
For example, if you were a tech worker in California, unable to eat out or go out regularly for 2 years, so you piled up cash...
And now the rest of the country looks like a good choice, compared to CA policy...
This has been a true statement since like, what, 2008?
Now? The price of the house we bought is dropping, and the cost of buying any house anywhere else is effectively going up because of the rate increase.
Putting aside my narrow self interest in the bubble being sustained so I can move without losing my shirt, I do hope that this causes actual home values to go down. A lot of first time buyers would have been really hard pressed to afford the down payment at the peak of the bubble, so it's good for them that things are correcting now.
The house isn’t the most amazing thing out there, just a run of the mill mass built suburb house, but it’s such a huge upgrade over the apartments I had been living in and the payment is much lower than the rent I had been paying, and more importantly it’s mostly static (no increase to brace for impact for each year), so for now I’m pretty happy to be “stuck” with it.
I'm locked in at 2.8% and even though I don't love my city, I am not selling (as long as I can hold off). I know a half dozen people in my similar situation here, and none plan on selling. I do plan on leaving (probably within 5 years), but I will rent my place out, not sell, if the market doesn't improve even slightly and I need/want to live. I see nothing to gain rn by selling
There's definitely a big element of missed opportunity, though. Non-billionaires got a giant infusion of cash through higher wages and such, for the first time in decades... So, too much money chasing too few goods in the short term, giving inflation. But in the longer run, it would be far better to rework the economy to actually meet the demands of non billionaires (housing, education, medical care, oh my) than to complain about how the proles have money all the sudden and plot new ways to take it away from them.
The truth is were rates not "low" the US would have probably have entered a period of either extremely slow growth, recession or out-right deflation over the last decade. Reason being there is such a thing as the neutral rate of interest which is basically the interest rate require to keep inflation at a constant pace if you go above or below that inflation is likely to start increasing or decreasing.
What central bankers are basically trying to do is keep core inflation somewhere around 2-3% so the value of money is stable, but it also doesn't pay to horde cash. Then when you get to that 2% target you want to try to keep rates around the neutral rate of interest to remain at that 2% inflation target.
This idea that I suspect you're heard that interest rates were "ultra low" assumes that there is some normal rate of interest which there isn't - the average rate is different for different economies. The appropriate interest rate simply depends on the economic conditions - specifically growth trends. As real economic growth slows interest rates will naturally need to fall which is why they have been trending down in the US and other developed economies for decades now.
Now where I think people are specifically going wrong here is that there is no dangerous or irresponsible level for interest rates. What's dangerous about interest rates isn't the level, but the change. For example were interest rates closer to 5% over the last decade then they suddenly shot up to 20% in 2022, that isn't any better than what we see today. Because what matters here isn't the specific rate of interest, but how affordable debt is and that affordability can only be assessed in a relative manner.
So where mistakes are made imo is in excessively sharp cuts to interest rates followed by excessive hikes. I'd argue that yes, what's been happening since Covid has been so extremely irresponsible it's almost beyond belief. But if you're going to claim interest rates were "low" you need to explain what you mean. Do you mean relative to the neutral rate or relative to what they were during a pervious period in time when economic conditions were completely different? The former is a valid conversation to have, the latter simply asserts that the historic average, or the rate at some specific point in time is the correct rate for today which is an argument that holds little merit.
Oh no, slightly less out of control consumerism! Slightly less carbon emission! Horrors!
> or out-right deflation
You mean the lower classes would have to pay less for their basic necessities? They might be able to afford housing? God that sounds like a nightmare.
Look at this graph[0] of rates over time. When the 2008 recession happened, rates dropped to stimulate the economy. While you can find dissent on this point, overall, this is generally considered a prudent move and the conventional responce to a recession.
What happened next was that interest rates stayed near 0 until 2015, which was far too long. In 2015 the Fed started raising rates, but did so slowly.
The problem came in 2020, when the Covid recession hit. Following conventional wisdom, the Fed responded by dropping rates. However, rates were not yet high enough for this to be fully effective, and you can't go (much) below 0%. As a result, the Fed resorted to more creative measures of stimulating the economy; and economists will likely be arguing about the effect of that for years.
Having said that. This isn't particularly relevent to what is going on today. To fight inflation, the important factor is the increase of interest rates. Even if we started with high rates, they would still need to increase them to get the desired deflationary effect.
Simmilarly, the stimulating effect is more about dropping rates then having low rates.
Are you seeing PMI costs? Or are they being waived for you? Or is it a non conforming loan that does not require PMI? There’s a bunch of other possible reasons on this website.
There are a bunch of effects that make very low long term interest rates surprisingly bad for long term economic growth.
I think a fair amount of people - particularly those in HCOL cities - could afford monthly payments that are on the high side, but saving for a 20% deposit has been more difficult because of how high prices have been (ie, stuck in a rent cycle of only saving a bit because of how high rent is and so on).
For a large portion of people, monthly cost is not the big problem. A 20% down payment on an median home price of $850k (Seattle), $1M (LA), $1.3M (SF) (all these taken from google’s results) is because it’s very hard to save that much money when you’re paying median rent of $2.7k (Seattle), $3.3k (LA), or $4k (SF) (Zumper, 2bd apartment).
All else equal, I think a lot of people when trying to buy for the first time would prefer lower house purchase price with higher interest rate because of saving for a down payment vs the same house at a higher price and lower interest rate.
This is a separate calculation of how much one can sell their house for relative to purchase price, unrelated to preferring low interest rate/high purchase price or high interest rate/low purchase price.
But based on decades of interest rate history, it would seem prudent to bet the Fed will lower rates again in a few years and you can refinance to a lower interest rate.
If you buy a $410,000 house at 2%, you pay $82,000 down and $1,200/month. If things stay like that and you move after five years, you'll have about $286,000 left on your mortgage and thus get about $124,000 back out, $42,000 more than your down payment.
So in the 7% scenario, you have $37k + investment return + $10.5k.
In the 2% scenario, you have $42k.
- refi at a lower rate in the future
- sell the house without having to take a huge loss compared to low-% bagholders
I do not agree with this, because the lower downpayment needed for lower purchase price means more of your money can be invested.
The option is not pay a low price for home and get 3% mortgage. The option is pay a high price for home (and high downpayment) and get 3%, or pay a lower price for the house, and get 7%, and I would bet you can then refinance this 7% to something lower in the coming years.
I agree with you if the lower downpayment is proportional to the cost difference incurred between 7 and 3%. It hasn't been so far, not even close. I've run the numbers for my own purchase and 7% over 30 years is completely insane compared to 3. I highly doubt at 7% with minimum down you can beat the interest payment by investing in the market. Even if not, there's risk that you won't gain off whichever investment is chosen. While paying off a home early (no matter the interest rate) is guaranteed to pay off financially. From both the reduced interest payments and freeing up your income sooner.
Yes, it will take a little time for the supply and demand curves to adjust. And, of course, popular/richer areas may not adjust down as much as less popular/poorer areas.
> Even if not, there's risk that you won't gain off whichever investment is chosen.
This is political, but if the US government lets its stock market indices fall/stagnate over the long term (5 to 10 years), we probably have bigger problems to worry about.
> Even if not, there's risk that you won't gain off whichever investment is chosen. While paying off a home early (no matter the interest rate) is guaranteed to pay off financially.
FDIC guaranteed savings accounts are offering 2.5% to 3% these days. I presume a higher mortgage rate means higher guaranteed savings account rates.
You, the buyer, put 10% down. Pre-regime: $40,000 + $360,000 @ a 3% interest rate = $1,518/mo. In the future: $36,000 + $324,000 @ 7% interest = $2,156/mo (+$638/mo)
Imagine the pre-regime buyer invests the difference. $0 upfront + over 30 years, at a conservative rate of 4% APY, that's: $442,000.
Assume, again, interest rates stabilize and drop to, say, 4% five years from now. The person holding the 3% mortgage does not refinance, because why would they?
The post-regime buyer invests the amount saved up-front, and refinances in five years. Their returns on that initial down payment investment, same 4% APY over 30y: ~$13,000. Their new monthly after that point would be $1458 (amortization schedule + reduced interest rate). They, also, invest the difference in their monthlies (+$698/mo @ 4% APY over 25 years); added on to the down payment savings returns: $371,000.
Two interesting points which extend out of this math:
1) The hypothetical home price reductions over the next months/years don't have to go far above 10% before the benefit flips in favor of the person who waited. I haven't ran the math, but I'd estimate somewhere around 15%.
2) This doesn't take into account, say, investing the down payment for the person who waited, over the past two years.
3) As interest rates recover, housing prices likely follow. But they're recovering from the bottom, not the top where many bought. Imagine, say, in ten years, this home is valued at $450,000. All else already described being equal, the person who waited can add even more to their gains beyond the person who bought early; closing the gap further (the exact amount of calculable, but I'm too lazy to figure out the amortization schedules).
None of this asserts that it was a "mistake" or something to buy early. Just that its not all doom and gloom "your financial future is fucked" for people buying now. Its really surprisingly close once you run the math; the people saying "I feel like I won the lottery with 3%" may retire, decades from now, ahead half a years salary.
And municipal valuations never go down, barring someone paying for an independent appraisal and going through the abatement process. If real estate values corrected by 50%, then the people who really complained might be able to get their taxes reduced by 10%. But even that's doubtful.
Although, I hope you have a good reason to think you are better at predicting probabilities of default than professional lenders with teams who do it day in and day out.
For example, a professional lender is likely to face greater scrutiny under the Civil Rights Act.
In the context of the last four years it is not. It is "merely" good.
I do not consider the last four years to be the foundation on which to start building assumptions.
Even in the context of the last four years, for auto loans 4.09% is only above average for about six of the last 48 months (Sept 2021 - Feb 2022).
1. homeowners, who have total confidence in the market, willfully ignoring the influence of federal reserve policy, and everything "just work out in the long term," and
2. aspiring homeowners, who are hoping for a fall in prices, regardless of how destructive the secondary effects might be.
Yet another fault line to fracture American culture.
Anyway...
Prices are going down. Both groups 1 and 2 will feel some kind of pain - both groups are connected and do not realize or ignore that fact. It's the debt we will all have to pay for pretending we were rich.
A lot of assumptions will be challenged - including the assumption that asset prices always go up in the log term.
I find all of this to be very sad and avoidable.
Otherwise, a homeowner not looking to trade up using leverage from current home’s equity is in the same camp as #2. Higher home prices simply mean higher prices for everything else (eventually), which the average homeowner is not going to like.
For instance- I could afford 3 of my current mortgages currently, so if I have to move but would get wreck on the price if I sold currently, all I have to do is go back to renting and rent my house out.
So what harm could this do to me?
The key word being: currently. I wouldn't begin to speak to individual situations, but: what the World is and will continue to go through in order to correct some of the imbalance that happened over the past ten years will decimate a lot of people. Maybe ironically, the people it may least impact are the people who were already decimated. As they say, when a tornado hits, homeowners lose their home, but the homeless lose nothing.
And, I'm sure, Bezos will be fine. Its the people in the middle that always get screwed.
Operative word being if
> So what harm could this do to me?
It will harm those around you. I advise you look at yourself as a part of the American society you participate in - acting like we are separate is the source of many of our problems.
I'm just seeing a lot of people referring to deluded new homeowners who are telling themselves they're gonna be fine when really their finances will be ruined - or something to that effect. This comment is me 1) saying there are plenty of people who were aware of the potential for falling housing prices and got into the market anyway because the reward is greater than risk and 2) putting feelers out to see if I'm part of the deluded camp or if my assessment is correct.
So many comments here glazing over an obvious factor.
You were always going to need somewhere to live, so whatever net worth you have that's locked inside your house is almost theoretical. Even if house prices crash a huge amount, they'll probably come back at some point, unless we're heading for an era of Japan-style stagnation.
It's not ideal, but as someone in a similar boat to you (price agreed mid 2021), I'm probably going to end up technically underwater at some point despite dropping a large deposit. Only thing to do is to bear down and at least be happy that you have a house.
Decreasing home value only matters if you need to sell. If you plan to live in your home for a long time, the changes in the dollar value of the house in the meantime aren't as big of a deal. However, spring was clearly the peak of this market, and it's hard to know how long it will be until a house reaches the same dollar value. It depends a lot on how long interest rates stay high.
I think buying around April is not the worst possible situation. You at least got the good rates, even if you got peak pricing. I've been grinding on sellers so hard that we either backed out or lost our deals. I'm flush with cash so other than not having a home, happy I'm still in the market as I expect sellers to get the message on the state of the market by January. 2023 is the year for anyone that has cash and has been waiting.
My deal won't be perfect either. It may require years of waiting to hit the bottom of the market. I am expecting 2019 pricing soon in my market in 2023, which is all that I'm aiming for.
Prices aren't dropping that much - inflation. If you're expecting a 40% price drop anytime soon, well, don't hold your breath.
In fact rates going down without a [corresponding] spike in unemployment is a pandemic anomaly - which allowed so many people to refinance on favorable terms.
3.58% = $522k, or $202k in interest
7.16% = $778k, or $458k in interest
https://twitter.com/RickPalaciosJr/status/150811381352611430...
Publicly reported data:
https://www.cnbc.com/2022/04/27/adjustable-rate-mortgage-dem...
If rates were to go up to 8%+, a lot of homeowners here would be unable to meet their repayments. The basis of the stress testing we've been doing since 2014 was only whether people could afford their mortgage if rates rose by 3%.
One of the Fed’s primary methods to control inflation is adjusting economic demand by making loans cheaper or more expensive.
In our current regime of fixed mortgages, new home buyers disproportionately bear the cost of the Fed’s effort to reduce inflation, since only they need to pay the higher costs. But if everyone had ARMs, the cost of reducing inflation would be spread out over everyone with a mortgage, so the pool of people affected would be significantly wider and the needed interest rate increases to fix inflation would be significantly lower.
Right now fiscal is doing the exact opposite, i.e. giving people stimulus while FED raises rates.
- Risk Free Rate
- Inflation
- Default Risk Premium
- Liquidity Premium
- Maturity Premium
They will hold the reins on their houses and take some losses if need be, but ride it coolly till the end...
My 2C.
Thanks
They only become "more affordable" if you have money to buy without a mortgage. So if you're saying they're more affordable to the rich, sure. But I assume you mean the average home buyer.
No, cash buyers are in an even worse position right now. A traditional 60/40 portfolio is down substantially more right now than the average home price. Cash buyers don't sit on actual cash, they sell something in their portfolio prior to closing.
This isn't a law of nature. It's highly possible housing value decrease outpaces rising rates.
Currently, most new buyers with fixed rates will not see anything change. Its the handful of ARM (I think its handful - unless there is some data showing otherwise) who may be the real losers.
The Fed is independent in the sense that monetary policy and related decisions are made autonomously and are not subject to approval by the federal government. However, its governors are appointed by the President and must be confirmed by Congress. (citation: investopedia)
In parallel, when you're running the government, ideally you're running for the long-term well being of the country...
I'm sure the Democrats are not crazy about higher interest rates (although inflation is also bad politically), but they don't have control of the Fed, at least not in the short term.
https://www.reuters.com/markets/europe/central-banks-raise-r...
The problem with this line of thinking is to keep a brave face when the house is underwater, meaning that the house can not be sold without going into debt to pay it off.
As "homeowners" approach that point, panic starts to take hold. Nobody wants to be trapped in a house they can't sell for risk of destroying their credit. So those brave statements about hodling a house should be viewed in the cold hard light of a multi-year price decline.
It is recommended that when you purchase index funds as investment you buy and hold long term 5+ years.
The reason for this is because prices will fluctuate SHORT term, but generally are very stable long term and provide a return on investment.
If we take a look at the current situation, even if someone becomes underwater on their house, they can still have lower payments due to really low interest rates, a 4% rate hike is HUGE.
"The problem with this line of thinking is to keep a brave face when the house is underwater, meaning that the house can not be sold without going into debt to pay it off.
As "homeowners" approach that point, panic starts to take hold. Nobody wants to be trapped in a house they can't sell for risk of destroying their credit. So those brave statements about hodling a house should be viewed in the cold hard light of a multi-year price decline."
This is extremely flawed thinking and equivalent to "investors" who buy high and sell low. Real estate IS A LONG TERM investment, not day trading.
US history over the last 3 decades suggests otherwise.
Average home price in 1965 was $21k.
Average home price in 2020 was $514k.
Long term after every drop the prices have surpassed ATH.
plumbing/electrical/insulation are all different. Many would not enjoy living in a 1950 house, and a typical 1950 house would not sell for the price of an average house in 2020
[1] https://www.nahb.org/blog/2022/03/new-single-family-home-siz...
My home was built in 1970s. I believe the initial price was around $40k. Current worth is $450k.
It is hard to take all the different things into account.
https://fred.stlouisfed.org/series/MSPNHSUS
So from 1965 to latest, we went from 21K to 450K. Where is that coming from?
1. inflation
2. size of house
3. everything else - interest rate changes, increased value of land, etc.
For 1, let's deflate: https://fred.stlouisfed.org/series/MSPNHSUS
We get a multiple of 2.4. That is, $1 invested in 1965 gives $2.40 in 1965 dollars back, or a real gain of 140% over that 57 year holding period.
But the average size of a new home went from 1200 to 2500 square feet, so it doubled. Thus on a price per square foot basis, the real gain is about 20% over that 57 year hold.
So that is what "everything else" explains - a 20% gain over 57 years, which is good as an inflation hedge, but once you take into account that you should spend about 1% of the value of the house each year for maintenance, and then maybe throw in some property taxes, that bucket of #3 is basically zero gain and is probably a bit negative.
So houses, on the national level, have been a good inflation hedge -- which is important, but that's about all they've been in this period from 1965 to 2022.
Of course things very greatly by area. Buying a ton of almond orchards in silicon valley in 1965 would be very fortuitous. Buying an apartment complex in Detroit, not so much. If you want anecdotes, my parents bought a house for $80,000 in 1983 - Phoenix metro - and sold it for $250K in 2019. That's basically just inflation, and they put a lot of work into the house - remodeled kitchen, put in pool, changed the wiring, put in copper plumbing, new light fixtures, replaced carpet with tile in the living room, replaced wood fence with brick fence in the backyard, added new hardwood floors, replaced roof, double pane windows, paint, etc. Don't ask what the interest rate was back then, they needed to get some seller financing as the mortgage rates were obscene.
I am not sure why there is a cognitive barrier in understanding this. When you buy a home, the performance of that asset will not benefit from comps of much bigger homes that are sold in the future. Is this really confusing? Why am I hitting a wall here? You need to look at price per square foot data if you are going to be doing comps across time, because houses are always getting bigger, but the house you buy is not going to get bigger.