I know this is peak hn but the mortgage rate doesn't matter if you don't have a mortgage. Ideally, higher mortgage rates should push home prices lower and benefit cash buyers.
My home, just purchased 1.5 years ago, would be well beyond unaffordable now. How is that not insane?
I'm not sure you follow. Monthly payment, assuming the same loan term and the buyer not losing equity, is (amount borrowed + interest) / term. If the person selling their house was paying a lower rate and their house gained in value, and the house they are buying is worth the same (as the housing market got broadly more expensive) but the interest rate is higher, it means that to match the monthly payment one would have to buy a 'cheaper' house than their current. That just isn't favorable.
Of course the more fundamental question is, should you buy a home at all? And that's a complex decision. But if you do make that decision, sinking significant liquid funds into property instead of using relatively inexpensive leverage is, as a general rule, a terrible financial decision.
Some people don't have the financial savvy or time to optimize. One size does not fit all.
Dump your money into an all-market index fund and forget about it for 25 years. This requires zero "savvy" and not a lot of time. It does require a bit of research to develop some essential financial knowledge, but that's something everyone can benefit from.
If you can't do that much and you're in Canada, look at Wealthsimple, which is a robo-advisors that does this all for you. If you're not Canadian, there maybe be similar robo-advisors that automate passive investing that might be worth looking at.
One size may not fit all, but it absolutely fits most, and my bet is, no offense, you're actually not that special (I know I'm not).
It doesn't. I'm in DC, and prices have basically stayed put give or take a few percentage points. It's obvious why: if you own a house, you're going to be very resistant to taking a 100k+ loss when selling it, especially when the place you might buy is also stuck at a high price and will require paying double the interest rate.
So in practice, housing costs just shot up 40% until further notice for anyone who can't stay put.
For example, if you own a place with a 3% mortgage, you aren't likely to sell it and buy a new place with a 7% mortgage. If you bought a place at $500,000 with 20% down, your mortgage is $1,686/mo. Let's say that prices go down so that a new place at 7% would cost $1686/mo. Prices would have to dip to $317,000, a 37% decrease. After 5 years of owning your home that you purchased for $500,000, you still owe $356,000 on your mortgage. If you sold your place for $317,000 and then bought another place for $317,000, you'd have lost the $100,000 down payment on the first place, need a $63,000 down payment for the new place, have gotten zero equity out of your mortgage payments, and still have the same $1,686/mo payment. So you certainly wouldn't sell for $317,000.
If you sell for $450,000 and buy another place for $450,000, your monthly payment goes up by $527/mo. You need $90,000 for the down payment on the new place and you will have gotten back your $100,000 + $44,000 in equity from the first place so you'll have $54,000 in additional funds. You could invest that $54,000 and try and get a 10% return getting you $5,400/year or $450/mo. That's shy of the $527/mo increase in your monthly so you're still losing money.
So if you own a place with a low interest rate, you don't want to sell.
For people who are on the cusp of renting vs buying, it offers an incentive to continue renting for a few more years. A $750,000 place is $2,530/mo at 3%, but it's $3,992 at 7%. That's $1,462/mo more expensive and a 58% increase in the monthly mortgage payment. Of course, a strong incentive to continue renting puts upward pressure on rents.
Upward pressure on rents in turn offers potential buyers an incentive to pay more to own a place. If your rent is going up a lot, that makes buying a more attractive proposition and you're willing to pay more. The fear that rapidly increasing rents puts into peoples' heads also pushes prices higher.
Even if you own a place and are looking to buy a new place, it can make more sense to rent out the old place given your costs. As noted, there's upward pressure on rents as some buyers delay and your costs to rent the unit are going to be substantially less than someone trying to buy at 7%.
Yes, higher mortgage rates should put downward pressure on home prices. However, there's a lot of other stuff that pushes back on that. Sellers often can't afford to sell if the property is underwater. Even if they're not underwater, it makes more financial sense for them to stay put. It even makes more sense for them to rent out the place even if they're moving because of the good interest rate.
There just aren't strong scenarios for higher interest rates pushing housing prices significantly lower. Sure, the mortgage on that $750,000 place is now 58% more expensive. Not everyone will make decisions the same way, but certainly some owners would rather rent out the place at $3,000/mo than sell it for less and many potential buyers would rather put off ownership for a couple years given the huge increases from the mortgage rates. Some renters will be willing to pay more because home ownership is now more expensive and as rents increase that means that even more expensive ownership opportunities don't look as expensive.
I think the biggest thing is that people don't expect things to continue being bad. They expect to refinance their mortgage so even if rates are high for a year or two, they're confident they won't actually be paying that much over the long-run. If that's your mentality, then higher rates put limited downward pressure on housing prices - while the rest still exert their upward pressure. At some point there's a lot of confidence behind the market. It might be misplaced confidence. Maybe we'll be in 2030 with mortgage rates sticking at 7% and everyone will end up having paid a ton more money than they were expecting.
I will say that there is some evidence of prices lowering a bit in many markets - but they aren't lowering anywhere near enough to overcome the difference in mortgage payments. Again, there's a lot of other pressures keeping prices up (even if they're slightly down). And if most buyers think "it's just a couple years at the high rate so I'll budget $10k to refinance plus $35k in higher payments over two years, $705k is the same as $750k", then we aren't going to see major decreases in housing prices. Buyers "know" (or think they know) that interest rates will come down and so they just need to factor in the extra costs in the meantime. If rent is going up 10-15%, housing normally goes up 2-3%, and the interest rate/refinance cost is going to cost you ~6% of the home's value, then maybe a 0-4% decrease in house prices is the most that makes sense - or even an increase given the upward pressure from rental hikes (if that's happening in your area).
In the 2008 mortgage crisis, owners didn't have the option to stay. They defaulted on their mortgages. Demand was really soft because banks didn't want to lend. Unemployment was high. Today, there's nothing forcing people to sell - in fact, that 3% mortgage rate could be a huge asset to hang onto. Today, the job market is strong and especially strong in many cities keeping demand high. Even the stock market is just at such highs that many people feel like they have money to spend - in 2008, the S&P dropped around 50% so people had a ton less money if they wanted to liquidate stocks for a down payment. There's just a lot keeping prices high even in the face of higher interest rates today. That doesn't mean we won't see some declines, but without more going on it'll be hard to fall too much. There's too much confidence, few sellers, and a lot of demand.
People were doing ARMs, and interest only loans betting on appreciation & them being able to refinance or selling for profit
When that option dried up there was no path to success
Those that bought at a bad time but were able to pay still kept their homes and have recovered now