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Rising rates are going to cause havoc here in the Bay Area, and other metro areas with extreme cost of living expenses and NIMBYism due to the following: - Int
by ProfessorLayton 8y ago
Rising rates are going to cause havoc here in the Bay Area, and other metro areas with extreme cost of living expenses and NIMBYism due to the following:
- Interest rates were amazingly low in 2016. Many got their 30 year mortgages locked in at 3.5%, or we’re able to refinance their existing one into that.
- Rising rates may slow housing price increases, but due to NIMBYism, I don’t foresee them coming down substantially, if at all. The Bay Area recovered from the housing crash swiftly. In a normal market high interest rates should cause prices to come down since people can only afford a certain monthly payment, but an artificially constrained market is not normal.
- Those locked into an amazing interest rate are inscentivized to hold on to their homes, further reducing liquidity in the housing market. Combine that with other incentives like Prop 13, ridiculously low SALT deduction and lowered interest write offs for new mortgages in new tax bill, and you have a recipe for disaster.
- Further stratification between those who can afford to buy in these markets vs those who can’t.
I suppose interest rates could fall again, they were also at record lows in 2013, rose, and fell again in 2016.
Tl;dr rising interest rates are going to freeze an already illiquid housing market in SFBA, NIMBY metros.
Edit: I would love to read why someone disagrees with this analysis instead of just a downvote
- usaar333 8y agoAgreed that it is quite plausible this won't cut housing prices - and may even raise them - contrary to what might be expected from basic econ. This notably happened at the start of this year, where even though tax code changes made buying a house ~10% more expensive (relative to renting), housing prices kept riding, perhaps partially because existing owners also became more incentivized to hold because the code grandfathered in a $1M tax deduction. Nonetheless, I think "havoc" will be minor. It already makes little sense to buy in the Bay Area (https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-the-bay-area-right-now-9eff37da8d6 https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-t...) - and that fact will just continue to be true.
- jgh 8y agoAren't "locked-in" rates typically renegotiated every 5 years or so? So if rates keep increasing the entire time some folks might be in for a rude awakening in 2021...
- marssaxman 8y agoThat's an adjustable-rate mortgage. A traditional US 30-year mortgage has a fixed rate for the entire term. You can refinance, if you want to, but you're just getting a new 30-year (or 15-year) loan which pays off the old one, and then you have a new fixed rate for that entire term.
- jgh 8y agoI see. I'm not a homeowner so haven't gone through that before.
- sizzle 8y agoIf my rate is locked in at say 3.5%, would refinancing ever work out in my favor at interest rates >3.5%?
- marssaxman 8y agoIt depends on your situation. I did it last year, and I ended up with roughly $700 more space in my monthly budget even though my mortgage interest rate went up by 0.25%. I have enough equity now that I no longer have to pay for mortgage insurance, which saves a lot, and I also took the opportunity to roll up all my other debt into the mortgage. I'll pay more for the house over the long run, but I have more flexibility in the meantime, and that's been completely worth it.
- rufius 8y agoI’m reminded of this tweet from Morgan Housel a few days ago: https://twitter.com/morganhousel/status/997461370584133632?s=21 https://twitter.com/morganhousel/status/997461370584133632?s... “Mortgage rates are rising, which pushes home prices down. But rates are rising because the economy is growing, which pushes home prices up. Rising home prices pushes buyers away, which lowers prices. Lower prices will slow growth and cause rates to fall. I hate the economy.”