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The flip side though is low rates make it easier to afford the home payments too. Your mortgage payments on a 30yr loan at 4% on a 300K house are approximately

The flip side though is low rates make it easier to afford the home payments too. Your mortgage payments on a 30yr loan at 4% on a 300K house are approximately the same as 8% on a 200K house. (Not strictly proportional due to principal payments) One other thing to consider - it's real rates than matter, not nominal rates. 4% interest rate in a no-inflation environment is the same as 8% with 4% inflation.

phkahler 11y ago
>> The flip side though is low rates make it easier to afford the home payments too. Nope. When first time buyers go to the bank to get approved for a loan it goes like this: 1) Look at your income and expenses 2) Figure out what monthly payment you can afford 3) Work backward from #2 and the interest rate to determine how much you can borrow. From there every player (agents, sellers, bank) all want you to spend the full amount from #3 on your house. Since there is real crap at the bottom of the market, every $10k gets you a notable improvement. 2nd time buyers also fall for this, and it doesn't matter if you're smarter (like I was) and don't spend the full amount. Enough people let their loan approval amount influence them that the following holds: Your monthly payment is mostly based on your income. It's the price of housing that varies (inversely) with interest rates. By lowering rates over 30 years, they stimulated the economy until 2006-7. Then they jacked up the rates which initially lowered housing prices, which put people in trouble while also slowing the economy a bit and it all fell apart. They subsequently lowered rates and did QE1-3 to get things moving while also reinflating the housing bubble. They now have to raise rates ever so slowly to avoid part II, but they must raise them in order to restore the ability to regulate inflation with them. https://en.wikipedia.org/wiki/Federal_funds_rate#/media/File:FedfundsCAP.png https://en.wikipedia.org/wiki/Federal_funds_rate#/media/File...
- mathattack 11y ago
  I think you're missing my point... If rates go up, it doesn't help me that much as a buyer, because I can afford less house.

phkahler 11y ago

>> The flip side though is low rates make it easier to afford the home payments too. Nope. When first time buyers go to the bank to get approved for a loan it goes like this: 1) Look at your income and expenses 2) Figure out what monthly payment you can afford 3) Work backward from #2 and the interest rate to determine how much you can borrow. From there every player (agents, sellers, bank) all want you to spend the full amount from #3 on your house. Since there is real crap at the bottom of the market, every $10k gets you a notable improvement. 2nd time buyers also fall for this, and it doesn't matter if you're smarter (like I was) and don't spend the full amount. Enough people let their loan approval amount influence them that the following holds: Your monthly payment is mostly based on your income. It's the price of housing that varies (inversely) with interest rates. By lowering rates over 30 years, they stimulated the economy until 2006-7. Then they jacked up the rates which initially lowered housing prices, which put people in trouble while also slowing the economy a bit and it all fell apart. They subsequently lowered rates and did QE1-3 to get things moving while also reinflating the housing bubble. They now have to raise rates ever so slowly to avoid part II, but they must raise them in order to restore the ability to regulate inflation with them. https://en.wikipedia.org/wiki/Federal_funds_rate#/media/File:FedfundsCAP.png https://en.wikipedia.org/wiki/Federal_funds_rate#/media/File...

mathattack 11y ago
I think you're missing my point... If rates go up, it doesn't help me that much as a buyer, because I can afford less house.