More like GDPR fear mongering and lack of reading comprehension.
If I got an euro for every person that repeats BS like "your site will be fined 20Mi Euros for a violation" I would probably have the aforementioned 20Mi Euros
Mortgage rates continued their upward march this week, extending the most prolonged increase in rates in 46 years.
According to the latest data released Thursday by Freddie Mac, the 30-year fixed-rate average climbed to 4.66 percent with an average 0.4 point. (Points are fees paid to a lender equal to 1 percent of the loan amount.) It was 4.61 percent a week ago and 3.95 percent a year ago.
The 15-year fixed-rate average jumped to 4.15 percent with an average 0.4 point. It was 4.08 percent a week ago and 3.19 percent a year ago. The five-year adjustable rate average rose to 3.87 percent with an average 0.3 point. It was 3.82 percent a week ago and 3.07 percent a year ago.
"Mortgage rates so far in 2018 have had the most sustained increase to start the year in over 40 years," Sam Khater, Freddie Mac's chief economist, said in a statement. "Through May, rates have risen in 15 out of the first 21 weeks (71 percent), which is the highest share since Freddie Mac began tracking this data for a full year in 1972."
The Federal Reserve released the minutes from its May 2 meetings earlier this week. Officials indicated they are unlikely to hasten increases to their benchmark rate. The next interest rate hike is expected in June.
"The minutes suggest that the [Federal Open Market Committee] remains committed to a gradual withdrawal from the remnants of its crisis-era policies, rather than a more aggressive withdrawal as had been suggested in several recent speeches," said Aaron Terrazas, senior economist at Zillow. "Absent any geopolitical surprises, financial markets should be quiet going into the long holiday weekend, but expect more movement next week leading up to next Friday's jobs report."
Bankrate.com, which puts out a weekly mortgage rate trend index, found that nearly half of the experts it surveyed say rates will rise in the coming week. Shashank Shekhar, CEO at Arcus Lending, disagrees. He expects rates to remain unchanged following the holiday weekend.
"After touching a seven-year high, mortgage rates expectedly went down a tad last week," Shekhar said. "However, there is no reason for that downward trend to continue to anything significant. The Fed is still expected to raise the rate again in June with odds currently split between the probabilities for three or four increases for the year as a whole. With no major policy change expected from Fed and a short week because of Memorial Day, should mean a mostly stable market with mortgage rates not changing much for the week."
Meanwhile, mortgage applications declined again last week, according to the latest data from the Mortgage Bankers Association. The market composite index - a measure of total loan application volume - decreased 2.6 percent from a week earlier. The refinance index fell 4 percent, while the purchase index dropped 2 percent. The refinance share of mortgage activity accounted for 35.7 percent of all applications.
"As a result of rising rates, refinance applications continued to decrease, with our refinance index hitting its lowest level since December 2000," said David Stevens, MBA president and CEO. "Purchase applications decreased over the week, but the average loan amount for purchase loans increased to over $320,000 after averaging around $317,000 for the past four weeks, likely a sign that inventory for lower priced homes remains low and the mix is still skewed toward larger loan balances,." said David Stevens, MBA president and CEO.
Can someone with a background in econ / real estate weigh in on this a bit? Curious to hear some opinions on the housing market within the context of rising rates.
Generally, in most discussions of the cost of housing, people discuss this expense in terms of a fraction of your income. In the US, a number of advisory articles and books consider between 25 and 30% of your gross take home pay as a "reasonable" amount of your income to pay for housing. So if you make $120,000 a year, that is about $3,000/month as 1/3 of your gross take home salary.
According to the FED income growth has been fairly static over the last decade so that 1/3 number has been fairly static as well. [1]
Given those two observations, you can derive the impact of rising interest rates on home sales, which is to say that as the rates rise, the monthly payment will rise, and that will put homes out of the 25 - 30% window for people. Historically that means a slower sales cycle and downward pressure on house prices (which keeps the payments at the lower level).
If there is a commensurate rise in real wage growth it won't slow down the housing market and the banks will make more money. If wages stay stagnant the housing market will cool off and if it does so for long enough prices will come down as people who have to move will feel pressure to lower the price in order to have the sale go through.
For one, the Federal Reserve has been raising the overnight rate it charges banks. Commercial lenders typically try to maintain a certain interest rate "spread" between the Fed's overnight rate and the rates they charge mortgagors, so if the Fed's rate goes up, all lending rates tend to go up in tandem. (This is called "indexing.")
In the past year, the Fed's base rate has gone up 75 basis points (0.75%) and it looks like mortgage rates have basically gone up in lock step (actually a bit less -- last year a 30-year fixed was about 4.05%, today it's about 4.61%).
Usually, the Fed raises rates when it has significant inflation concerns -- so it's most likely the overall inflation risk that's driving increased rates across the whole market, and not something that points to an overheated real estate market in particular.
Well, for context, mortgage rates have hovered between 3.5-4.5% for almost a decade. Rates now going over 4.5% is new, but it’s not a HUGE change yet, and still well below historical norms. The headline is a little sensational.
That said, if the trend continues, it will have an impact on the cost of home ownership, the returns to real estate investors, and ultimately property prices. The cost of debt is just another line item in the economics of owning property, and as it goes up, affordability goes down. This is, of course, offset by a more buoyant economy (I.e. more people with jobs able to afford the higher costs)
I invest in real estate, and was curious what the rising interest rates would imply for investment property. So I ran some analysis here:
Rising rates will add cost (assuming you use leverage), which hurts returns (all things being equal). Every situation is unique, but for higher yielding properties in the Midwest, a 0.5% increase in rates would require a 3-5% drop in property value in order to hold investor returns constant. Of course, that’s not what I’m seeing in the market. It’s the opposite in fact. As rates have been rising, property prices have as well. This has the effect of compressing prospective investment returns. Ironically, it’s times like now when it is most dangerous to invest. I think there are still deals worth doing out there, but it’s wise to proceed with caution. Now is not a time for ‘risk on’.
FYI, housing prices can rise as well as fall for periods of 40-50 years and this has been shown in the historical record.
The Journal of Real Estate Economics has a fascinating article from 2011 which goes into this in detail, by looking at the price of land / various housing structures in Manhattan and Chicago from 1920 to 1960.
By 1932, housing prices had dropped nearly 70% from their 1929 peak. If you had bought a 1-story house in Manhattan in 1929, it would not be until the mid-1960’s that you got to just break-even, let alone made any money.
Also for those curious, I suggest you search “home prices” on https://images.google.com. The very first image is so laughable, and such a suggestion of the times we are in. This will not end well.
I'll take that argument :-). If we enter a deflationary spiral in housing it traps people with mortgages who find themselves owing more in their house than it is worth (we saw that after the Mortgage meltdown). Where as if the prices continue to rise, we see people who would prefer to own houses kept out of the market, but their mobility is not impacted.
Of the two scenarios, I consider the deflationary one "worse" in terms of its impact on more people.
It seems they both impact mobility equally? In a rising market, people are priced out of entering an area. In a falling market, people are priced out of leaving. Seems symmetrical to me, unless i'm missing something.
I think they're saying renters can move without taking a large loss, but owners generally can't, since they have to either sell at a loss, or rent out their property at a loss.
That can work for some. Paying a mortgage and rent on the new location, along with 2 sets of taxes gets expensive real quick. Some utilities have standing charges/line rental too.
I've witnessed this myself. In 2009 the company I was working for in Calabasas, California, laid off a lot of people. Since I rented, I was able to end my lease and move to a new job in Orange County. Colleagues who had bought and were underwater were forced to search for new jobs within commuting distance of their house.
I see it a bit differently. If people are priced out of buying into a market they can often still rent in that market, and the rising sales prices allow people with ownership to sell and move to new markets. But in a falling market the renters can still move but owners can't (or are pressured not to) sell and move. They do have the option of becoming landlords but that can limit their cash flow and make it harder elsewhere.
I don't think that quite follows. When property values increase, so do rents. When rents increase, someone is getting priced out. That is, if you could buy before, maybe now you have to rent. But if you could only rent before...maybe now you can't even rent.
Broadly speaking, rents are tied to incomes, house prices to the availability and cost of credit (i.e., interest rates). Average income places an upper bound on rents because renters can only pay rent from income (since no bank will lend you money to pay rent).
I'm currently benefiting from this phenomenon myself as I rent a house for ~$25k/year (in Melbourne, Australia). Buying that same house would cost me ~$45k/year.
> Broadly speaking, rents are tied to incomes, house prices to the availability and cost of credit
Mind citing a source for this? I've seen a situation where rents and house prices didn't both rise together. Maybe not precisely the same rate, there may be some noise from other factors, but within a few percentage points of each other.
Rents may be somewhat related to the incomes of the people who are renting in the area, but these people are not necessarily the average population. In a housing shortage the people with high paying jobs rent decent places, everyone who makes less is forced to live with roommates or commute from further away and many leave the area altogether.
And then in your example, that's not necessarily so crazy. Some of that $45k goes towards the mortgage interest which is tax deductible (in the US, not sure about Australia), and of course over time more and more of it goes to the principle so effectively paying yourself.
https://www.economist.com/graphic-detail/2018/02/09/the-econ... lets you play around with comparing house prices vs income and rents. In Australia (where I live) and Canada (where I'm from) house prices are more overvalued compared to rent than income (i.e., rents have increased slower than house prices).
> Rents may be somewhat related to the incomes of the people who are renting in the area, but these people are not necessarily the average population.
By definition renters must live in the are where they rent, and must work within commuting distance of where they rent (even if it's a very long commute).
Landlords, however, can live anywhere, provided they have someone to manage their rented properties. E.g., my landlord lives in Singapore, but I pay my rent to a Melbourne based property management agency. But since I live (and work) in Melbourne my rent is set by the market rate in Melbourne, not the (much higher) rate in Singapore.
Unfortunately for non-techies in SF, their rents have been pushed up massively due to the much higher tech salaries. But that only proves the strong correlation between rent and income.
BTW, mortgage interest in not tax deductible in Australia. Somewhat crazily, however, rental losses on investment properties are tax deductible ("negative gearing").
Prices (values) are based on that market willingness to pay divided by the cost of capital. If the cost of capital goes up, all else equal, values will fall while rents are flat.
The fed agrees with you. That’s why they have an inflation target of ~2%. They’re basically saying outright that they expect to erode the purchasing power of the USD over time. It’s one thing we can count on - inflation might be bad, but deflation is worse.
I did a more thorough review of historical inflation, and the implications for investments here - cheers:
they can always sell the house and take the loss. just like a stock bought on a loan. don’t get why it’s preferable that someone can’t afford a house rather than someone who already has a house no longer being able to afford it. that’s like saying no matter how big of a mortgage i take it’s immoral for something to happen where i can’t afford it anymore
Some mortgages are not non-recourse, so you could be forced into bankruptcy. Either way, your credit is going to take a big hit, which may mean you're stuck wherever you moved to, since many landlords will avoid renting to people with recent forclosures or bankruptcies. (Probably a good idea to move before you default). A lot of people are uncomfortable defaulting on a debt if they have the ability to pay, even if it's the smartest move economically.
100k down on a 500k house for 20%. Value dips significantly and your house is worth 300k. You owe 400k on a 300k valued property. You default and your 100k is gone forever. Do not pass go, do not collect 200 dollars.
How is your situation improved by sticking around to pay $400,000 + cost of financing for a $300,000 house? That just loses you a second $100K (plus cost of financing).
> So? It's gone forever whether you default or not.
Your premise assumes housing values never go back up. The value is not necessarily gone forever.
The house that declined to $300k can climb back to $400k or $500k.
You can continue paying the mortgage, do absolutely nothing else, and watch as the property value climbs back to where it was due to economic factors (whether a hot economy or low interest rates fueling value recovery).
Over five years, from Jan 2010 to Jan 2015 you pay $120,000 in mortgages payments on the $400,000 mortgage. You get back to 2015 and the housing market has recovered your property back to over $400k (from the low of $300k). You continue making your mortgage payments. By Jan 2018, thanks to hot asset prices, your house is now worth $550,000. You're now solidly above water, you've paid off ~26% of your mortgage term (eight years of payments), and you're sitting on maybe $200,000 in equity value vs your original $500k purchase price. The value of the property recovered, and you didn't lose your $100k down payment from walking away.
Depending on the circumstances, you may very well have been better off holding on to a property in 2009-2010, rather than selling at a loss. The housing value recovery has been extraordinary over the last six or seven years. Certainly some property scenarios were extreme, where owners were perma-buried. The worst hit states, such as Arizona, Nevada, Florida, etc. saw rapid value recoveries.
If you have the cash to be able to buy the house outright why would you default in the first place? Otherwise, after a default (which likely includes bankruptcy) you will be unable to get credit.
This was the scenario that I saw during the mortgage crash. People who would have to pay the bank tens of thousands of dollars in order to "sell" their house.
Then those people had spent beyond their means when they purchased the home. When you buy a home, part of the risk is that most of your net worth is wrapped up in the home, and as a result you may not be able to move if you have to sell at a harsh loss. If you are not prepared to ride out a dip in the housing market, you shouldn't buy in the first place.
The problem is that if everyone is making stupid bets (and the bank is also making stupid bets), you may also have to make a stupid bet if you're determined to own your home.
Or you could rent, but that's not just an economic decision.
This is why in my opinion local goverment should somehow credibly commit to keep land prices nominally constant by adjusting taxes on property. (Land, not buildings) Inflation would take care of long term lowering of the housing costs which is arguably a good thing to most people.
I can't follow this logic at all. When home prices go up, rents also go up. How is your mobility not affected when you can't afford rent and have to move out of the city? Or for the people whose rent goes above what they can afford and they end up homeless?
If you're underwater on a mortgage, it's still the same payment month over month that you were expecting when you took out the mortgage. It'll recover eventually if you hold on. When you're paying rent month to month, that number changes on you as prices rise and you can't just hold on.
The market can remain irrational for longer than you can remain solvent.
Additionally, your statement is false under many conditions. It is not close to a proven fact that it is true "eventually," no matter the time horizon.
home prices and rent prices arent entirely correlated.. sure home prices can impact the overall cost of living in the area, but that also is more influenced by the average salary in the area.
I can't follow this logic at all. When home prices go up, rents also go up
If that were true, the purchase price to rent ratios would all be the same. They aren't.[1]. There are some places in the US (looking at you SF!) where renting is cheaper than buying and vice versa.
Not if the supply of rental units is increasing. One apartment building can put 100 - 500 units on the market versus perhaps 10 single family houses in that same space.
A good example of this in action right now is Sunnyvale, which has had rising home prices over the last three years but flat rents because the number of rental units coming online has greatly exceeded the available housing inventory.
It would be accurate to say that house rents go up with rising housing prices, but it is not true that all rents go up with rising housing prices. What it does is re-factor the ratio of renters to owners in favor of renters.
@ChuckMcM - I always enjoy your comments, thank you for the perspective you bring to HN.
I've seen the argument you present used frequently, and I can understand where it is accurate in many markets.
In Seattle, a very similar argument is being made as a cure for the lack of affordable housing -- greater density of construction will lower costs through greater housing supply.
What I see happening in actuality though is that one house that would have fetched ~$900,000 today (and maybe $400,000 just a few years ago, post-recession) is torn down, and four condos put up in the same footprint. Ok - so supply increased, right? Not exactly, because if each unit is priced at ~$700,000, it's still above affordability for most people. So then those units get swallowed up by speculators and investors, the same as what's happened NY, Paris, London, and Vancouver.
I also recall in Seattle there is some building regulation where new apartment buildings get a tax rebate or some similar incentive that lasts 5 years - and then after that the units get converted to condos (or maybe its the other way around). In any event - my point is that there can be a lot of shenanigans that get in the way of the market.
This is a very scientific sounding description that basically says "anything can happen". I mean our current economical system exists since WW2, so you can't even fit 2 40-50 years slices in there. And while the environment inside the US might seem similar, you can't really ignore how the "local" markets are globally interconnected. For instance one reason for housing prices rising in the last decade might very well be connected to the rise of Chinese economic power, leading to millions of Chinese coming to the US and buying property there.
Ok but if you could hold on to that house/land and pass it on to your kids they'd be millionaires! So it's the "markets may remain irrational longer than you can afford idea".
My gut tells me this is a result of the automobile effectively increasing the size of a city and therefore the amount of land. It is possible we could see something similar aided by self driving cars. Or better tech for building tall cost effeciently.
In europe my loan is tied to the euribor 3month rate, which has been negative for ages and hasn't shown any signs of rising.
I remember having an argument on some webforum with some non european guy that could not believe my current interest rate is close to zero (mostly just fees collected by the bank).
The Federal Reserve Bank ("The Fed") sets the base rate (i.e. the "overnight rate") from which commercial banks can borrow. Those banks, in turn, lend to debtors of all sorts, adding various risk premiums to the interest rates along the way.
Sounds similar with a base reference rate + lender's margin (in finland currently like 0.2-0.5% for house loans), but for some reason the base rates are positive in the us?
After 2008 in europe the rates took a dive and have been negative for a few years.
A variety of market factors set them, but Since 2008 they've been effectively set by the Fed intervening in/manipulating the market. Historically the Federal Reserve intervened to set interest rates by buying short term Treasuries. This doesn't have a direct effect on long term debt though, and the Fed didn't want a greater collapse in housing prices after 2008, so they moved to keep mortgage rates low by directly printing money to buy mortgages. The Fed also moved to buy long-term Treasuries, which pushes others who otherwise would buy Treasuries to buy MBS.
As for the scale of this, in 2008, the Fed owned 0 MBS. Since then, the Fed has printed 1.7 trillion dollars [1] to buy MBS. The total amount of total outstanding mortgage debt on every house in the U.S. is 8.8 trillion [2]. Now that the Fed has stopped doing this, rates are going up.
Mortgage rates are, mostly, driven by the market. The Federal Reserve influences the Federal Funds Rate (they don't "set it"; they set a target and then manipulate the market by buying & selling to try to reach that target). The FFR is just for overnight lending between massive institutions.
If your intuition says "hey, the difference between overnight lending between banks and 30-year lending to people is massive!" Well...that's right.
In 2015 the Fed raised rates by 0.25% but mortgage rates went down by 0.50%. The complete opposite of what most of your replies claim should happen.
This is not exactly a mysterious surprise. The Federal Reserve themselves have mountains of research, policy notes, and blog posts showing that there is an often large disconnect between the very short-term rates that the Federal Reserve can manipulate and longer term rates.
Here's on recent one (from 2017) titled, appropriately enough, "The Fed Funds Rate's Impact on Other Interest Rates"[1].
(Most US mortgages are fixed interest for the life of the mortgage. Very few other countries have that luxury. If you get a variable rate in the US, then it would be like yours -- tied to something else but with a markup.)
Most mortgages in the US are sold to Fannie and Freddy (government-sponsored enterprises) [1]. These GSEs in fact commit themselves to buy mortgages at a predetermined rate [2], and I suspect this rate is the main driver for the rates banks charge, at least for "qualifying mortages" (i.e. not jumbo loans and so on). In turn, I suspect the rates the GSEs offer depends on the rates at which the GSEs can finance themselves.
Now, who lends to these agencies (i.e. who purchases "agency MBS")? I couldn't find recent numbers, but this [3] FRBNY article from 2015 states that the Fed owns most of it, followed by banks (which buy agency mbs partly because it counts as a safe asset (a "high quality liquid asset"), and allows them to satisfy their liquidity coverage ratio requirements.
This leads me to your first point:
> Mortgage rates are, mostly, driven by the market.
Pre-2008, I would say probably yes, but nowadays I'm not entirely sure, as the govt. is the biggest buyer and plays a large role in the second-biggest buyer.
TLDR: rates are still very low, but have increased a skosh with some consistency over the past several months, the meaningfulness of which statistic is here unsupported.
Missing from this article is that mean 30-year rates have dropped more-or-less steadily from 9.25% in 1991, to 3.65% in 2016.[0] Also, even "rising at a pace not seen in almost 50 years" seems iffy. Mean 30-year rates increased from 8.85% in 1977, to 16.64% in 1981. Rates increased at 2%-3% per year during 1977-1981, vs an 0.8% increase from May-17 to May-18.
I'm not an expert at all in this - but it seems like now is a great time to be a real estate investor?
Given that interest rates will rise, there will be more demand in the rental market. I don't think REITs will be a good option because of the potential for higher interest rates but investing in a property, locking in that interest rate, and generating positive cash flow from rent would be a sound decision?
5 years ago was a great time to invest in real estate. Today is probably okay, though prices have risen dramatically across the board (even the cities that got crushed in the recession have risen past pre recession levels), and rates are rising. Returns are getting compressed. Still good deals out there, but the risk/reward profile is shifting in the wrong direction.
I guess I should rephrase - now is a good time compared to the foreseeable future? As in, next couple of years it will be a worse time.
I actually bought a house 5 years ago, and I really feel I totally lucked out. Back then though, the fear of rising interest rates scared me into buying. Like you, I don't expect those type of returns with any investment I make now... but I was thinking about diversifying my finances, and moving money away from stocks into property real estate.
I know that I'll have to be much more diligent about finding the right market/deal. I'm using Bigger Pockets at the moment which is quite an amazing resource. Thanks for pointing me to your site too.
Doesn't mean you shouldn't invest - just figure out what sort of returns you're willing to accept (along with the corresponding risk / cushion you need), and hold that line when you run your diligence. FWIW, I think you can still find single family investments in the midwest that will generate 8%+ cash on cash returns (after fully accounting for all direct, and reserved expenses). That's still a pretty good return, but getting harder to find.
It's hard to say when the market will soften or correct, so a dollar-cost-averaging approach to buying RE is probably a good idea (i.e. buy a rental property every quarter, or every half year.).
Given that pretty much everything is going right in the economy right now, my investment stance is more conservative. It's not a bad time to buy, but it's definitely not a fire sale. Bigger Pockets is a great resource. Drop me a line if you ever want to chat in more detail. I've gone pretty deep in the whole space, and have a background in investing and finance.
Rising rates are going to cause havoc here in the Bay Area, and other metro areas with extreme cost of living expenses and NIMBYism due to the following:
- Interest rates were amazingly low in 2016. Many got their 30 year mortgages locked in at 3.5%, or we’re able to refinance their existing one into that.
- Rising rates may slow housing price increases, but due to NIMBYism, I don’t foresee them coming down substantially, if at all. The Bay Area recovered from the housing crash swiftly. In a normal market high interest rates should cause prices to come down since people can only afford a certain monthly payment, but an artificially constrained market is not normal.
- Those locked into an amazing interest rate are inscentivized to hold on to their homes, further reducing liquidity in the housing market. Combine that with other incentives like Prop 13, ridiculously low SALT deduction and lowered interest write offs for new mortgages in new tax bill, and you have a recipe for disaster.
- Further stratification between those who can afford to buy in these markets vs those who can’t.
I suppose interest rates could fall again, they were also at record lows in 2013, rose, and fell again in 2016.
Tl;dr rising interest rates are going to freeze an already illiquid housing market in SFBA, NIMBY metros.
Edit: I would love to read why someone disagrees with this analysis instead of just a downvote
Agreed that it is quite plausible this won't cut housing prices - and may even raise them - contrary to what might be expected from basic econ.
This notably happened at the start of this year, where even though tax code changes made buying a house ~10% more expensive (relative to renting), housing prices kept riding, perhaps partially because existing owners also became more incentivized to hold because the code grandfathered in a $1M tax deduction.
Aren't "locked-in" rates typically renegotiated every 5 years or so? So if rates keep increasing the entire time some folks might be in for a rude awakening in 2021...
That's an adjustable-rate mortgage. A traditional US 30-year mortgage has a fixed rate for the entire term. You can refinance, if you want to, but you're just getting a new 30-year (or 15-year) loan which pays off the old one, and then you have a new fixed rate for that entire term.
It depends on your situation. I did it last year, and I ended up with roughly $700 more space in my monthly budget even though my mortgage interest rate went up by 0.25%. I have enough equity now that I no longer have to pay for mortgage insurance, which saves a lot, and I also took the opportunity to roll up all my other debt into the mortgage. I'll pay more for the house over the long run, but I have more flexibility in the meantime, and that's been completely worth it.
Most of the web is funded by targeted advertising. Are you seriously surprised that a lot of those websites are blocking EU users since they cannot make a profit off of them now due to GDPR?
Cheap money along with mortgage lenders have done nothing but push home prices to absurd levels. Local governments are complicit in this exploitation as property taxes rise/reset, giving them a skin in the game. The only suckers are the home owners, new and existing alike. They are being exploited by usury and repayment of an unreasonable debt on a home ,which without lender money would cost significantly less. Some long term residents are being priced out due to rising taxes. Remember, the home value gains aren’t realized until you sell whereas the interest payment and property taxes are each and every year. This dynamic is turbulent and bad for health and continuity of communities.
Car and student loans are similar. It’s not suprising that tuitions are out of control. Like with housing, the school administrators are complicit. Student loans are perhaps worse. One can’t default on a student loan but the rates are 6-7%+ nevertheless.
Securitization of debt in dwelling, education and transportation are just three examples of exploitation of the individual. The irony that some of this liquidity is your very own retirement funds is not lost on me. A self-feeding loop. One must work their entire life, often in misery to repay these absurd prices. For me this is enslavement. Ideals aside, this is reality. Such is the system and life. It’s survival. Having this perspective helps me refrain from being trapped and make sensible decisions.
What’s the justification for this premium on this debt?
“Umm, we provide liquidity to the very asset bubbles we create. We assume the risk of default on the loan which in reality Uncle Sam insures is against. Oh and also, we can use that money in one of the other markets that exist for us to exploit.”
Tell me again, what risk are these institutions really taking?
A recent "The Indicator from Planet Money" podcast episode "Rising Rates Vs. The Housing Market" explains how housing price declines don't necessarily follow from rising mortgage interest rates.
Yeah, there’s less of a relationship between those than one would think. Slightly related: it’s time to phase out the mortgage interest deduction and plow that revenue into affordable housing.
Sure, I can see that. Without not knowing their argument, I can see the following pressures on sustaining current price levels:
1. Investor money swooping up property for rental purposes.
2. Home owners refraining from selling in a buyers’ market. As long as they are able to make payments on their leveraged debt.
But there is no denying that higher interest rates put a downward pressure on home prices due to debt being more expensive and investment money finding more promising returns elsewhere; i.e. bonds.
Some other downward pressures I could see impacting housing markets are:
1. Lack of wage increases
2.Baby boomers dumping homes on the market over the next decade
3. Insolvent municipal/state public pensions. Money on these IOUs gotta come from somewhere. Bonds and cuts are one way, raising taxes is another.
The system is set up to keep rich people being rich and in control, just like always. It's not at all random who is in control. Someone makes those decisions and it's not the public through elections :)
We never left the age of kings and peasants. We just have different names. The difference in income has only increased, and the gladiator arenas used to entertain the masses was replaced with sports and computer games.
We are more comfortable now though but so are the rich people.
> The irony that some of this liquidity is your very own retirement funds is not lost on me. A self-feeding loop.
This “self-feeding loop” is actually completely expected and not at all ironic.
One of the core benefits of credit markets is the ability to shift your income across your lifetime: to support spikes in spending like buying a house, or fill periods of lower income like retirement.
Securitization of mortgage debt is why you can buy a house with a 30 year fixed rate mortgage at 4.5% (and a non-trivial reason why 30 year fixed is available at any price).
> What risk are these institutions really taking?
Default risk, interest risk, etc. I’m a 15 year shareholder of Bank of America; would you like a brief history of how riskless making loans to ordinary Americans is given that the federal government will bail you out of any losses?
> Securitization of mortgage debt is why you can buy a house with a 30 year fixed rate mortgage at 4.5% (and a non-trivial reason why 30 year fixed is available at any price).
No, this is the reason why I can’t buy a house using my responsible savings after years of hard work. You are eroding the value of my savings. The massive increase of money supply chasing the finite asset is the reason why the ordinary American is forced to use your product in the first place.
You should consider yourself lucky that you have any BoA shares to hold onto after the subprime meltdown.
Let’s not kid ourselves, providing liquidity to these markets isn’t done out of good faith. All lenders are doing is hiding/shifting risk. This does not mean the risk goes away, but rather creating massive systemic risk much more catastrophic to society.
Interest risk is covered with interest rate swaps; floating vs fixed.
Is BoA a bank or investment bank? Should it take deposits in pay a fixed return, add its markup and lend it out what they have as responsible, vetted business loans?
Look, I’m not arguing the efficiencies of the status quo. I’m empathizing and voicing the risk and serfdom the ordinary individual and communities endure. When an individual defaults, lender isn’t the only one who suffers. Between the 4.5% interest plus 1-2% property tax realized every year, you hope that your property value rises by 5.5-6.5% every year before you break even. Should your primary dwelling be viewed as a financial instrument? How about profit sharing rather than usury upon sale of the house if you really want to assume the risk? Or partial settlement refund if the home never went up in value? It’s difficult to realistically consider these options as the foundation of our financial system is based on interest and inflation.
> Between the 4.5% interest plus 1-2% property tax realized every year, you hope that your property value rises by 5.5-6.5% every year before you break even.
A house doesn't need to appreciate 6% to be a good purchasing decision. Not having to pay rent is most commonly the biggest advantage to buying a house.
Reading comments here it seems that US house owners consider 3.5% low, is this correct? Article is locked for EU readers.
This just makes me even more scared about Swedens new normal that is 1.50% (1.00% after tax deduction). Today I even get offered 0.99% (0.70% after tax deduct).
What is currently "normal" rates in different regions in the world?
Think about it the other way around, that you would lend someone a significant amount of money, that you could also invest in stock, into your own business etc. I think 1.5% is really low, when you think about it that way.
3.5% in the US is probably adjustable rate. 30-year fixed rate is around 4.66% (http://www.freddiemac.com/pmms/). Note that, AFAIK, the US is the only country in the world to offer fixed 30-year mortgage rates.
Here in Australia five year fixed rates are around 4.79%.
Swedish rates are crazy low. Lots of people are going to go bankrupt when they're forced to renew at higher rates.
US is definitely not the only 30y fixed country in the world... how many countries are you familiar with? For example, the Netherlands has done 30y since forever. Current rates are between 2.5% (best case) and 3% (worst case with 0 down) for 30y fixed. 5y fixed is 1.2% to 1.6%, it's absolutely ridiculous.
3.5% is low in the US, but it also depends on the duration and type of the loan.
Rates below 2% would be exceptionally rare, but you can't compare rates if you don't also consider the other terms of the loan.. Are your <1% loans for the full price of the home, or a reduced price after accounting for you paying for some percentage in cash? (in the US, known as a down payment)
Loans are always approved up to 85% of home value, so 15% cash payment required. 1 - 1.5% loans are freely available with 1-5 years fixed rate. And you get 30% back of the interest paid from IRS yearly.
Repayment terms are usually 40-100 years and not uncommon that 3years in on a 100year repayment you refinance the 97% left on a new 100years repayment plan.
To put it into some numbers.
A typical middle class income for a couple would be 85.000usd/year, 60.000usd after taxes. They buy a home for 320.000usd with a loan of 270.000usd.
Interest cost $180/month.
I find it very interesting that the markets in many countries have similar movements but loans are nothing alike.
Are country markets really so different or are some markets just broken and it will catch up one day?
American mortgages are a little unusual in that they are typically fixed rate for 30 years and can be paid off at any point without penalty (so if rates drop you can refinance for the lower rate).
Similarly in Mexico: You can choose to pay for 20/30 years a fixed amount. And if you pre-pay you either reduce the number of months or reduce the amount to be paid each month. Now, rates are not similar at all, being tripled in Mexico.
Shit, in November last year I got a mortage for 8.5% in Mexico. That is considered low over here, which is crazy. In 2018, mortage rates have gone up to 13%.
I envy USA rates of 4%. Rates like the one you describe in Sweden (1.5%) would be a dream.
As someone not living in the US, having a loan rate fixed for 30 years seems insane. So if interest rates go up in the US more than Freddie Mac expects, they are going to lose money on all their loans for 30 years? Seems like an unsustainable risk to me.
In Australia we have 4 year fixed home loan rate, and most loans are variable rate.
Are you aware of the amortization schedule? Interest portion of the payoff is front loaded. It is a very good deal to write a mortgage no matter what the rate is, assuming default risk is low.
It's May 25th, 2018, and 9 hours and 14 minutes ago GDPR came into effect. I tried opening this link, which I imagine links to some news or media outlet. This is what I see:
451 Unavailable For Legal Reasons
Sorry, this content is not available in your region.
Super simple web connection switchboard by Gorhill (person behind uBlock Origin).
It allows you to assign certain addresses and elements to block calls from/to. For example 'www.google-analytics.com'. I use it as a catch-all when loading a web page, then release elements that I want to load.
141 comments
[ 0.24 ms ] story [ 187 ms ] threadlame.
If I got an euro for every person that repeats BS like "your site will be fined 20Mi Euros for a violation" I would probably have the aforementioned 20Mi Euros
Mortgage rates continued their upward march this week, extending the most prolonged increase in rates in 46 years.
According to the latest data released Thursday by Freddie Mac, the 30-year fixed-rate average climbed to 4.66 percent with an average 0.4 point. (Points are fees paid to a lender equal to 1 percent of the loan amount.) It was 4.61 percent a week ago and 3.95 percent a year ago.
The 15-year fixed-rate average jumped to 4.15 percent with an average 0.4 point. It was 4.08 percent a week ago and 3.19 percent a year ago. The five-year adjustable rate average rose to 3.87 percent with an average 0.3 point. It was 3.82 percent a week ago and 3.07 percent a year ago.
"Mortgage rates so far in 2018 have had the most sustained increase to start the year in over 40 years," Sam Khater, Freddie Mac's chief economist, said in a statement. "Through May, rates have risen in 15 out of the first 21 weeks (71 percent), which is the highest share since Freddie Mac began tracking this data for a full year in 1972."
The Federal Reserve released the minutes from its May 2 meetings earlier this week. Officials indicated they are unlikely to hasten increases to their benchmark rate. The next interest rate hike is expected in June.
"The minutes suggest that the [Federal Open Market Committee] remains committed to a gradual withdrawal from the remnants of its crisis-era policies, rather than a more aggressive withdrawal as had been suggested in several recent speeches," said Aaron Terrazas, senior economist at Zillow. "Absent any geopolitical surprises, financial markets should be quiet going into the long holiday weekend, but expect more movement next week leading up to next Friday's jobs report."
Bankrate.com, which puts out a weekly mortgage rate trend index, found that nearly half of the experts it surveyed say rates will rise in the coming week. Shashank Shekhar, CEO at Arcus Lending, disagrees. He expects rates to remain unchanged following the holiday weekend.
"After touching a seven-year high, mortgage rates expectedly went down a tad last week," Shekhar said. "However, there is no reason for that downward trend to continue to anything significant. The Fed is still expected to raise the rate again in June with odds currently split between the probabilities for three or four increases for the year as a whole. With no major policy change expected from Fed and a short week because of Memorial Day, should mean a mostly stable market with mortgage rates not changing much for the week."
Meanwhile, mortgage applications declined again last week, according to the latest data from the Mortgage Bankers Association. The market composite index - a measure of total loan application volume - decreased 2.6 percent from a week earlier. The refinance index fell 4 percent, while the purchase index dropped 2 percent. The refinance share of mortgage activity accounted for 35.7 percent of all applications.
"As a result of rising rates, refinance applications continued to decrease, with our refinance index hitting its lowest level since December 2000," said David Stevens, MBA president and CEO. "Purchase applications decreased over the week, but the average loan amount for purchase loans increased to over $320,000 after averaging around $317,000 for the past four weeks, likely a sign that inventory for lower priced homes remains low and the mix is still skewed toward larger loan balances,." said David Stevens, MBA president and CEO.
Generally, in most discussions of the cost of housing, people discuss this expense in terms of a fraction of your income. In the US, a number of advisory articles and books consider between 25 and 30% of your gross take home pay as a "reasonable" amount of your income to pay for housing. So if you make $120,000 a year, that is about $3,000/month as 1/3 of your gross take home salary.
According to the FED income growth has been fairly static over the last decade so that 1/3 number has been fairly static as well. [1]
Given those two observations, you can derive the impact of rising interest rates on home sales, which is to say that as the rates rise, the monthly payment will rise, and that will put homes out of the 25 - 30% window for people. Historically that means a slower sales cycle and downward pressure on house prices (which keeps the payments at the lower level).
If there is a commensurate rise in real wage growth it won't slow down the housing market and the banks will make more money. If wages stay stagnant the housing market will cool off and if it does so for long enough prices will come down as people who have to move will feel pressure to lower the price in order to have the sale go through.
[0] https://www.google.com/search?q=what+percentage+of+my+salary...
[1] https://fred.stlouisfed.org/series/LES1252881600Q
In the past year, the Fed's base rate has gone up 75 basis points (0.75%) and it looks like mortgage rates have basically gone up in lock step (actually a bit less -- last year a 30-year fixed was about 4.05%, today it's about 4.61%).
Usually, the Fed raises rates when it has significant inflation concerns -- so it's most likely the overall inflation risk that's driving increased rates across the whole market, and not something that points to an overheated real estate market in particular.
That said, if the trend continues, it will have an impact on the cost of home ownership, the returns to real estate investors, and ultimately property prices. The cost of debt is just another line item in the economics of owning property, and as it goes up, affordability goes down. This is, of course, offset by a more buoyant economy (I.e. more people with jobs able to afford the higher costs)
I invest in real estate, and was curious what the rising interest rates would imply for investment property. So I ran some analysis here:
https://ramenretirement.com/2018/05/16/interest-rate-impact/
Rising rates will add cost (assuming you use leverage), which hurts returns (all things being equal). Every situation is unique, but for higher yielding properties in the Midwest, a 0.5% increase in rates would require a 3-5% drop in property value in order to hold investor returns constant. Of course, that’s not what I’m seeing in the market. It’s the opposite in fact. As rates have been rising, property prices have as well. This has the effect of compressing prospective investment returns. Ironically, it’s times like now when it is most dangerous to invest. I think there are still deals worth doing out there, but it’s wise to proceed with caution. Now is not a time for ‘risk on’.
The Journal of Real Estate Economics has a fascinating article from 2011 which goes into this in detail, by looking at the price of land / various housing structures in Manhattan and Chicago from 1920 to 1960.
By 1932, housing prices had dropped nearly 70% from their 1929 peak. If you had bought a 1-story house in Manhattan in 1929, it would not be until the mid-1960’s that you got to just break-even, let alone made any money.
http://www.people.hbs.edu/tnicholas/anna_tom.pdf
Also for those curious, I suggest you search “home prices” on https://images.google.com. The very first image is so laughable, and such a suggestion of the times we are in. This will not end well.
Of the two scenarios, I consider the deflationary one "worse" in terms of its impact on more people.
You just need to pay taxes and mortgage but not utilities for your empty house.
I had coworkers who wanted to find a new but were now $200K under on their house.
The mobility renting offers can't be understated.
Maybe, but probably not at the same rate.
Broadly speaking, rents are tied to incomes, house prices to the availability and cost of credit (i.e., interest rates). Average income places an upper bound on rents because renters can only pay rent from income (since no bank will lend you money to pay rent).
I'm currently benefiting from this phenomenon myself as I rent a house for ~$25k/year (in Melbourne, Australia). Buying that same house would cost me ~$45k/year.
I'm pretty sure every bank will do this, in the form of a credit card.
>I'm pretty sure every bank will do this, in the form of a credit card.
I’ve never seen an option to pay rent with a credit card. Cash, check, money order, or cashier check have been options I’ve seen.
Mind citing a source for this? I've seen a situation where rents and house prices didn't both rise together. Maybe not precisely the same rate, there may be some noise from other factors, but within a few percentage points of each other.
Rents may be somewhat related to the incomes of the people who are renting in the area, but these people are not necessarily the average population. In a housing shortage the people with high paying jobs rent decent places, everyone who makes less is forced to live with roommates or commute from further away and many leave the area altogether.
And then in your example, that's not necessarily so crazy. Some of that $45k goes towards the mortgage interest which is tax deductible (in the US, not sure about Australia), and of course over time more and more of it goes to the principle so effectively paying yourself.
> Rents may be somewhat related to the incomes of the people who are renting in the area, but these people are not necessarily the average population.
By definition renters must live in the are where they rent, and must work within commuting distance of where they rent (even if it's a very long commute).
Landlords, however, can live anywhere, provided they have someone to manage their rented properties. E.g., my landlord lives in Singapore, but I pay my rent to a Melbourne based property management agency. But since I live (and work) in Melbourne my rent is set by the market rate in Melbourne, not the (much higher) rate in Singapore.
Unfortunately for non-techies in SF, their rents have been pushed up massively due to the much higher tech salaries. But that only proves the strong correlation between rent and income.
BTW, mortgage interest in not tax deductible in Australia. Somewhat crazily, however, rental losses on investment properties are tax deductible ("negative gearing").
Prices (values) are based on that market willingness to pay divided by the cost of capital. If the cost of capital goes up, all else equal, values will fall while rents are flat.
I did a more thorough review of historical inflation, and the implications for investments here - cheers:
https://ramenretirement.com/2018/04/23/inflation/
In such cases, "forgiven" debt is taxable as regular income in that year, which adds another layer of problems.
How is your situation improved by sticking around to pay $400,000 + cost of financing for a $300,000 house? That just loses you a second $100K (plus cost of financing).
Your premise assumes housing values never go back up. The value is not necessarily gone forever.
The house that declined to $300k can climb back to $400k or $500k.
You can continue paying the mortgage, do absolutely nothing else, and watch as the property value climbs back to where it was due to economic factors (whether a hot economy or low interest rates fueling value recovery).
Over five years, from Jan 2010 to Jan 2015 you pay $120,000 in mortgages payments on the $400,000 mortgage. You get back to 2015 and the housing market has recovered your property back to over $400k (from the low of $300k). You continue making your mortgage payments. By Jan 2018, thanks to hot asset prices, your house is now worth $550,000. You're now solidly above water, you've paid off ~26% of your mortgage term (eight years of payments), and you're sitting on maybe $200,000 in equity value vs your original $500k purchase price. The value of the property recovered, and you didn't lose your $100k down payment from walking away.
Depending on the circumstances, you may very well have been better off holding on to a property in 2009-2010, rather than selling at a loss. The housing value recovery has been extraordinary over the last six or seven years. Certainly some property scenarios were extreme, where owners were perma-buried. The worst hit states, such as Arizona, Nevada, Florida, etc. saw rapid value recoveries.
Or you could rent, but that's not just an economic decision.
I will take people declaring bankruptcy over people being unable to afford to live in a home ANY day.
If you're underwater on a mortgage, it's still the same payment month over month that you were expecting when you took out the mortgage. It'll recover eventually if you hold on. When you're paying rent month to month, that number changes on you as prices rise and you can't just hold on.
The market can remain irrational for longer than you can remain solvent.
Additionally, your statement is false under many conditions. It is not close to a proven fact that it is true "eventually," no matter the time horizon.
If that were true, the purchase price to rent ratios would all be the same. They aren't.[1]. There are some places in the US (looking at you SF!) where renting is cheaper than buying and vice versa.
[1] https://www.mashvisor.com/blog/best-real-estate-markets-pric...
Not if the supply of rental units is increasing. One apartment building can put 100 - 500 units on the market versus perhaps 10 single family houses in that same space.
A good example of this in action right now is Sunnyvale, which has had rising home prices over the last three years but flat rents because the number of rental units coming online has greatly exceeded the available housing inventory.
It would be accurate to say that house rents go up with rising housing prices, but it is not true that all rents go up with rising housing prices. What it does is re-factor the ratio of renters to owners in favor of renters.
I've seen the argument you present used frequently, and I can understand where it is accurate in many markets.
In Seattle, a very similar argument is being made as a cure for the lack of affordable housing -- greater density of construction will lower costs through greater housing supply.
What I see happening in actuality though is that one house that would have fetched ~$900,000 today (and maybe $400,000 just a few years ago, post-recession) is torn down, and four condos put up in the same footprint. Ok - so supply increased, right? Not exactly, because if each unit is priced at ~$700,000, it's still above affordability for most people. So then those units get swallowed up by speculators and investors, the same as what's happened NY, Paris, London, and Vancouver.
I also recall in Seattle there is some building regulation where new apartment buildings get a tax rebate or some similar incentive that lasts 5 years - and then after that the units get converted to condos (or maybe its the other way around). In any event - my point is that there can be a lot of shenanigans that get in the way of the market.
In europe my loan is tied to the euribor 3month rate, which has been negative for ages and hasn't shown any signs of rising.
I remember having an argument on some webforum with some non european guy that could not believe my current interest rate is close to zero (mostly just fees collected by the bank).
More info: https://www.federalreserve.gov/aboutthefed/structure-federal...
After 2008 in europe the rates took a dive and have been negative for a few years.
This is a very complicated question.
There have been periods where short rates go up but 30y mortgage rates are unched or only up small or even down.
I think most people use 30y fixed rate mortgages in the US.
As for the scale of this, in 2008, the Fed owned 0 MBS. Since then, the Fed has printed 1.7 trillion dollars [1] to buy MBS. The total amount of total outstanding mortgage debt on every house in the U.S. is 8.8 trillion [2]. Now that the Fed has stopped doing this, rates are going up.
[1] https://www.federalreserve.gov/monetarypolicy/bsd-overview-2... [2] https://www.marketplace.org/2018/02/13/economy/divided-decad...
Mortgage rates are, mostly, driven by the market. The Federal Reserve influences the Federal Funds Rate (they don't "set it"; they set a target and then manipulate the market by buying & selling to try to reach that target). The FFR is just for overnight lending between massive institutions.
If your intuition says "hey, the difference between overnight lending between banks and 30-year lending to people is massive!" Well...that's right.
In 2015 the Fed raised rates by 0.25% but mortgage rates went down by 0.50%. The complete opposite of what most of your replies claim should happen.
This is not exactly a mysterious surprise. The Federal Reserve themselves have mountains of research, policy notes, and blog posts showing that there is an often large disconnect between the very short-term rates that the Federal Reserve can manipulate and longer term rates.
Here's on recent one (from 2017) titled, appropriately enough, "The Fed Funds Rate's Impact on Other Interest Rates"[1].
(Most US mortgages are fixed interest for the life of the mortgage. Very few other countries have that luxury. If you get a variable rate in the US, then it would be like yours -- tied to something else but with a markup.)
[1]: https://www.stlouisfed.org/on-the-economy/2017/october/incre...
Now, who lends to these agencies (i.e. who purchases "agency MBS")? I couldn't find recent numbers, but this [3] FRBNY article from 2015 states that the Fed owns most of it, followed by banks (which buy agency mbs partly because it counts as a safe asset (a "high quality liquid asset"), and allows them to satisfy their liquidity coverage ratio requirements.
This leads me to your first point:
> Mortgage rates are, mostly, driven by the market.
Pre-2008, I would say probably yes, but nowadays I'm not entirely sure, as the govt. is the biggest buyer and plays a large role in the second-biggest buyer.
[1] http://www.freddiemac.com/singlefamily/factsheets/sell/frm.h...
[2] https://www.bankrate.com/rates/interest-rates/fannie-mae-30-...
[3] https://www.newyorkfed.org/medialibrary/media/banking/intern...
Fixed rate mortgages exists in Europe as well. But most consumers prefer 0.5% variable rates to 5% fixed rates.
0) https://www.valuepenguin.com/mortgages/historical-mortgage-r...
Edit: Maybe they're adjusting for inflation. But they don't say so, if they are.
Given that interest rates will rise, there will be more demand in the rental market. I don't think REITs will be a good option because of the potential for higher interest rates but investing in a property, locking in that interest rate, and generating positive cash flow from rent would be a sound decision?
For more on real estate investing, I write a lot on the topic here: https://ramenretirement.com/
I actually bought a house 5 years ago, and I really feel I totally lucked out. Back then though, the fear of rising interest rates scared me into buying. Like you, I don't expect those type of returns with any investment I make now... but I was thinking about diversifying my finances, and moving money away from stocks into property real estate.
I know that I'll have to be much more diligent about finding the right market/deal. I'm using Bigger Pockets at the moment which is quite an amazing resource. Thanks for pointing me to your site too.
https://ramenretirement.com/2018/05/16/interest-rate-impact/
Doesn't mean you shouldn't invest - just figure out what sort of returns you're willing to accept (along with the corresponding risk / cushion you need), and hold that line when you run your diligence. FWIW, I think you can still find single family investments in the midwest that will generate 8%+ cash on cash returns (after fully accounting for all direct, and reserved expenses). That's still a pretty good return, but getting harder to find.
It's hard to say when the market will soften or correct, so a dollar-cost-averaging approach to buying RE is probably a good idea (i.e. buy a rental property every quarter, or every half year.).
Given that pretty much everything is going right in the economy right now, my investment stance is more conservative. It's not a bad time to buy, but it's definitely not a fire sale. Bigger Pockets is a great resource. Drop me a line if you ever want to chat in more detail. I've gone pretty deep in the whole space, and have a background in investing and finance.
- Interest rates were amazingly low in 2016. Many got their 30 year mortgages locked in at 3.5%, or we’re able to refinance their existing one into that.
- Rising rates may slow housing price increases, but due to NIMBYism, I don’t foresee them coming down substantially, if at all. The Bay Area recovered from the housing crash swiftly. In a normal market high interest rates should cause prices to come down since people can only afford a certain monthly payment, but an artificially constrained market is not normal.
- Those locked into an amazing interest rate are inscentivized to hold on to their homes, further reducing liquidity in the housing market. Combine that with other incentives like Prop 13, ridiculously low SALT deduction and lowered interest write offs for new mortgages in new tax bill, and you have a recipe for disaster.
- Further stratification between those who can afford to buy in these markets vs those who can’t.
I suppose interest rates could fall again, they were also at record lows in 2013, rose, and fell again in 2016.
Tl;dr rising interest rates are going to freeze an already illiquid housing market in SFBA, NIMBY metros.
Edit: I would love to read why someone disagrees with this analysis instead of just a downvote
This notably happened at the start of this year, where even though tax code changes made buying a house ~10% more expensive (relative to renting), housing prices kept riding, perhaps partially because existing owners also became more incentivized to hold because the code grandfathered in a $1M tax deduction.
Nonetheless, I think "havoc" will be minor. It already makes little sense to buy in the Bay Area (https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-t...) - and that fact will just continue to be true.
“Mortgage rates are rising, which pushes home prices down.
But rates are rising because the economy is growing, which pushes home prices up.
Rising home prices pushes buyers away, which lowers prices.
Lower prices will slow growth and cause rates to fall.
I hate the economy.”
Sorry, this content is not available in your region.
Seriously???
Cheap money along with mortgage lenders have done nothing but push home prices to absurd levels. Local governments are complicit in this exploitation as property taxes rise/reset, giving them a skin in the game. The only suckers are the home owners, new and existing alike. They are being exploited by usury and repayment of an unreasonable debt on a home ,which without lender money would cost significantly less. Some long term residents are being priced out due to rising taxes. Remember, the home value gains aren’t realized until you sell whereas the interest payment and property taxes are each and every year. This dynamic is turbulent and bad for health and continuity of communities.
Car and student loans are similar. It’s not suprising that tuitions are out of control. Like with housing, the school administrators are complicit. Student loans are perhaps worse. One can’t default on a student loan but the rates are 6-7%+ nevertheless.
Securitization of debt in dwelling, education and transportation are just three examples of exploitation of the individual. The irony that some of this liquidity is your very own retirement funds is not lost on me. A self-feeding loop. One must work their entire life, often in misery to repay these absurd prices. For me this is enslavement. Ideals aside, this is reality. Such is the system and life. It’s survival. Having this perspective helps me refrain from being trapped and make sensible decisions.
What’s the justification for this premium on this debt? “Umm, we provide liquidity to the very asset bubbles we create. We assume the risk of default on the loan which in reality Uncle Sam insures is against. Oh and also, we can use that money in one of the other markets that exist for us to exploit.”
Tell me again, what risk are these institutions really taking?
END RANT
1. Investor money swooping up property for rental purposes.
2. Home owners refraining from selling in a buyers’ market. As long as they are able to make payments on their leveraged debt.
But there is no denying that higher interest rates put a downward pressure on home prices due to debt being more expensive and investment money finding more promising returns elsewhere; i.e. bonds.
Some other downward pressures I could see impacting housing markets are:
1. Lack of wage increases
2.Baby boomers dumping homes on the market over the next decade
3. Insolvent municipal/state public pensions. Money on these IOUs gotta come from somewhere. Bonds and cuts are one way, raising taxes is another.
We never left the age of kings and peasants. We just have different names. The difference in income has only increased, and the gladiator arenas used to entertain the masses was replaced with sports and computer games.
We are more comfortable now though but so are the rich people.
https://ourworldindata.org/wp-content/uploads/2013/12/Pre-In...
https://en.wikipedia.org/wiki/Gini_coefficient#/media/File:2...
What's the problem with economic slavery again?
This “self-feeding loop” is actually completely expected and not at all ironic.
One of the core benefits of credit markets is the ability to shift your income across your lifetime: to support spikes in spending like buying a house, or fill periods of lower income like retirement.
> What risk are these institutions really taking?
Default risk, interest risk, etc. I’m a 15 year shareholder of Bank of America; would you like a brief history of how riskless making loans to ordinary Americans is given that the federal government will bail you out of any losses?
No, this is the reason why I can’t buy a house using my responsible savings after years of hard work. You are eroding the value of my savings. The massive increase of money supply chasing the finite asset is the reason why the ordinary American is forced to use your product in the first place.
You should consider yourself lucky that you have any BoA shares to hold onto after the subprime meltdown.
Let’s not kid ourselves, providing liquidity to these markets isn’t done out of good faith. All lenders are doing is hiding/shifting risk. This does not mean the risk goes away, but rather creating massive systemic risk much more catastrophic to society.
Interest risk is covered with interest rate swaps; floating vs fixed.
Is BoA a bank or investment bank? Should it take deposits in pay a fixed return, add its markup and lend it out what they have as responsible, vetted business loans?
Look, I’m not arguing the efficiencies of the status quo. I’m empathizing and voicing the risk and serfdom the ordinary individual and communities endure. When an individual defaults, lender isn’t the only one who suffers. Between the 4.5% interest plus 1-2% property tax realized every year, you hope that your property value rises by 5.5-6.5% every year before you break even. Should your primary dwelling be viewed as a financial instrument? How about profit sharing rather than usury upon sale of the house if you really want to assume the risk? Or partial settlement refund if the home never went up in value? It’s difficult to realistically consider these options as the foundation of our financial system is based on interest and inflation.
A house doesn't need to appreciate 6% to be a good purchasing decision. Not having to pay rent is most commonly the biggest advantage to buying a house.
This just makes me even more scared about Swedens new normal that is 1.50% (1.00% after tax deduction). Today I even get offered 0.99% (0.70% after tax deduct).
What is currently "normal" rates in different regions in the world?
Here in Australia five year fixed rates are around 4.79%.
Swedish rates are crazy low. Lots of people are going to go bankrupt when they're forced to renew at higher rates.
Rates below 2% would be exceptionally rare, but you can't compare rates if you don't also consider the other terms of the loan.. Are your <1% loans for the full price of the home, or a reduced price after accounting for you paying for some percentage in cash? (in the US, known as a down payment)
Repayment terms are usually 40-100 years and not uncommon that 3years in on a 100year repayment you refinance the 97% left on a new 100years repayment plan.
To put it into some numbers. A typical middle class income for a couple would be 85.000usd/year, 60.000usd after taxes. They buy a home for 320.000usd with a loan of 270.000usd. Interest cost $180/month.
I find it very interesting that the markets in many countries have similar movements but loans are nothing alike. Are country markets really so different or are some markets just broken and it will catch up one day?
I envy USA rates of 4%. Rates like the one you describe in Sweden (1.5%) would be a dream.
In Australia we have 4 year fixed home loan rate, and most loans are variable rate.
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Super simple web connection switchboard by Gorhill (person behind uBlock Origin).
It allows you to assign certain addresses and elements to block calls from/to. For example 'www.google-analytics.com'. I use it as a catch-all when loading a web page, then release elements that I want to load.