4 ms·

Can someone with a background in econ / real estate weigh in on this a bit? Curious to hear some opinions on the housing market within the context of rising rat

Can someone with a background in econ / real estate weigh in on this a bit? Curious to hear some opinions on the housing market within the context of rising rates.

ChuckMcM 8y ago
Disclaimer: I'm just an enthusiast. Generally, in most discussions of the cost of housing, people discuss this expense in terms of a fraction of your income. In the US, a number of advisory articles and books consider between 25 and 30% of your gross take home pay as a "reasonable" amount of your income to pay for housing. So if you make $120,000 a year, that is about $3,000/month as 1/3 of your gross take home salary. According to the FED income growth has been fairly static over the last decade so that 1/3 number has been fairly static as well. [1] Given those two observations, you can derive the impact of rising interest rates on home sales, which is to say that as the rates rise, the monthly payment will rise, and that will put homes out of the 25 - 30% window for people. Historically that means a slower sales cycle and downward pressure on house prices (which keeps the payments at the lower level). If there is a commensurate rise in real wage growth it won't slow down the housing market and the banks will make more money. If wages stay stagnant the housing market will cool off and if it does so for long enough prices will come down as people who have to move will feel pressure to lower the price in order to have the sale go through. [0] https://www.google.com/search?q=what+percentage+of+my+salary+should+I+spend+on+housing https://www.google.com/search?q=what+percentage+of+my+salary... [1] https://fred.stlouisfed.org/series/LES1252881600Q https://fred.stlouisfed.org/series/LES1252881600Q
otterley 8y ago
For one, the Federal Reserve has been raising the overnight rate it charges banks. Commercial lenders typically try to maintain a certain interest rate "spread" between the Fed's overnight rate and the rates they charge mortgagors, so if the Fed's rate goes up, all lending rates tend to go up in tandem. (This is called "indexing.") In the past year, the Fed's base rate has gone up 75 basis points (0.75%) and it looks like mortgage rates have basically gone up in lock step (actually a bit less -- last year a 30-year fixed was about 4.05%, today it's about 4.61%). Usually, the Fed raises rates when it has significant inflation concerns -- so it's most likely the overall inflation risk that's driving increased rates across the whole market, and not something that points to an overheated real estate market in particular.
ramen-san 8y ago
Well, for context, mortgage rates have hovered between 3.5-4.5% for almost a decade. Rates now going over 4.5% is new, but it’s not a HUGE change yet, and still well below historical norms. The headline is a little sensational. That said, if the trend continues, it will have an impact on the cost of home ownership, the returns to real estate investors, and ultimately property prices. The cost of debt is just another line item in the economics of owning property, and as it goes up, affordability goes down. This is, of course, offset by a more buoyant economy (I.e. more people with jobs able to afford the higher costs) I invest in real estate, and was curious what the rising interest rates would imply for investment property. So I ran some analysis here: https://ramenretirement.com/2018/05/16/interest-rate-impact/ https://ramenretirement.com/2018/05/16/interest-rate-impact/ Rising rates will add cost (assuming you use leverage), which hurts returns (all things being equal). Every situation is unique, but for higher yielding properties in the Midwest, a 0.5% increase in rates would require a 3-5% drop in property value in order to hold investor returns constant. Of course, that’s not what I’m seeing in the market. It’s the opposite in fact. As rates have been rising, property prices have as well. This has the effect of compressing prospective investment returns. Ironically, it’s times like now when it is most dangerous to invest. I think there are still deals worth doing out there, but it’s wise to proceed with caution. Now is not a time for ‘risk on’.

Can someone with a background in econ / real estate weigh in on this a bit? Curious to hear some opinions on the housing market within the context of rising rates.

ChuckMcM 8y ago

Disclaimer: I'm just an enthusiast. Generally, in most discussions of the cost of housing, people discuss this expense in terms of a fraction of your income. In the US, a number of advisory articles and books consider between 25 and 30% of your gross take home pay as a "reasonable" amount of your income to pay for housing. So if you make $120,000 a year, that is about $3,000/month as 1/3 of your gross take home salary. According to the FED income growth has been fairly static over the last decade so that 1/3 number has been fairly static as well. [1] Given those two observations, you can derive the impact of rising interest rates on home sales, which is to say that as the rates rise, the monthly payment will rise, and that will put homes out of the 25 - 30% window for people. Historically that means a slower sales cycle and downward pressure on house prices (which keeps the payments at the lower level). If there is a commensurate rise in real wage growth it won't slow down the housing market and the banks will make more money. If wages stay stagnant the housing market will cool off and if it does so for long enough prices will come down as people who have to move will feel pressure to lower the price in order to have the sale go through. [0] https://www.google.com/search?q=what+percentage+of+my+salary+should+I+spend+on+housing https://www.google.com/search?q=what+percentage+of+my+salary... [1] https://fred.stlouisfed.org/series/LES1252881600Q https://fred.stlouisfed.org/series/LES1252881600Q

otterley 8y ago

For one, the Federal Reserve has been raising the overnight rate it charges banks. Commercial lenders typically try to maintain a certain interest rate "spread" between the Fed's overnight rate and the rates they charge mortgagors, so if the Fed's rate goes up, all lending rates tend to go up in tandem. (This is called "indexing.") In the past year, the Fed's base rate has gone up 75 basis points (0.75%) and it looks like mortgage rates have basically gone up in lock step (actually a bit less -- last year a 30-year fixed was about 4.05%, today it's about 4.61%). Usually, the Fed raises rates when it has significant inflation concerns -- so it's most likely the overall inflation risk that's driving increased rates across the whole market, and not something that points to an overheated real estate market in particular.

ramen-san 8y ago

Well, for context, mortgage rates have hovered between 3.5-4.5% for almost a decade. Rates now going over 4.5% is new, but it’s not a HUGE change yet, and still well below historical norms. The headline is a little sensational. That said, if the trend continues, it will have an impact on the cost of home ownership, the returns to real estate investors, and ultimately property prices. The cost of debt is just another line item in the economics of owning property, and as it goes up, affordability goes down. This is, of course, offset by a more buoyant economy (I.e. more people with jobs able to afford the higher costs) I invest in real estate, and was curious what the rising interest rates would imply for investment property. So I ran some analysis here: https://ramenretirement.com/2018/05/16/interest-rate-impact/ https://ramenretirement.com/2018/05/16/interest-rate-impact/ Rising rates will add cost (assuming you use leverage), which hurts returns (all things being equal). Every situation is unique, but for higher yielding properties in the Midwest, a 0.5% increase in rates would require a 3-5% drop in property value in order to hold investor returns constant. Of course, that’s not what I’m seeing in the market. It’s the opposite in fact. As rates have been rising, property prices have as well. This has the effect of compressing prospective investment returns. Ironically, it’s times like now when it is most dangerous to invest. I think there are still deals worth doing out there, but it’s wise to proceed with caution. Now is not a time for ‘risk on’.