4 ms·

No, the #1 reason it's so hard to find an affordable home is that potential buyers can get huge loans at very low rates. Since buyers compete with each other,

by taprun 9y ago

No, the #1 reason it's so hard to find an affordable home is that potential buyers can get huge loans at very low rates. Since buyers compete with each other, prices go up. I guarantee that if interest rates were allowed to creep up, and the government stopped guaranteeing loans made by the banks, we'd have cheaper homes almost immediately.

mooreds 9y ago
Agreed. There'd be some howling from the mortgage and real estate industries though. I have often thought that the mortgage interest deduction is actually a subsidy to banks (because if you pay cash you get no deduction) and existing homeowners (because it supports existing prices).
tehlike 9y ago
Cheaper house, sure, but does that also mean less monthly payments? Or would i still pay the same monthly, but most would go to interest. Alternatively in the bay area there are a lot of wealthy people. I dont know how it would affect them
- bradleyjg 9y ago
  Even if the monthly payment for a 30 yr fixed were to stay the same the buyer would be better off with a lower price. American mortgages have no prepayment penalty, so the buyer has the possibility of refinancing at a lower rate sometime over the payback period or even just making extra principal payments.
Simulacra 9y ago
Do you have a source for this? Huge loans at very low rates? The current is about 3.85% even for an FHA loan. Even then they won't loan you huge amounts unless you have the income to justify it. Even if interest rates were allowed to "creep up" the government will not stop guaranteeing loans, and banks won't stop lending. They'll find some other way to offset. With higher interest comes higher payments which means only higher income people will be able to afford that housing. That will horribly exacerbate the problem. Now the middle and low income people don't even have a prayer of owning a home. Is that your intention?
- zaroth 9y ago
  It turns out people buy generally the most home they can afford, and this is in terms of monthly payment. As interest rates increase, demand falls for higher priced homes and the new equilibrium price ends up hitting just about the same monthly payment as you had before. Low interest rates have the same effect in reverse. Prices adjust so that regardless of interest rate your monthly payment is about the same, but low rates do transfer huge wealth to existing homeowners. As down payments have come down over time this is only more pronounced. From 50% down with a 5 year term in the early 1900s to peak-mortgage 5% down 50 year terms a few years ago.
closeparen 9y ago
Nominally cheaper, sure, but not more affordable, since ability to pay would fall proportionally.
codingdave 9y ago
If rates went up, the homes may be cheaper, but you'd then be paying more on your monthly mortgage, and more money would be just going to the banks. I'm not a finance expert, but this doesn't sound like a good solution.
matwood 9y ago
It would not really work that way. People buy houses based on payment. If rates went up, the price would go down, but people would still compete on who can pay more each month.
sytelus 9y ago
Not really... these days 20% downpayments are the norm. I know several people holding off purchases because they simply don't have downpayment. Higher home prices reduces number of potential customers but right now we have so many of them that reduction doesn't matter and margines are much higher on higher end.
- planteen 9y ago
  80-10-10 loans are quite popular right now from talking with friends.
- scarface74 9y ago
  FHA loans are easy to get and the down payment required is 3.5%. Even with mortgages that don’t qualify for FHA it’s relatively easy to get 5% down payment loans.
  - prostoalex 9y ago
    They generally require PMI, so still an extra payment out of pocket, are usually hard-capped at 30% of buyer’s current income, and take looong time to close compared to strong cash offers with conventional loans, so sellers view them as last-resort. It’s possible, but not very realistic for an FHA applicant to outbid everyone else on price.
    - scarface74 9y ago
      You can get prequalified for an FHA loan just like any other loan. Everyone doesn't live in SV where houses go so fast you're constantly having to outbid people.
      - prostoalex 9y ago
        taprun's comment was describing a competitive market "potential buyers can get huge loans at very low rates. Since buyers compete with each other, prices go up".
- 9y ago
pfranz 9y ago
Maybe in general? I don't have numbers, but over the past few years a lot of the competition I've seen seems to be all-cash buyers. At least on the west coast (Vancouver, Seattle, LA). Low interest rates elsewhere in the market could be freeing up the cash, but I don't see it being the primary driver for getting mortgages.

by taprun 9y ago

mooreds 9y ago

Agreed. There'd be some howling from the mortgage and real estate industries though. I have often thought that the mortgage interest deduction is actually a subsidy to banks (because if you pay cash you get no deduction) and existing homeowners (because it supports existing prices).

tehlike 9y ago

Cheaper house, sure, but does that also mean less monthly payments? Or would i still pay the same monthly, but most would go to interest. Alternatively in the bay area there are a lot of wealthy people. I dont know how it would affect them

bradleyjg 9y ago
Even if the monthly payment for a 30 yr fixed were to stay the same the buyer would be better off with a lower price. American mortgages have no prepayment penalty, so the buyer has the possibility of refinancing at a lower rate sometime over the payback period or even just making extra principal payments.

Simulacra 9y ago

Do you have a source for this? Huge loans at very low rates? The current is about 3.85% even for an FHA loan. Even then they won't loan you huge amounts unless you have the income to justify it. Even if interest rates were allowed to "creep up" the government will not stop guaranteeing loans, and banks won't stop lending. They'll find some other way to offset. With higher interest comes higher payments which means only higher income people will be able to afford that housing. That will horribly exacerbate the problem. Now the middle and low income people don't even have a prayer of owning a home. Is that your intention?

zaroth 9y ago
It turns out people buy generally the most home they can afford, and this is in terms of monthly payment. As interest rates increase, demand falls for higher priced homes and the new equilibrium price ends up hitting just about the same monthly payment as you had before. Low interest rates have the same effect in reverse. Prices adjust so that regardless of interest rate your monthly payment is about the same, but low rates do transfer huge wealth to existing homeowners. As down payments have come down over time this is only more pronounced. From 50% down with a 5 year term in the early 1900s to peak-mortgage 5% down 50 year terms a few years ago.

closeparen 9y ago

Nominally cheaper, sure, but not more affordable, since ability to pay would fall proportionally.

codingdave 9y ago

If rates went up, the homes may be cheaper, but you'd then be paying more on your monthly mortgage, and more money would be just going to the banks. I'm not a finance expert, but this doesn't sound like a good solution.

matwood 9y ago

It would not really work that way. People buy houses based on payment. If rates went up, the price would go down, but people would still compete on who can pay more each month.

sytelus 9y ago

Not really... these days 20% downpayments are the norm. I know several people holding off purchases because they simply don't have downpayment. Higher home prices reduces number of potential customers but right now we have so many of them that reduction doesn't matter and margines are much higher on higher end.

planteen 9y ago
80-10-10 loans are quite popular right now from talking with friends.
scarface74 9y ago
FHA loans are easy to get and the down payment required is 3.5%. Even with mortgages that don’t qualify for FHA it’s relatively easy to get 5% down payment loans.
- prostoalex 9y ago
  They generally require PMI, so still an extra payment out of pocket, are usually hard-capped at 30% of buyer’s current income, and take looong time to close compared to strong cash offers with conventional loans, so sellers view them as last-resort. It’s possible, but not very realistic for an FHA applicant to outbid everyone else on price.
  - scarface74 9y ago
    You can get prequalified for an FHA loan just like any other loan. Everyone doesn't live in SV where houses go so fast you're constantly having to outbid people.
    - prostoalex 9y ago
      taprun's comment was describing a competitive market "potential buyers can get huge loans at very low rates. Since buyers compete with each other, prices go up".
9y ago

pfranz 9y ago

Maybe in general? I don't have numbers, but over the past few years a lot of the competition I've seen seems to be all-cash buyers. At least on the west coast (Vancouver, Seattle, LA). Low interest rates elsewhere in the market could be freeing up the cash, but I don't see it being the primary driver for getting mortgages.