If rates go from a low of 2% up to, say, 9%, then in order to keep the mortgage payment the same, the price of a $400,000 house would have to drop to around $230,000. This assumes a 30-year fixed rate mortgage, and the details will vary depending on money down, etc. but the basic fact remains that house prices will need to fall by a lot, down to levels of 5 years ago or more, before the current interest rate hiking cycle ends.
I don't think most people who invested in housing in the last couple years, are ready to believe that yet.
Most of the people I speak to who locked in <3.5% are not planning on selling in the next 10 years or more. Then to consider the scenario of renting throughout this period; how much cash is being torched compared to a mortgage payment? How will they save for a down payment during a period of inflation like this?
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.
> locked in <3.5% are not planning on selling in the next 10 years or more
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.
If you are downsizing you can cash out and then buy your next (smaller) place in cash without a loan. This all assumes you aren't in California, though, where prop 13 encourages you to stay put no matter what.
Almost, except Prop 19, which allows you to transfer your property tax valuation under Prop 13 to a new property to allow people to downsize in retirement.
Frankly, I don't know any peers (millenials), that are able to afford anything more than a starter home anyway. That seems like a very outdated concept for people who are very well-off.
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.
> don't know any peers (millenials), that are able to afford
> 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?
Thank you for the low-effort snarky response. I wasn't aware that starter homes in my area built in the 1950s are an instagram-worthy location.
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.
Do the high COL Instagram-worthy locations happen to be wear all the jobs are? Not everyone can work remote.
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.
>Current renters will have lower potential to save on a monthly basis
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.
> if you own you have to factor in maintenance, property taxes, and insurance.
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.
The price to rent ratio compares the price to rent vs own. It’s definitely cheaper to rent than to own in many places. You can also get rent control in many cities so comparing renting to owning is going to vary with the specific situation.
I'm sorry, I must be missing some subtelty here. If renting is indeed cheaper than owning, landlords would be subsidising renters. That can't be correct...
i rent, and i'd pay over $1-$1.5k/month more on a mortgage if i wanted to live in the neighborhood where i rent. i'm doing an okay job saving for a down payment while waiting for everybody with low interest rates who need to sell because life happens.
> Most of the people I speak to who locked in <3.5% are not planning on selling in the next 10 years or more.
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)
Agreed. I was just offering an anecdote from my personal circle, many of whom view their real estate purchases as an investment to tuck away. Mostly, these are people who divested a portion or their stock portfolio in mid-2021 and didn't want to sit on cash in anticipation of the current inflation we are seeing now.
Not only that, new listings are down YoY while inventory continues to grow. That's a bad combination if you want prices to continue to go up.
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.
Many home owners can wait if their plans are flexible.
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!).
I'm not sure if I'd call it irrelevant. People have to do fast home sales for many reasons, and it can come up as a necessity at any time. Life can be a twisty road that we can't foresee. I suppose I can't disagree that hoping for the best makes it irrelevant.
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.
> You'll pay for any house at any rate 2-3+ times over if you just pay the minimum payments.
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.
But no harm comes to me if my house value drops considerably if I'm not selling it. I keep on paying the same mortgage payment as before and I keep on living in my house. If the mortgage payment was worth it before, then it is worth it after.
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.
If most people don't sell and there is high demand, then the few properties that will be on the market will be gone quickly and people will compete, driving up the prices.
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.
In the US at least, we really should simplify, ease, and mandate 401k loans/withdrawal options for first-time homebuying.
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.
I'm not sure I understand. It's quite easy to take money out of your 401k without penalty for a first time home buyer. How could it be easier than just requesting the money?
Loans are subject to plan administrators allowing it, and withdrawals are subject to taxes and penalties, unless one qualifies for a hardship exception which is nebulously defined and at IRS discretion for home purchases, no?
Withdrawals are subject to taxes which is fair because you haven't paid taxes on it yet. While there may be some wiggle room for 401k administrators or the IRS, generally if you don't have other resources for a down payment on a house then you won't see any penalties for the withdrawal. The 401k loan will depend on your plan, but the terms are defined by your general plan, not something that the administrator will deny because you have poor credit.
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.
We allow people to save for college in tax advantaged plans. Why not houses? And if so, why not use a vehicle that already exists (401k/IRA) instead of creating a whole new one?
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?
I mean, I'd love to save for a home with a tax advantaged account. That sounds so good that if I ever planned on moving I'd want to max out my contributions to that, sell my house, take the money I earn from that house and dump it in my Roth 401k since I won't pay taxes on most of the capital gains, then take the distribution from the home savings account and put it towards the next down payment on a house and avoid taxes there too. As for why we don't allow you to do that from a 401k, for the same reason we have separate accounts for the education savings. 401k is designed to incentive retirement, not education or housing. Society could decide to make 401k's more broad, but I suspect that would just lead to the more well off people being able to better use them as tax shelters. Mortgages are already subsidized in other ways, including government down payment assistance, or low down payment requirements for loans.
This is another thing people don't consider: housing is priced at the margin. One house has to sell in the neighborhood because of divorce / death / etc, and boom you have the one comp that everything else is tied to.
Even if they stay in their home, people over-levered on their fake housing equity through HELOCs are in trouble.
you think people are going to pay mortgages they are massively underwater on?
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
> you think people are going to pay mortgages they are massively underwater on?
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.
I bought a house in the Chicago suburbs in August 2007 for $275k. I short sold it 4 years later for $115k. It sold 2 years ago (13 years afer I bought it) for $210k.
"Eventually" is doing a lot of work in your comment.
People seem to look at aggregate housing, and pretend that every buyer's experience will be "about average".
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.
Which is why buying a house should be considered consumption. It's to own a residence. Asset appreciation in real estate is a very long game and is not guaranteed. Strategic default will wreck your credit.
Really, I think I'm making three incorrect assumptions:
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.
With taxes, mortgage, and maintenance, I was paying about $1k/mo more than I would have paid for comparable rent. We stayed, watching our house fall in value for over 3 years. Housing is housing, but it's also an investment, and paying $12k extra every year on an asset that would take decades to break even isn't smart. We took the option that was available to us. FWIW, the credit impact wasn't bad, because so many people defaulted on loans in that period so there was a lot of grace given.
That being said, I don't expect 2022-23 to be like 2008-10 for housing.
Chicago metro real estate is unique in its price changes due to outlier amounts of debt for state and local governments. Both Chicago and IL are multiple standard deviations above the norm for projected tax liabilities, so accounting for that reduces the amount people pay for the real estate.
That's not what happened in 2008. This exact scenario was the primary cause of the financial meltdown at the time. The prevailing wisdom was people would always pay their mortgage, so the securitization of real estate mortgages were viewed as a safe investment - and invest they did! When the housing bubble popped a lot of investment banks who thought they had safe assets suddenly found themselves upside down, further compounding the problem and turning it into a full-fledged crises necessitating congressional intervention. Perhaps you're too young to know this story, but this is what happened. There's no reason to believe homeowners won't behave in the same manner today. We can argue whether this behavior is rational or not, but we're rather infamous for not being rational creatures, are we not?
This is true, but it's also missing the key part where leading up to 2008 lenders offered mortgages to people they were pretty sure wouldn't be able to keep paying, and then laundered those into the so-called "safe" investment when it was anything but.
I think the laundering is a bit overstated. Yes, there were "risky" loans being made but those risks were being mitigated by bundling those loans with "safe" loans into a new securities product. No one was really surprised by the risky loans going under. It was the presumably "safe" loans going under that caught everybody off-guard and created the financial storm. The entire mortgage risk model turned out to be wrong.
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.
Maybe you and the other commenter were talking about the so-called "jumbo" loans or interest-only loans that had become popular at the time. This was at the height of "flipping" and the idea was you'd make into your house and after five years you'd flip it and make a fortune because home prices were soaring so high. I saw the writing on the wall, but a lot of home buyers apparently didn't realize this was a first-mover opportunity and they may be left holding the bag. As it turned out, that was only the tip of the iceberg and that is what caught everybody by surprise!
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?
I don't think so. The time for requirements is when the loan is originated. I think it's typical to require mortgage insurance when the loan is more than 80% of the value, and it's very uncommon to loan more than 95% of the value.
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.
No, because no matter what, I'll still owe the bank the difference between the value of the house and the mortgage balance. If I was foreclosed on, then my credit is wrecked and I wouldn't be able to get a mortgage on the new house.
I know several people that walked away from homes in 2008 and if they had a good job they bought another home for half the price down the street. Your fears didn't materialize for them. Every one of them bought nicer homes as well.
In most states, lenders have recourse. So if you stop paying your mortgage, the bank will foreclose on your home and then come after your other assets to make up the difference in what you owe vs. what the home is currently worth.
I’ve defaulted on two mortgages in a recourse state, one primary residence, one investment property. Neither was pursued. While extreme, you can always move to Texas or Florida; they have incredibly strong creditor protections making you mostly judgement proof. Depends on your threat model, exposure, and risk tolerance.
Recourse versus non-recourse mortgages is an interesting difference that most people seem to be unaware of. I do not recall reading about it in any of the disclosures (running hundreds of pages) that I had to read. I only found out about it while researching on the internet.
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.
Refinance in California remains non-recourse as of maybe 10 years ago.
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.
> you think people are going to pay mortgages they are massively underwater on?
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.
> you think people are going to pay mortgages they are massively underwater on?
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.
Even worse than that: people in construction will change career paths, and apprentices won't enter the industry for the next 5-10 years leading to a dearth of experience when it comes time to build houses again.
Most people only own one home and when they sell their current home they need to buy or rent another one. So for these owners, the supply/demand balance should be minimally impacted by their actions. This is certainly an over simplification of how things work, for example during COVID a flight to the burbs caused a drop in urban condos and rise in single family homes. But on balance, I think it is a good rule of thumb to consider when trying to evaluate the real estate market.
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 dropping prices mean that someone who's been holding out over the last few years of insane price growth might finally find a home elsewhere that they can afford.
As someone who was too young to climb aboard the price bubble of the last 5 years: here's hoping.
Exactly, prices don't fall in symmetrical ways as they rise in happy times due to people's greed (or patience to wait). Seen it in 2008 and even before.
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.
I sometimes hear people say this, but it makes zero sense to me, and I can never get anybody to explain what they mean by it. Could you try to explain how we have enough houses but somehow corporations are the problem?
I don't understand how a corporate purchaser is worse than any other investor; I live in an area with almost only single family homes, and a huge fraction of them are investor owned and rented out. The small time land lords have a huge variance in how well they behave, but I'm not sure why corporate landlords are worse.
I think the idea is that corporate owners are helping keep prices propped up because they’re much less sensitive to vacancy. They can let a house sit unoccupied for much longer before dropping the price to get someone in compared to a small time landlord. Smalltimers don’t usually have the capital available to do that and will either need to drop prices to get someone in the house or sell the house.
Perhaps I'm too used to the California market, where the carrying cost of a long-held property goes basically to zero, and most landlords are long time holders of property.
So those who have recently bought a property, even corporate buyers, are far far more likely to keep a property occupied than most landlords.
Basically RE prices went through the roof and became an object of investment that gained in value during a time when money was cheap and cash was a bad place to store it.
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.
I can understand a small time house investor not renting out the house, and I see that all around me, in a very very tight housing market. Small time owners of 2-3 houses, especially those who have paid off the mortgage, avoid the hassle of renting because they have limited time to seek out tenants and deal with them, or limited tolerance for risk from a bad tenant.
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.
And some of those investors already lost their asses buying up SFH. I'm sure the rest see the writing on the wall. For example, BRG spun off a home trust division just this month, and it's the one that bought up all of these SFH during the boom. Could it be that they were expecting a massive drop in value of these investments?
SFH are a pretty insane choice of RE investment for institutions because they are so incredibly inefficient compared to apartment and office buildings.
> 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
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?
They would have to consist of a huge fraction of the market in order to do price fixing, but the highest percentage of purchases I have ever seen referenced is about 10% of purchases in a time period, which doesn't get anywhere close to having a significant number of the housing stock.
10% of a few quarters of purchases is still a tiny tiny tiny fraction of the market, and not enough to coordinate pricing.
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.
You've got it backwards. The bigger issue is that we aren't building new supply to meet demand. Corporations buying property is only an issue because we've stopped/slowed new home development/supply to not keep up with demand. Allow supply to meet demand and the corporations don't have a market to monopolize. This is the law of supply and demand 101.
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.
>I don't think most people who invested in housing in the last couple years, are ready to believe that yet.
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.
We purchased a year ago with a 2.4% mortgage. We are planning on staying here till retirement. I don’t much care where home prices go in the short term, but I do wonder where they will be in decades from now.
I don't see how they're going to go down that low. To do that, you need to have oversupply, or you need to be able to build a house for that price (building prices are up and will likely stay up due to prices of materials, living cost, and energy).
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.
One thing about housing, is that if more people live in each unit, demand can go down quite a bit. This isn't happening during a 2 year bust, but if inflation becomes endemic, people may be forced to. Some unhappy couples may continue to live together, children don't leave their parents' homes, students that shared an apartment while studying continue to do so after they start working, etc. Also, more people who own houses may decide to rent out half.
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).
Rents aren't going to go down. Raising mortgage rates makes housing more expensive, by raising the cost of the mortgage. That's going to force some would-be buyers to not be buyers, and to instead, rent. More demand on rent => prices go up.
I do see evidence of people renting, because they intend to buy next year when the prices are lower. So I do think rent will be a lagging indicator, and will keep going up for a while. That will keep the inflationary pressure on the Fed to raise rates higher and for longer.
Prices don't have to fall back down to pre-inflation levels for inflation to end.
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.
> people who invested in housing in the last couple years
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.
Of course. Thanks. Didn’t realize that was standardized. Here in Sweden the terms are government mandated and different depending on your salary and money down.
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.
> 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.
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).
The interest rate increases so far have not had any effect on inflation. This makes sense, the inflation is being caused by money that has already been injected into the market and the normal price corrections that an increased interest rate would normally cause is ironically causing losses to the fed itself as it bought basically the entire corporate bond market up during covid. I expect the fed to keep raising rates into an unresponsive market, getting more and more desperate.
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).
I saw someone point out that this interest rate hike will effectively nullify any bubble breaks. House prices could drop over 30% (the amount it dropped in the last housing bubble popping) and the monthly mortgage payment will still be more than it was before.
It’s still not a great time to look for a house. Prices have come down some but no where near enough to offset how much they went up by in the first 2 years. I guess if someone’s price anchor has been reset to the new normal, a house now looks great…
It can go one of two ways. Inventory continues its years long downward trend as people stop selling due to the price drops. Or, the increased rates combined with price drops trigger a wave of foreclosures and the market crashes hard. I think the former is more likely.
Inventory continues to rise today while new listings go down. Prices are going down continuously in my market. The outlook for a cash buyer is good right now, especially by January.
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.
Inventory will likely go down, but that doesn't really matter if demand goes down further.
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.
There are a lot of non-ultra-rich people close to retirement with maybe 300 or 400K they want to move away from more volatile instruments. That's what we did a few years ago and with the housing market now favoring cash buyers even more I'm tempted to repeat.
Putting a few hundred thousand in one parcel of land and structure seems a lot more volatile than a cheap broad market equity or bond or target date index fund.
We have a great house with a 2.75% mortgage. It would be hard to leave now, because a similar house would be a much higher monthly mortgage. Stuck, but thankfully we really love it and not plan on leaving.
I'm in the opposite boat. We had to move for work, and we bought a crappy house in a town I desperately want to leave as soon as possible. The housing market was going bonkers, so we now have a huge mortgage (but at a low rate).
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.
I similarly bought about a year ago with a similar interest rate, closing just a month or two before rates started climbing.
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.
Same boat. Relocated last May for work, quality of life to a mid-tier city from a major hub and bought near top of local market. I miss where I was living, but my mortgage is cheaper than the rent I had been paying for the last decade in previous city. Plus - no annoying neighbors or sharing walls.
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
Financial Ignoramus here - looking back - were ultra low rates a mistake? It seems insane that this number has grown so much since even last year. Would slowly growing them over a longer period have been better than these huge jumps? It seems wrong that I refinanced a 500k mortgage last year and I would be paying ~35% less per month than someone who did the same thing today.
The trick here is that high interest rates may be the smallest possible evil: we had a two year pandemic and all kinds of stacked global economic catastrophes (with the War of Russian Aggression still ongoing), from which you would expect major economic problems to arise. The measures taken to stage off the worst possible effects are now manifesting high interest rates. The cure can hurt, too.
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.
I'm getting increasingly agitated by this claim that rates were irresponsibly low over the prior decade. It's honestly shocking to me that so many people who should know better are even making this claim because I feel it's misleading people like yourself to believe there is some responsible level for interest rates.
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.
Its complicated. Overall, I think it is safe to say that rates were too low.
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.
It's also good for buyers with low net worth, but high yearly income. I got into the tech world 5 years ago, fresh out of college. Many of my peers can afford monthly payments of $2-3k... but getting your hands on $100k cash for a 20% down payment takes time, even at decent income levels.
The difference for most conforming loans (sold to US government) is that less than 20% down payment requires property mortgage insurance (PMI), which should add to monthly payments compared to a 20% down mortgage.
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.
Based on what numbers? At a 6.6% loan, putting down 5% rather than 20% will increase your monthly payment by over 25%, on interest alone, ignoring PMI.
Post correction it makes homes more affordable as it lowers the down payment requirement. It also helps people build equity after a refinance at eventual lower interest trades etc.
There are a bunch of effects that make very low long term interest rates surprisingly bad for long term economic growth.
If it causes real estate to be seen as an investment unlikely to appreciate, whereas higher interest rates make bonds more attractive, then it could cause big money to rotate out of real estate and into other assets whose rate of return is proportional to the interest rates. When it happens, that will be a good thing. But, a lot of pain between here and there.
I would think this could help with people trying to buy their first place.
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).
Same markets offer 5% or 0% down loans. Financing isn’t the problem it’s the monthly cost. Rent is cheaper than owning in Seattle, LA, and SF metro areas for a large portion of the housing stock.
I don’t think I agree with you. I don’t know of a lender offering 0% down loans for people in those markets (the only thing I could find was VA loans or USDA), but could be wrong.
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.
Because you would theoretically be paying the same amount, just paying it as interest instead of principal. It's not practically that big of a deal, but it does mean you would have less equity. If you had to sell it, you would get much less back, and you might have more taxable gain if you don't qualify for §121 exclusion.
> If you had to sell it, you would get much less back, and you might have more taxable gain if you don't qualify for §121 exclusion.
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 $225,000 house at 7%, you pay $45,000 down and $1,200/month. If things stay like that and you move after five years, you'll have about $169,500 left on your mortgage and thus get about $55,500 back out, $10,500 more than your down payment.
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.
You would have to account for the difference in down payment and opportunity cost of investing the $37k difference in down payments for the same period.
So in the 7% scenario, you have $37k + investment return + $10.5k.
This is correct, you will pay more to service the loan but only until you can refinance it. If you pay more in a low interest rate regime you have no way to improve your situation, and no way to sell if you need to.
Yes, I would rather pay usurious rates with a commensurately low price. Even though it would be terrible basically having the vast majority of my monthly payment going purely to interest for a long time, it's possible to:
- refi at a lower rate in the future
- sell the house without having to take a huge loss compared to low-% bagholders
You can win like a cash buyer if you pay a 2nd payment every year. If you plan on paying the minimum though, you definitely lose at 7% vs 3%. You are correct. As long as someone drops that extra payment monthly or yearly, depending on the amount and if you ensure it all applies to the principal with your lender.
> If you plan on paying the minimum though, you definitely lose at 7% vs 3%.
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.
The refi is an unknown and incurs closing costs again. That's a big gamble, and if it were guaranteed to work out, everyone would get an ARM. I view those statements as a "put your money where your mouth is, get an ARM", but few do.
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.
Here's a little math. Let's assume a $400,000 home pre-high interest rate regime. Assume, and this is the critical assumption as you say: six to twelve months from now that price drops 10%, to $360,000.
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.
It's a good thing for everyone. Even if you have a mortgage, when the principal is lower you can pay it off sooner by paying more than the minimum. This inflated asset bubble is strangling our society, especially for housing.
Thats not how property taxes usually work. Most municipalities set a millage rate based on how much revenue they want. If property values decrease, the millage rate goes up. If all property went down 30% the millage rate is adjusted accordingly to hit the revenue target.
That's not at all how real estate valuations work in my experience. In times of asset inflation, they lag to cut homeowners a break. So much so that other tax authorities outright reject using municipal valuations on their filings.
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.
Refinancing at 2.5% is the closest I have ever been to winning the lottery. I can't imagine trying to buy a house or finance a car right now, especially with dealers charging crazy ADMs. Something is going to have to give.
There is, just put a sign outside your door or post an ad on Craigslist/Facebook/etc.
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.
Lots of companies doing this for awhile. I'm not sure about the rates, but you can find them by googling "best ptp loans for investors" or something like that. https://www.prosper.com/ is one, for example.
As I read the comments here, and observe discussions about housing in the media and among friends / family, I can't help but to pick up that two opposing groups start to manifest:
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.
#1 only applies to those that are either living in a home and want to use an increase in the home’s price to get more leverage to purchase a more expensive home, or for people who have multiple properties and earn money by buying low and selling high.
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.
I understand it isn't ideal that a new homeowner would have the price if their house collapse after purchasing, but if you never intend to sell, what possible harm could that do to you?
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.
> I could afford 3 of my current mortgages currently,
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.
> but if you never intend to sell, what possible harm could that do to you?
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 not saying "welp doesn't affect me so fuck it"
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.
I’m pretty sure I bought at the worst possible time (March). Every month that goes by, thousands of dollars of my net worth disappear because of circumstances completely out of my control. It makes me doubt the value of hard work - sure, if you slave away at your desk job you can earn maybe an extra $30k a year, but the guy down the road who just happened to buy a house at the right time earned an extra $300k over the last few years doing nothing.
The primary purpose of buying a house is to live in it. Don't look at month to month price fluctuations. The minimum holding period for a house should be 5-7 years due to transactions costs including realtor commission, mortgage origination fees, moving your stuff, and implicit costs like a zillion trips to the hardware store in the beginning.
Right. Closing costs alone could eat away at 1-2 years of equity. You won't realize gains from a sale until the 5-7 year mark (not withstanding the last few years of fu*kery)
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.
That's true but we're talking a very long time when you look at how many decades of gains were priced into these peak prices. Most people that got into an even worse situation (~07) never did get back to purchase price to this day. From what I've seen, these recent peaks didn't match what was going on back then.
I bought at a similar time, right as rates were starting to really tick up. I got in at 3.75%. That time looks to be the tipping point, but in which direction is still not clear to me.
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've been in the market for a home since summer 2021 and learned a lot. I've gone through multiple agents, realizing how useless most of them are. The one I do find useful said the buyers disappeared around April of this year. Which lines up with your stories.
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.
people in the comments don't seem to realize if prices drop, you can buy and refinance later when rates come down. so it's really a great time to keep an eye on the market
Rates will eventually settle at ~5%+ after its confirmed inflation is brought down, and then remain there. 40% may not happen but we will be back to 2019 pricing in most markets in 2023, and then back to tracking 2-6% inflationary gains. That correction is guaranteed. I'm watching my market closely and it's collapsing. 40% gains is an aggregate, not every market in the US hit that, and not all will drop that much. It could happen on the coasts, we'll see soon enough.
We bought at 5.75. we have no delusions about rates coming down for a very long time. These rate hikes aren't an anomaly, the prior low interest rates were.
That is true, but only under the assumption that you can qualify for a refinance when the rates come down. Last time that rates went down that much we also had a spike in unemployment and much tighter lending standards - the two seem to go hand in hand.
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.
There is nuance that interest changes over the period of the loan. In or so 2007 some people took 5% Euribor + margin loans, but only some years after it was negative. And since negative euribor was not written to contracs some paid less interest than was margin.
I know this article is about the US, but in the UK, 30 year fixes are very rare nowadays. Most people are on 2 to 5 year fixes which revert to adjustable or trackers. The norm here is to refinance to a new fix every few years.
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%.
We should outlaw ARM for most people. It should only be for "accredited borrows" like we do for investing. People who don't really understand the risks get screwed and it creates unnecessary bubbles.
To play devil’s advocate, we really should ban 30 year fixed mortgages, not 5/1 ARMs. I know it sounds contradictory, but hear me out.
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.
There's also a much easier way to fix [monetary] inflation and that is fiscal - just raise taxes. Much quicker to propagate through the economy too. Just politically challenging.
Right now fiscal is doing the exact opposite, i.e. giving people stimulus while FED raises rates.
That is an interesting thought and I'll have to think about that more deeply. I think one thing that we need to remember is that with a fixed mortgage, you are paying tomorrow's mortgage at today's prices. As inflation rises and salaries rise to keep pace, your mortgage stays the same. It incentives home buying which is why there are so many government programs in this area. Obviously you don't want to just in at the top of the bubble, but getting in asap is a great strategy for most everyone.
This rate is for a 30-year fixed rate mortgage, and more a reflection of the uncertainty for that period of time and not something that will necessarily influence shorter-term lending rates.
The RFR has of course increased substantially in the last year but the other 4 components can easily be assessed as "riskier" when comparing to a year ago. Shorter term rates will absolutely be affected by the same components to varying degrees.
The interest rate shot up because the Fed stopped buying MBS. Banks now have to charge higher interest rates so they can make them attractive to investors compared to other investment vehicles like bonds
I find it strange that nobody here brings up the option of renting out your house instead of selling when you have to. If the mortgage is fully or even mostly covered by the rent, you can usually do that. In fact it would usually be sufficient if the interest is covered. The only exception would be divorce, unless both parties can agree.
Renting out a house is a huge pain. Local laws can make you accept tenants you wouldn't otherwise, and eviction moratoriums can make a bad tenant very difficult to get rid of. Not only that, but being a landlord isn't a labor-free job, and many of us don't have time for that, while property management companies are very expensive.
Many people I know, cashed out big on their stocks/ crypto. They may not be in the bucket of foreclosure unless they make seriously dubious financial choices and ruin their worth.
They will hold the reins on their houses and take some losses if need be, but ride it coolly till the end...
The redistribution of workers thanks to remote friendly policies mean municipal tax revenues in large cities have dramatically fallen. To cover that shortfall, will we now see increased appraisals and support for increased property tax rates? Such things are historically a political third rail, but I wonder if increased social inequality and disgust for short term rentals may flip the script. This may also have the effect of nudging out those who are otherwise content to sit on long term low rate mortgages. With more homes on the market this would help to drive down the cost of getting into home ownership in an age when mortgages are high.
Most county governments have a fixed levy for property tax mills. So if their target is $639 million then as tax appraisal values increase the tax per $1000 of appraised value will fall so the total property tax collected is constant. Of course as more levies are approved by voters individual property tax bills will creep up that way.
Great news - affordable housing is around the corner! This will also deep-six people speculating on real estate or buying homes to AirBnB them (won't be profitable). All good news.
If house prices drop because of interest rates affordability remains constant.
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.
> So if you're saying they're more affordable to the rich, sure.
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.
Also, I think a housing crash - similar to early 2000s, as many people think will happen - I dont think that will happen now. Its a different situation now. Subprime mortgage was taken care off with new regulations in subsequent years.
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.
Deaths, divorces, moves, bankruptcies, etc. still happen, so there's still a market. The average peasant didn't suddenly begin to make 2x more per month, so for the same fixed monthly payment, the house price needs to go way down. Cash buyers may be less sensitive to rates, but even they have significantly slowed purchases since the low rate frenzy.
Prices for homes last year were crazy high, because of the low interest rate. You should have a chance to get a house in the next year or two when prices come down a bit, and then refinance in 5 years.
At some point ARMs might actually make sense for people again as well. Once rates go up further and inflation actually starts to come down they should be a relatively safe bet.
Land cannot be created. The interest rate hike is on purpose. Price buyers out of homes from people who've deceased or moved into assisted living. Landlords purchase with cash, interest drops... then homes have a limited availability and increase in price. Repeat
Right, I think tech is a little different because salaries went up so much in the last 10 years. For most workers there are big shortages and raises everywhere. I know the people I've been involved in hiring are up 10-20% from pre-covid, even social security is up 8.7% for next year.
Isn't there "midterm" elections coming up in two months in the US? Aren't moves like spiking the rent to induce mass unemployment likely to benefit the Republican party? It can't be a winning strategy.
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...
Nominally independent but in practice the government still exercises a lot of power over fiscal policy. Thus, it is odd that the government has not exercised its power despite the upcoming election. Likely, lots of politicians will lose their jobs because the people will blame them for the bad economy.
Not sure how many other options the Fed has to keep inflation under control. They've basically forgone any efforts to keep unemployment low and switched entirely to controlling inflation. It is a critical moment for them—I don't think any amount of complaining from politicians is going to change that.
My father, in the 1970's, took an adjustable rate mortgage because he thought there was no way they would keep hiking rates with a presidential election coming. However, Volcker and company hiked the rates anyway (to levels far higher than today's), and he took a financial beating on his house payment.
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.
Interest rates are effectively set by the federal reserve which is a non-partisan institution that doesn't answer to congress or the president, at least that's the idea.
Several comments here state very confidently that either the commenter does not plan on moving for many years, or someone they know has similar plans.
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 buy a house you buy it long term 5+ years.
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.
Average house built today is 2,560 square feet[1]. In 1950, it was 980 square feet.
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
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.
Homes built in the 1950s don't sell for discounts in my town. They might have added some attic insulation for a few thousand dollars, but the walls, plumbing and electrical is probably original. Some of our priciest neighborhoods are homes from the 50s and 60s.
It is. Smaller square foot houses tend to go for more per sq ft. That said, my house is 1700 sq ft built mid 50s. We looked at many anywhere from 1500-3000k built in the 50s and 60s. But a 1700sq ft house built in the 50s doesn’t get discounted over a 1700sq ft home built in the 2000s despite old plumping, electrical and insulation. Homes in disrepair obviously are cheaper, but that’s just as true for 20 year old homes as 70.
So the post pointed out that home sale prices were increasing in time in terms of the performance of the asset class, and I pointed out that homes were growing in size, and you seem to have fixated on the age of the house rather than the fact that in 1950, the average home was almost 1/3 the size of the average home of 2022, and therefore you would expect it to be much less in price just on that basis alone.
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.
You're hitting a wall because you changed your tune from "plumbing/electrical/insulation" to square foot size, and you're being rude. I don't think anyone disagrees that overall prices have gone up in homes that are larger. Where did I say a 950sq ft home goes for the same as a 3000 sq foot one?
I don't think most people who invested in housing in the last couple years, are ready to believe that yet.