5 ms·

I heard a theory the other day that houses are more affordable than they were in the 70's - because even though the house prices are high, the repayments are lo

I heard a theory the other day that houses are more affordable than they were in the 70's - because even though the house prices are high, the repayments are lower because the interest rates are a lot lower. It was a business commentator trying to rationalise the housing market.

JimTheMan 5y ago
The repayments seem to stay about the same but the overall payment is incredibly large. And because getting the % deposit is a big factor in whether you can afford a house, it pushes lower income people out of the market. And if you bought in 1980, the high rates kept the lid on prices. However while you may have started with the same payment but the rates have been steadily ticking down since then. Creating a massive generation gap between those who bought while rates were high and those who didn't have the opportunity. And I am sure this is only one of the factors in housing affordability but in my fairly uneducated opinion it seems like the largest.
- ChrisLomont 5y ago
  >And because getting the % deposit is a big factor in whether you can afford a house, it pushes lower income people out of the market. Median downpayment is 6%, a common low end is 3%, some places and programs go lower. Median house price sold in 2020 was 347k, well over 25% of houses sell for under 250k [1]. So, for a starter home, saving 3% of say 200k is 6k. If someone can pay this mortgage without killing themselves (30%, say 4%, monthly payments ~1K) then they can save a 6K downpayment over a reasonable time. So downpayment should not be keeping many people out of homes that want one that can afford a mortgage. If their income is so low that they cannot even afford a mortgage, then yes, they are pushed out of the market, but there is no way they could enter anyways. [1] https://www.census.gov/construction/nrs/pdf/quarterly_sales.pdf https://www.census.gov/construction/nrs/pdf/quarterly_sales....
  - throwaway210222 5y ago
    > If someone can pay this mortgage […] then they can save a 6K downpayment Not if they are paying rent - there would be no surplus every month to save.
    - pnutjam 5y ago
      Bingo, my rent is going up $100 bucks a month this year.
    - miketyson2000 5y ago
      The sad reality is that if you can't save 6k, house ownership may not be a viable option for you. Things break. Things need maintenance.
    - ChrisLomont 5y ago
      >there would be no surplus every month to save. IF someone is so on the edge that they have zero extras, then they should not get a mortgage, because they're one hiccup away from losing it all. This is why I put in the phrase "without killing themselves." And, if you want to save that 6K mortgage downpayment, downsize life by a little - it really is not much to do. If you're so poor you cannot do this, there are federal programs to assist. Again, this is a non-issue for pretty much every person that is also capable of paying a mortgage.
  - pjc50 5y ago
    97% LTV mortgages are a bit worrying, a big contributor to the last financial crisis was this kind of thing. Or even >100% LTV mortgages.
  - JimTheMan 5y ago
    Depends where you live I suppose. I am in Australia where typically you need 20%. At 10% you need to purchase special insurance or get a guarantor. I am surprised at how crazy low those US ratios are. Thats just bonkers.
    - ghaff 5y ago
      Those down payments used to be the standard in the US. However, I am surprised that, indeed, median down payments do seem to be significantly below that these days.
      - to11mtm 5y ago
        There's a few contributing factors to down payments being lower. Like with FHA loans, you can have a very minimal down payment, however unlike a conventional loan, the 'MIP' (the insurance comparable to a Conventional's PMI) will never go away on a new FHA loan if your original down payment was less than 10%. So, what a lot of people do is either just eat that extra cost (for lower cost homes, it more or less comes out to the equivalent of an additional 0.8-1%) for the life of the loan, or refinance out to a conventional loan once they're below 80% LTV. There is also the shady case of the 80/20 Mortgage. Basically, you take out one 'primary' mortgage for 80% of the home's value, and then a second mortgage or HELOC on 20% of the rest. This can in some cases be cheaper, but arguably goes against the whole spirit of PMI in the first place. (Not saying I don't have issues with the way PMI/MIP works...)
    - ChrisLomont 5y ago
      Australia lets people get 5% down houses regularly. And in the US, below 20% you get an extra insurance called PMI. Sounds like the two countries work the same because money works the same.
    - nly 5y ago
      Yeah it seems like in America you can still put almost nothing,.or like 5% down and get a crazy low interest rate mortgage for 25 years. Here in the UK you can't even get fixed rate mortgages of more than 10 years and all of those require substantial deposits. >20% down is where the best interest rates are. Most people are on variable rate deals or short term (2 year) fixed deals.
  - nly 5y ago
    Maybe things are better in the US but here in the UK it stinks. Deposits of 5% are irrelevant because you still have to mortgage the rest. Median house prices in the UK are something like 8x median incomes, and banks will only lend a maximum 4-5x earnings. This means average Joe need to save something much closer to 3/8ths, not 5% As a real world example based on my current circumstances: - At rough ballpark property prices, with ~15% down, market mortgage rates are about 3.5%. - At 3.5%, with most I am comfortable paying every month (about 40% more than my current rent), I can only borrow around ~60% of what I need to buy the kind of home that I want (and rent now). On paper this means I have to save 40%. - However, reality is somewhere in the middle. If I have 25% to put down, mortgage rates drop dramatically to 1.5%, allowing me to afford the same home. So the long and short of it is you realistically need 20-25% here in the UK.
slv77 5y ago
When rates were higher total interest payments tended to dominate over the life of the mortgage. In most cases the interest payments would exceed the entire value of the principal over the life of the loan. Over the life of a loan the interest portion is negotiable while the principal payments are not. A buyer in improving financial circumstances can accelerate payment on the principal and avoid future interest payments. The buyer could also refinance if interest rates came down. Interest payments in the US were also tax deductible while principal payments were not. This preserved some purchasing power early in the mortgage when interest dominated the payment. Renters can deduct both interest, depreciation and upkeep while homeowners can only deduct interest. Lower interest rates skew the market more towards renting versus buying. The result of lower interest rates is that today’s buyers are making a very different financial bet then buyers over the last 50 years. The only option buyers have to avoid payments on principal is to default. They won’t be able to accelerate repayment and reclaim future purchasing power like previous generations did.
- qqqwerty 5y ago
  My main concern right now is that an increase in interest rates is going to cause a drop in home prices and possibly trigger another crash. For example, the relatively modest rate increases in 2018 caused a fairly noticeable swoon in the SF/Bay area housing market. For those that think buying a house is a good hedge against inflation, it is worth considering that the best tool to combat inflation is to raise interest rates. And considering most buyers budgets are created by working backwards from the monthly payment that they can afford, higher rates naturally translate to lower prices. And as you alluded to, in a rising interest rate environment, there are no more "escape hatches" for folks that might be struggling to make ends meet. In a rising rate environment, refinancing is off the table, selling might be off the table if you are underwater on the mortgage, etc... I have been waiting for an opportunity to buy for quite a while now. It has always felt like our household income was a few ticks too low to comfortably afford anything but the dregs of the market. And as our pay increased, the market would rise another 20% and slip out of reach again. And right now I am seeing a few niches in the market that might work for our budget, but the interest rate situation has me spooked, so once again, I am leaning towards sitting this one out. I guess on the plus side, I can buy cryptocurrency at a 100-1 leverage ratio which was something that wasn't available to my parents generation!!!

JimTheMan 5y ago

The repayments seem to stay about the same but the overall payment is incredibly large. And because getting the % deposit is a big factor in whether you can afford a house, it pushes lower income people out of the market. And if you bought in 1980, the high rates kept the lid on prices. However while you may have started with the same payment but the rates have been steadily ticking down since then. Creating a massive generation gap between those who bought while rates were high and those who didn't have the opportunity. And I am sure this is only one of the factors in housing affordability but in my fairly uneducated opinion it seems like the largest.

ChrisLomont 5y ago
>And because getting the % deposit is a big factor in whether you can afford a house, it pushes lower income people out of the market. Median downpayment is 6%, a common low end is 3%, some places and programs go lower. Median house price sold in 2020 was 347k, well over 25% of houses sell for under 250k [1]. So, for a starter home, saving 3% of say 200k is 6k. If someone can pay this mortgage without killing themselves (30%, say 4%, monthly payments ~1K) then they can save a 6K downpayment over a reasonable time. So downpayment should not be keeping many people out of homes that want one that can afford a mortgage. If their income is so low that they cannot even afford a mortgage, then yes, they are pushed out of the market, but there is no way they could enter anyways. [1] https://www.census.gov/construction/nrs/pdf/quarterly_sales.pdf https://www.census.gov/construction/nrs/pdf/quarterly_sales....
- throwaway210222 5y ago
  > If someone can pay this mortgage […] then they can save a 6K downpayment Not if they are paying rent - there would be no surplus every month to save.
  - pnutjam 5y ago
    Bingo, my rent is going up $100 bucks a month this year.
  - miketyson2000 5y ago
    The sad reality is that if you can't save 6k, house ownership may not be a viable option for you. Things break. Things need maintenance.
  - ChrisLomont 5y ago
    >there would be no surplus every month to save. IF someone is so on the edge that they have zero extras, then they should not get a mortgage, because they're one hiccup away from losing it all. This is why I put in the phrase "without killing themselves." And, if you want to save that 6K mortgage downpayment, downsize life by a little - it really is not much to do. If you're so poor you cannot do this, there are federal programs to assist. Again, this is a non-issue for pretty much every person that is also capable of paying a mortgage.
- pjc50 5y ago
  97% LTV mortgages are a bit worrying, a big contributor to the last financial crisis was this kind of thing. Or even >100% LTV mortgages.
- JimTheMan 5y ago
  Depends where you live I suppose. I am in Australia where typically you need 20%. At 10% you need to purchase special insurance or get a guarantor. I am surprised at how crazy low those US ratios are. Thats just bonkers.
  - ghaff 5y ago
    Those down payments used to be the standard in the US. However, I am surprised that, indeed, median down payments do seem to be significantly below that these days.
    - to11mtm 5y ago
      There's a few contributing factors to down payments being lower. Like with FHA loans, you can have a very minimal down payment, however unlike a conventional loan, the 'MIP' (the insurance comparable to a Conventional's PMI) will never go away on a new FHA loan if your original down payment was less than 10%. So, what a lot of people do is either just eat that extra cost (for lower cost homes, it more or less comes out to the equivalent of an additional 0.8-1%) for the life of the loan, or refinance out to a conventional loan once they're below 80% LTV. There is also the shady case of the 80/20 Mortgage. Basically, you take out one 'primary' mortgage for 80% of the home's value, and then a second mortgage or HELOC on 20% of the rest. This can in some cases be cheaper, but arguably goes against the whole spirit of PMI in the first place. (Not saying I don't have issues with the way PMI/MIP works...)
  - ChrisLomont 5y ago
    Australia lets people get 5% down houses regularly. And in the US, below 20% you get an extra insurance called PMI. Sounds like the two countries work the same because money works the same.
  - nly 5y ago
    Yeah it seems like in America you can still put almost nothing,.or like 5% down and get a crazy low interest rate mortgage for 25 years. Here in the UK you can't even get fixed rate mortgages of more than 10 years and all of those require substantial deposits. >20% down is where the best interest rates are. Most people are on variable rate deals or short term (2 year) fixed deals.
- nly 5y ago
  Maybe things are better in the US but here in the UK it stinks. Deposits of 5% are irrelevant because you still have to mortgage the rest. Median house prices in the UK are something like 8x median incomes, and banks will only lend a maximum 4-5x earnings. This means average Joe need to save something much closer to 3/8ths, not 5% As a real world example based on my current circumstances: - At rough ballpark property prices, with ~15% down, market mortgage rates are about 3.5%. - At 3.5%, with most I am comfortable paying every month (about 40% more than my current rent), I can only borrow around ~60% of what I need to buy the kind of home that I want (and rent now). On paper this means I have to save 40%. - However, reality is somewhere in the middle. If I have 25% to put down, mortgage rates drop dramatically to 1.5%, allowing me to afford the same home. So the long and short of it is you realistically need 20-25% here in the UK.

slv77 5y ago

When rates were higher total interest payments tended to dominate over the life of the mortgage. In most cases the interest payments would exceed the entire value of the principal over the life of the loan. Over the life of a loan the interest portion is negotiable while the principal payments are not. A buyer in improving financial circumstances can accelerate payment on the principal and avoid future interest payments. The buyer could also refinance if interest rates came down. Interest payments in the US were also tax deductible while principal payments were not. This preserved some purchasing power early in the mortgage when interest dominated the payment. Renters can deduct both interest, depreciation and upkeep while homeowners can only deduct interest. Lower interest rates skew the market more towards renting versus buying. The result of lower interest rates is that today’s buyers are making a very different financial bet then buyers over the last 50 years. The only option buyers have to avoid payments on principal is to default. They won’t be able to accelerate repayment and reclaim future purchasing power like previous generations did.

qqqwerty 5y ago
My main concern right now is that an increase in interest rates is going to cause a drop in home prices and possibly trigger another crash. For example, the relatively modest rate increases in 2018 caused a fairly noticeable swoon in the SF/Bay area housing market. For those that think buying a house is a good hedge against inflation, it is worth considering that the best tool to combat inflation is to raise interest rates. And considering most buyers budgets are created by working backwards from the monthly payment that they can afford, higher rates naturally translate to lower prices. And as you alluded to, in a rising interest rate environment, there are no more "escape hatches" for folks that might be struggling to make ends meet. In a rising rate environment, refinancing is off the table, selling might be off the table if you are underwater on the mortgage, etc... I have been waiting for an opportunity to buy for quite a while now. It has always felt like our household income was a few ticks too low to comfortably afford anything but the dregs of the market. And as our pay increased, the market would rise another 20% and slip out of reach again. And right now I am seeing a few niches in the market that might work for our budget, but the interest rate situation has me spooked, so once again, I am leaning towards sitting this one out. I guess on the plus side, I can buy cryptocurrency at a 100-1 leverage ratio which was something that wasn't available to my parents generation!!!