Mortgage Rates Could Tank Home Prices by 20%, Fed Study Finds
bloomberg.com
bloomberg.com
This would not be a problem if the entire US economy, right from nearly every tax incentive, to the schools you send your kids to, to the opportunities that are available to you and your kids, etc. wasn't based on home ownership and making home ownership the primary source of building starting wealth.
The other alternative is to find a high paying FAANG or finance job and/or starting a company. The former is available to a select few, and the latter also is built on owning a home, because many people who start companies will often find funding to start, maintain, and/or grow their company by taking loans against their homes.
Because, once again, the entire US system is built around rewarding home ownership, and so it's the only source of wealth building available to the vast majority of Americans.
That possibility is gone; houses in the Midwest are now a significant fraction of the prices of houses in California.
Let’s stop pushing the idea that buying a house always builds or increases wealth. There are many good personal reasons to buy a house and many alternatives to getting debt for ventures.
Your advice is only for those with a high risk tolerance.
It does suck for anyone who's in a position where they _must_ sell their property right now, and not buy another one. It sucks, albeit somewhat less, for someone who got a nice APR on their mortgage and needs to move; their purchasing power is reduced, and they'll pay a premium on the new mortgage until the market's in a place that refinancing will make sense, which could be a while.
But we're not seeing a 2008 right now, or a 50%+ drop in valuation, or anything crazy like that. We could get there! That would be scary! But this feels more like a correction than "tanking".
Yeah, but consider the source. :) Bloomberg writes for the investor class.
It does suck for anyone who's in a position where they _must_ sell their property right now, and not buy another one.
It's important to note that investments can lose money. It's a risk one should understand. If you think this sucks, this is just capitalism. There are winners and there are losers.
Yeahhhhhh....and many of these are people's homes. I don't have a good solution without a socioeconomic reboot, but I do have sympathy for individuals whose primary reason for purchasing a home is to live in it. That houses have turned into an Investment Asset has a lot of knock-on effects, many of which are negative for the non-wealthy.
Banks and funds can deal with losses. It's their job.
My parents' place was up 30% over the last 12 months earlier this year.
Unscrupulous home buyers are hitting us, the children, up with text message ads. Last one I got was Saturday, so they don't seem to concerned about the market yet.
It's a scam sold in scammy "real estate get rich quick" schemes.
- people get stuck in a house because moving would cause them to lose the favorable rate they currently have. Everybody would benefit from some measure of mortgage portability -- the producer, the consumer, the mortgager, the mortgagee but instead we have this massive deadweight loss.
- price drop causes house building to drop dramatically. We're in such a mess today because builders stopped building in 2008.
In a normal market you'd be right. This isn't a normal market and regulators need to step up.
My personal anecdata, our house practically doubled in value since we bought it over 5 years. That is not normal. That price needs to go down. The liquidity here is imaginary just like liquidity in just about anything else. It is worth what people are willing to pay for it.
Finally, the change in rate will mean that they will be willing to pay less, because it will be harder to borrow more.
> This isn't a normal market and regulators need to step up.
It just means more of the home is going to pay interest, and less is going to the seller.
The most recent sale of a home near me was a completely unremarkable 100-year-old detached house for $2.6 million. This market has a lot of cooling it still needs to do.
Let me introduce you to a scary concept of mortgages in foreign currencies :)
We had that in Poland over a decade ago: People would get loans in Swiss franks, and when exchange rate went from 2 PLN per 1 CHF in 2007/8 to 4.8 PLN today the amount owed (expressed in PLN) more than doubled. Of course right now such loans were deemed illegal and courts are invalidating them now, one by one, but for a long time it was a real burden for people.
Sorry for having so many questions, but this seems to open a pandora's box of complications
- Your loan is converted to PLN, you get a refund of all the extra costs incurred by the currency exchange rates, and you continue to pay off your loan in PLN.
- Your loan is considered invalid and is abolished, which means that you have to pay back the original sum to the bank, and the bank has to repay you all the payments you made over the years. If your loan was issued a long time ago you typically will come ahead (over years your payments add up). This means you keep the property and are debt-free. If it turns out you still have a significant amount to pay off you can refinance it.
Basically, everyone would recognize that the bank could take a $50k wash if they foreclosed, so for the right deal they'd take a smaller wash, and you'd have a lower principal amount and a longer payment term or similar.
It still happens with big commercial loans at times.
Asset prices, particularly homes, have been puffed up by ZIRP and other factors for a long time, and are overdue for a correction.
If people are willing to pay 30% more from you doing nothing, then the value still went up simply because that’s the definition of value.
Maybe the people who didn't bail on their communities during covid can finally afford a home.
(This is the general you, not the specific you, of course.)
But no, let's take a loan out against our RSU's so we can get a $1M bi-level because the schools in this district are amazing /s. Now a house in North Carolina is worth as much as one in New Jersey.
> $1M home at 3% interest(30year) = ~$4200 monthly payment. $800k home at 6% interest = $4800 monthly payment.
Over a 30 year term, your interest rate has much more impact on affordability than the purchase price does. 20% down is a drop in the bucket when your rate necessitates paying 1.5-2x the purchase price in interest because it's spread out over 30 years, especially at higher price points and at the edges of people's budgets.
If the house prices is lower, every extra payment to the principal will drastically decrease the interest over the entire term, much more-so than the initial larger loan/principal.
This analysis assumes that rates would decline from exceptional highs, which is implied by the phrase "exceptionally high".
A Boomer who bought a house with 10% down and a $56k loan on fixed 30-year terms at 18% in October 1981 was initially paying $844/mo but in 1982 they could have refinanced down to just $700/mo. By 1986 their home was worth a nominal $80k and their payment was potentially down to just $450/mo.
By the way, the same "increase of face value" is true of buying long bonds at peak interest rates.
Of course, the trick is knowing when the peak is. But if the Fed's actions have their intended effect, we may be somewhat close currently. (Note well: I am not an investment advisor! Follow at your own risk.)
I feel like it was a prerequisite living the life I wanted, and the absence was the source of a lot of depression and anxiety.
My main regret is not buying earlier, money be dammed. I would happily trade that money for more happy years.
Some people are handy and enjoy taking care of their home.
Some people don't like hearing their neighbors footsteps above them all the time.
Some people play Drums and don't want to pay/share a small 10x10 room to practice in.
With who I am, from my culture and upbringing, it was near impossible to be happy without a home. I tried for 15 years without success. I grew up reading Walden and love building and improving things. I was never going to be happy in a rental without substantially changing my personality, and couldn't do so when I tried
And I'm sorry but people left communities which abandoned them, not the other way around.
We've still got a way to go to shave off the bloat of the past several years (my home value has gone up 50% since I bought it 4 years ago), but I planned on giving the market a good look in a year or so. A casual glance at Zillow in my area already shows several times the listings count from this time last year. So, it's definitely happening right now.
How is a scarce resource going to devalue in a high inflationary environment? The cost of building homes continues to go up, the availability of land has not changed, restrictive housing policies are not being lifted, wages are growing, the population is growing... Where does the decline in price come from?
Demand side prices can come down if lots are divided. But supply side profit remains the same or grows. High rates will not help first-time home buyers. More housing will.
What is scarce, however, is affordable housing. The problem with housing is indeed the artificially propped up prices which makes it impossible for people to buy new housing.
Btw, this does not counter the YIMBY argument, which argues that we can drop housing prices by making housing easier to build. Part of that would be by increasing supply. But another major part of the YIMBY argument is that if housing was easier to build, everytime a developer got an opportunity to build new housing stock in a desirable area, they wouldn't always need to go for the highest value, i.e. luxury housing, build. They could actually look at market needs and build affordable and/or starter housing.
Right now getting the right to build a property in desirable areas is a once in a decade opportunity, so they're willing to keep their built housing empty for many years, because they won't get a similar opportunity until much later, if ever.
Also, most new construction is going to be labeled luxury, then later enter the affordable supply. This is the lifecycle of housing.
Raising rates shifts demand left. Price goes down.
… case in point, my apartment's rent is going up 10-80% YoY, depending on lease.
Also, demand for housing at a particular price, size, and location is not inelastic.
I grew up an area with a lot of "vacant" housing. They are vacant largely because nobody would want to live there. After a year or two, they are uninhabitable and the cost to remove the place exceeds the value of the land. Lots of them ended up mysteriously burning down.
Scarcity also does not guarantee value. For one thing, housing demand is baseline proportional to the number of people. Population growth is really slowing [1]. The decades of home price gains might mostly have been due to a population surge, which is ending.
[1]: https://www.census.gov/library/stories/2021/12/us-population...
In nominal terms, guaranteed it will tank home prices, if given enough time. This is because trade involves two items, and it's entirely possible to make dollars more scarce than houses. I mean for hyperbole, it'd be impossible to sell a house for 300k+ dollars, if there was only 2 dollars in existence in the entirety of the world. Again, that was hyperbole, but the Fed raising interest rates and reducing their balance sheet, literally work to remove money from existence, and works to move us closer to that regard.
But as for real terms, that's another matter...