7 ms·

This is a really important point that more people need to think about. Sticker price and interest rate have an inverse relationship. But the price you paid is s

This is a really important point that more people need to think about. Sticker price and interest rate have an inverse relationship. But the price you paid is set in stone when you buy, though the interest rate can change over time. For those who bought when rates were high and sticker prices were low, declining rates brought higher valuations. Additionally, the ability to refinance at lower rates meant that monthly payments were able to decrease along with total interest paid out on the loan. For those who bought now (me!) at high sticker prices and low interest rates, the mechanics don’t work in our favor. Interest rates are only likely to go up, which doesn’t allow refinancing at a cheaper rate. At the same time, (inflation-adjusted) sticker prices will go down. So while renting gotten ridiculously more expensive, home ownership also looks like an increasingly worse deal.

daniel-thompson 6y ago
Half-facetiously, what about people who bought at (comparatively) low sticker prices _and_ low interest rates? If you had bought a house in (say) Austin 10 years ago, you would have gotten about a 3-4% rate, and the value of your house on the market today would be almost double what it was then.
- stouset 6y ago
  It's easy to find individual markets (or time periods) where people have been lucky with overperforming house prices. I'm more concerned right now with what the future looks like for the median case. Home ownership is still probably a decent deal overall (I bought two years ago). But home ownership was an incredible deal for boomers who have been able to refinance at progressively lower rates while seeing a disproportionate rise in home value. Millennials now are stuck buying those homes with highly-inflated prices with not nearly as rosy a probable future. While it's certainly possible that housing prices continue to rise drastically, my own read of the available information shows that this was chiefly a side-effect of declining interest rates, which frankly can't get that much lower.
  - geenew 6y ago
    Interest rates can be negative.
    - acchow 6y ago
      Nominal interest rate (which is the rate quoted on your loan) cannot go negative. So your actual amortized payments for acquiring a home will never be subsidized by a "negative" mortgage APR.
      - reducesuffering 6y ago
        Any reasoning you want to give on this? Negative nominal interest rates already exist in European countries as a counterexample.
        acchow 6y ago
        For a consumer to borrow funds the nominal rate is negative? Where have you seen this? I'd like to see a citation. The reason this rate cannot be negative is that demand will immediately fill it up and use it for arbitrage (shove the money under a mattress and pay back the loan later) before it can become negative.
    - deleted 6y ago
      [deleted]
reader_mode 6y ago
>At the same time, (inflation-adjusted) sticker prices will go down. Who cares about inflation adjusted price when you have a mortgage ? Your rate will be X for Y years, as long as your income keeps up with inflation you'll get a net discount. Buying a property with loans is a good way of betting on inflation - I don't know if it will happen but if it does you'll win. Worst case scenario is recession, you have reduced income and housing prices plummet - I don't see this playing out, running low interest rates to high inflation seems likely to me.
- stouset 6y ago
  > Worst case scenario is recession, you have reduced income and housing prices plummet - I don't see this playing out, running low interest rates to high inflation seems likely to me. And the standard case scenario is rising interest rates, where your highly-leveraged asset drastically underperforms the market (and may even produce negative real returns, if it doesn't keep up with inflation).
  - bluGill 6y ago
    Which only matters if you want to sell. So never buy a house you don't plan to live in for a long time.
    - refurb 6y ago
      I don’t know too many people who would be excited at continuing to pay off a $500k mortgage on a house worth $400k.
      - sombremesa 6y ago
        Also, the bank will ask you to post the difference in money ASAP. The bank never loses.
        Nick87633 6y ago
        Banks in the US don't do this on mortgages.
runeks 6y ago
> For those who bought now (me!) at high sticker prices and low interest rates, the mechanics don’t work in our favor. Interest rates are only likely to go up, which doesn’t allow refinancing at a cheaper rate. At the same time, (inflation-adjusted) sticker prices will go down. This ignores the fact that, in some countries at least (e.g. Denmark), you reduce your debt if you refinance at a higher interest rate. For example, if you financed your house with a $200,000 2% fixed-rate 30 year Realkredit loan, and the rate of interest increases to 4%, then you can refinance you existing mortgage at 4% but now you only owe $100,000. This is how bonds work in general: a doubling of the rate of interest halves the bond price, and a halving of the rate of interest doubles the bond price.
SkyPuncher 6y ago
I'm not understanding how this doesn't work out for you. You got in at low interest rates. Why would you have to refinance? Why is not being able to refinance an issue?

daniel-thompson 6y ago

Half-facetiously, what about people who bought at (comparatively) low sticker prices _and_ low interest rates? If you had bought a house in (say) Austin 10 years ago, you would have gotten about a 3-4% rate, and the value of your house on the market today would be almost double what it was then.

stouset 6y ago
It's easy to find individual markets (or time periods) where people have been lucky with overperforming house prices. I'm more concerned right now with what the future looks like for the median case. Home ownership is still probably a decent deal overall (I bought two years ago). But home ownership was an incredible deal for boomers who have been able to refinance at progressively lower rates while seeing a disproportionate rise in home value. Millennials now are stuck buying those homes with highly-inflated prices with not nearly as rosy a probable future. While it's certainly possible that housing prices continue to rise drastically, my own read of the available information shows that this was chiefly a side-effect of declining interest rates, which frankly can't get that much lower.
- geenew 6y ago
  Interest rates can be negative.
  - acchow 6y ago
    Nominal interest rate (which is the rate quoted on your loan) cannot go negative. So your actual amortized payments for acquiring a home will never be subsidized by a "negative" mortgage APR.
    - reducesuffering 6y ago
      Any reasoning you want to give on this? Negative nominal interest rates already exist in European countries as a counterexample.
      - acchow 6y ago
        For a consumer to borrow funds the nominal rate is negative? Where have you seen this? I'd like to see a citation. The reason this rate cannot be negative is that demand will immediately fill it up and use it for arbitrage (shove the money under a mattress and pay back the loan later) before it can become negative.
  - deleted 6y ago
    [deleted]

reader_mode 6y ago

>At the same time, (inflation-adjusted) sticker prices will go down. Who cares about inflation adjusted price when you have a mortgage ? Your rate will be X for Y years, as long as your income keeps up with inflation you'll get a net discount. Buying a property with loans is a good way of betting on inflation - I don't know if it will happen but if it does you'll win. Worst case scenario is recession, you have reduced income and housing prices plummet - I don't see this playing out, running low interest rates to high inflation seems likely to me.

stouset 6y ago
> Worst case scenario is recession, you have reduced income and housing prices plummet - I don't see this playing out, running low interest rates to high inflation seems likely to me. And the standard case scenario is rising interest rates, where your highly-leveraged asset drastically underperforms the market (and may even produce negative real returns, if it doesn't keep up with inflation).
- bluGill 6y ago
  Which only matters if you want to sell. So never buy a house you don't plan to live in for a long time.
  - refurb 6y ago
    I don’t know too many people who would be excited at continuing to pay off a $500k mortgage on a house worth $400k.
    - sombremesa 6y ago
      Also, the bank will ask you to post the difference in money ASAP. The bank never loses.
      - Nick87633 6y ago
        Banks in the US don't do this on mortgages.

runeks 6y ago

> For those who bought now (me!) at high sticker prices and low interest rates, the mechanics don’t work in our favor. Interest rates are only likely to go up, which doesn’t allow refinancing at a cheaper rate. At the same time, (inflation-adjusted) sticker prices will go down. This ignores the fact that, in some countries at least (e.g. Denmark), you reduce your debt if you refinance at a higher interest rate. For example, if you financed your house with a $200,000 2% fixed-rate 30 year Realkredit loan, and the rate of interest increases to 4%, then you can refinance you existing mortgage at 4% but now you only owe $100,000. This is how bonds work in general: a doubling of the rate of interest halves the bond price, and a halving of the rate of interest doubles the bond price.

SkyPuncher 6y ago

I'm not understanding how this doesn't work out for you. You got in at low interest rates. Why would you have to refinance? Why is not being able to refinance an issue?