6 ms·

While there's a lot of factors involved, the impact of lowering interest rate is usually underestimated. I didn't pay an absurd amount of money for my house be

by shados 5y ago

While there's a lot of factors involved, the impact of lowering interest rate is usually underestimated. I didn't pay an absurd amount of money for my house because the market was super hot and I had to outbid everyone in a bidding war (though I did have to do that). I paid an absurd amount because with interest rates so low, it was cheaper than renting in term of monthly payment + maintenance. I'd obviously be willing to go as high as my current rent, and probably a bit higher (to be allowed to do whatever I want with it), and that just came up to the price I paid. The only thing blocking you, financially, is the down payment. The lower the interest rate, the higher the down payment will be for the same monthly payment. That's the problem. To live in the house, if you can afford 1500/month (including insurance, HoA, maintenance), it doesn't matter if the house is worth 100k, 300k, 600k, 1 million...if the math adds up to 1500/month, you'll buy it. Interest rates go down, house value go up. Simple as that. Now if you add all the other factors, like how home ownership becomes a potentially profitable investment, alongside society's pressure that "it's what you're supposed to do", and of course prices will skyrocket, shortage or not. In turn, it raises rent prices, which makes the math above work out even more, and it's a self reinforcing cycle.

pashamur 5y ago
Yeah, you pretty much nailed it - this article gives context, but it's pretty much as you said, most people are not adjusting by inflation & interest rate: https://realestatedecoded.com/the-shocking-truth-about-house-prices-since-1990/ https://realestatedecoded.com/the-shocking-truth-about-house... Think of houses like bonds that pay a coupon (rent). If risk free rate goes down, the coupon is worth more in comparison so house price goes up. The only downside is that when you buy a house that is cheap with a high interest rate you can benefit from refinancing if the rate goes down (and deduct your mortgage interest, which used to be significant tax savings). When you buy an expensive house at a low rate, you get no such benefit (although if inflation does pick up, the fact that you are implicitly short the borrowed dollars might still work in your favor).
- epistasis 5y ago
  I think this is the correct analysis in many ways, but I am very fond of the Minsky view that we are all agents dealing with cash-flow. The other side of cash flow is income, and I'd be very interested to see if income has kept under this analysis too...
me_me_me 5y ago
Exactly, and not everyone is in white collar high paying job. I have few friends that are in a saving vicious cycle, high rent and cost of living eat up saving so that they save little. This makes them resigned and depressed - so the spend money on stuff to make them happy. Having 25 yr old tell you that they will be able to afford a down-payment in 20 years is a telling sign.
darrylb42 5y ago
And what I never got when I was younger rent ticks up 2-4% every year, your mortgage costs are fixed. I am now locked in paying the same as what I had in rent 5 years ago. I used the the same rent vs buy cost allocation with a down payment to get the monthly cost I wanted. Percent of my income for housing costs has actually dropped since buying, that never happened when I rented.
- selectodude 5y ago
  You need to take into consideration the ROI of your down payment as well. The S&P 500 goes up at a pretty consistent 7-10 percent yearly clip. Your $100k down payment will be worth about a quarter of a million dollars in ten years. Are you going to save that sort of money owning vs renting over a decade? Maybe. Maybe not. It's fuzzy.
  - ghaff 5y ago
    It varies depending upon the situation but I've never been convinced it's a slam dunk financial decision. Factors like: - Can you rent the type of property you want - For houses in particular, are you willing to put work in - How mobile do you want to be - How important is it to customize the property to how you want it etc.
    - shados 5y ago
      It's not a slam dunk if you just look at the numbers. With appreciation, my home, taking into account maintenance, renovations, significant raises in HoA fees and insurance, etc, and correlating that with how much it appreciated in value, probably comes a little shy of a triple-fund portfolio investment. The catch is, I get to live in it. I made it awesome. I put a ton of money on the kitchen, the bathroom, etc to make it something I'll never be able to rent (without paying 9-10k/month anyway, and I can't afford that). I was able to do all that while still coming up only SLIGHTLY below renting + investing the extra. There's a certain emotional value to buying a house that the math can't capture. Even JUST with the financial math, it's pretty close (and sometimes an amazing investment, in the right market). But once you tack on the emotional value, it shits all over the alternative (for people who want a home to call their own). I can't think of any other purchase where you can get something you really want, AND have that thing be a mediocre or better investment at the same time. I can't live inside of my S&P500 position.
epistasis 5y ago
At some point we need to have a reckoning on home prices, because there's only so much blood to squeeze out of those who don't own homes. Sure, parents that own will help their children continue the ever upward ratchet of prices, but as the disparity grows more and more it will eventually lead to social unrest. Already in the high demand areas of the country, the land that a house sits on is appreciating at a rate faster than a lot of full-time wages. There's a massive bubble in land prices that's happened due to suppressing building across entire regions, via downzonings decades ago. At some point housing has to return to acting like a piggy bank, rather than an asset that rises in value in excess of productive economic activity.
- slashdot2008 5y ago
  not all housing everywhere has gone up, just the desirable housing in desirable locations where people have excess income to spend on housing. Housing can gobble up as much of percentage of your incomine as you let it, and when incomes are large, and interest rates are low, the ceiling becomes quite high.
  - shados 5y ago
    This is really important. 30% of someone making minimum wage isn't the same thing as 30% of someone making 500k/year. I'm fairly well off. If housing took 70% of my after-tax income, I'd still be able to live reasonably well (and would have one hell of a badass home to go with it). My food, my phone, my electricity bill, my insurance, my transportation, they cost me the same as they cost someone else living in the same city making 1/4th of the money. Since real estate is wealth storage at worse and an investment at best, I can pour everything else I make it into it. It's not particularly optimal, but I -can- do it if I so choose. The end result is that money available for housing goes up in a curve as you go up the income bracket. People below the threshold get screwed.
    - bradlys 5y ago
      The problem there is that ratios are still important. If you are using 70% of your income on housing, you will lose your house as soon as you lose your job. Unless you spend less than 10% of your remaining income, you can’t really save for retirement or a rainy day. The ratios still matter unless you assume people never lose work (which isn’t realistic).
skeeter2020 5y ago
I think your logic around rent vs. mortgate highlights a huge shift in the perception of home ownership as well. I'm not convinced many people ask "Can I afford this home?" as much anymore, vs. "Can I affort the payments on this home?". This happened a while ago in vehicle ownership; no one cares that a truck has a MSRP north of $100K, just that they can swing the biweekly (or weekly!) payment of $xxx This was always the intent of very lower interest rates, so I think the question for all the crystal ball prognosticators out there is will interest rates eventually rise and change the math, or are savers the suckers because inflation will erode their wealth? I have to believe that we can have low, steady prices OR free cash, but the current situation of both can't last. What do you think?

by shados 5y ago

pashamur 5y ago

Yeah, you pretty much nailed it - this article gives context, but it's pretty much as you said, most people are not adjusting by inflation & interest rate: https://realestatedecoded.com/the-shocking-truth-about-house-prices-since-1990/ https://realestatedecoded.com/the-shocking-truth-about-house... Think of houses like bonds that pay a coupon (rent). If risk free rate goes down, the coupon is worth more in comparison so house price goes up. The only downside is that when you buy a house that is cheap with a high interest rate you can benefit from refinancing if the rate goes down (and deduct your mortgage interest, which used to be significant tax savings). When you buy an expensive house at a low rate, you get no such benefit (although if inflation does pick up, the fact that you are implicitly short the borrowed dollars might still work in your favor).

epistasis 5y ago
I think this is the correct analysis in many ways, but I am very fond of the Minsky view that we are all agents dealing with cash-flow. The other side of cash flow is income, and I'd be very interested to see if income has kept under this analysis too...

me_me_me 5y ago

Exactly, and not everyone is in white collar high paying job. I have few friends that are in a saving vicious cycle, high rent and cost of living eat up saving so that they save little. This makes them resigned and depressed - so the spend money on stuff to make them happy. Having 25 yr old tell you that they will be able to afford a down-payment in 20 years is a telling sign.

darrylb42 5y ago

And what I never got when I was younger rent ticks up 2-4% every year, your mortgage costs are fixed. I am now locked in paying the same as what I had in rent 5 years ago. I used the the same rent vs buy cost allocation with a down payment to get the monthly cost I wanted. Percent of my income for housing costs has actually dropped since buying, that never happened when I rented.

selectodude 5y ago
You need to take into consideration the ROI of your down payment as well. The S&P 500 goes up at a pretty consistent 7-10 percent yearly clip. Your $100k down payment will be worth about a quarter of a million dollars in ten years. Are you going to save that sort of money owning vs renting over a decade? Maybe. Maybe not. It's fuzzy.
- ghaff 5y ago
  It varies depending upon the situation but I've never been convinced it's a slam dunk financial decision. Factors like: - Can you rent the type of property you want - For houses in particular, are you willing to put work in - How mobile do you want to be - How important is it to customize the property to how you want it etc.
  - shados 5y ago
    It's not a slam dunk if you just look at the numbers. With appreciation, my home, taking into account maintenance, renovations, significant raises in HoA fees and insurance, etc, and correlating that with how much it appreciated in value, probably comes a little shy of a triple-fund portfolio investment. The catch is, I get to live in it. I made it awesome. I put a ton of money on the kitchen, the bathroom, etc to make it something I'll never be able to rent (without paying 9-10k/month anyway, and I can't afford that). I was able to do all that while still coming up only SLIGHTLY below renting + investing the extra. There's a certain emotional value to buying a house that the math can't capture. Even JUST with the financial math, it's pretty close (and sometimes an amazing investment, in the right market). But once you tack on the emotional value, it shits all over the alternative (for people who want a home to call their own). I can't think of any other purchase where you can get something you really want, AND have that thing be a mediocre or better investment at the same time. I can't live inside of my S&P500 position.

epistasis 5y ago

At some point we need to have a reckoning on home prices, because there's only so much blood to squeeze out of those who don't own homes. Sure, parents that own will help their children continue the ever upward ratchet of prices, but as the disparity grows more and more it will eventually lead to social unrest. Already in the high demand areas of the country, the land that a house sits on is appreciating at a rate faster than a lot of full-time wages. There's a massive bubble in land prices that's happened due to suppressing building across entire regions, via downzonings decades ago. At some point housing has to return to acting like a piggy bank, rather than an asset that rises in value in excess of productive economic activity.

slashdot2008 5y ago
not all housing everywhere has gone up, just the desirable housing in desirable locations where people have excess income to spend on housing. Housing can gobble up as much of percentage of your incomine as you let it, and when incomes are large, and interest rates are low, the ceiling becomes quite high.
- shados 5y ago
  This is really important. 30% of someone making minimum wage isn't the same thing as 30% of someone making 500k/year. I'm fairly well off. If housing took 70% of my after-tax income, I'd still be able to live reasonably well (and would have one hell of a badass home to go with it). My food, my phone, my electricity bill, my insurance, my transportation, they cost me the same as they cost someone else living in the same city making 1/4th of the money. Since real estate is wealth storage at worse and an investment at best, I can pour everything else I make it into it. It's not particularly optimal, but I -can- do it if I so choose. The end result is that money available for housing goes up in a curve as you go up the income bracket. People below the threshold get screwed.
  - bradlys 5y ago
    The problem there is that ratios are still important. If you are using 70% of your income on housing, you will lose your house as soon as you lose your job. Unless you spend less than 10% of your remaining income, you can’t really save for retirement or a rainy day. The ratios still matter unless you assume people never lose work (which isn’t realistic).

skeeter2020 5y ago

I think your logic around rent vs. mortgate highlights a huge shift in the perception of home ownership as well. I'm not convinced many people ask "Can I afford this home?" as much anymore, vs. "Can I affort the payments on this home?". This happened a while ago in vehicle ownership; no one cares that a truck has a MSRP north of $100K, just that they can swing the biweekly (or weekly!) payment of $xxx This was always the intent of very lower interest rates, so I think the question for all the crystal ball prognosticators out there is will interest rates eventually rise and change the math, or are savers the suckers because inflation will erode their wealth? I have to believe that we can have low, steady prices OR free cash, but the current situation of both can't last. What do you think?