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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 val

by 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!!!
- ryathal 5y ago
  Increased rates in the future will drop purchase prices, but it's likely that it either slows the rate of increase or doesn't drop them to below current prices. There aren't many markets even after 2008 that weren't at or above those levels 5 years later. You might get lucky in timing the housing market on a 1-2 year scale, but it won't matter at the 10+ year scale.
  - to11mtm 5y ago
    I hope you're right. As long as home values don't drop -too- much below existing prices, damage would be minimized. Big second order effect of a potential housing crash: There's a non-negligible part of the population that uses their homes as their own lines of credit. As their home increases in value, they occasionally will do a 'cash-out' refiance of their property. Or will open up a HELOC. If the market tanks, people who rely on this tactic will find themselves in a crunch quickly.
mac01021 5y ago
Hi slv77! I would love to ask you about a comment you made on another thread 5-6 years ago (https://news.ycombinator.com/item?id=12367754 https://news.ycombinator.com/item?id=12367754). If you're willing to spend a minute or two on me, please say so. You can email me at mac@quartyard.us or message me on twitter @mac01021 or we can go off topic and talk right here!

by slv77 5y ago

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!!!

ryathal 5y ago
Increased rates in the future will drop purchase prices, but it's likely that it either slows the rate of increase or doesn't drop them to below current prices. There aren't many markets even after 2008 that weren't at or above those levels 5 years later. You might get lucky in timing the housing market on a 1-2 year scale, but it won't matter at the 10+ year scale.
- to11mtm 5y ago
  I hope you're right. As long as home values don't drop -too- much below existing prices, damage would be minimized. Big second order effect of a potential housing crash: There's a non-negligible part of the population that uses their homes as their own lines of credit. As their home increases in value, they occasionally will do a 'cash-out' refiance of their property. Or will open up a HELOC. If the market tanks, people who rely on this tactic will find themselves in a crunch quickly.

mac01021 5y ago

Hi slv77! I would love to ask you about a comment you made on another thread 5-6 years ago (https://news.ycombinator.com/item?id=12367754 https://news.ycombinator.com/item?id=12367754). If you're willing to spend a minute or two on me, please say so. You can email me at mac@quartyard.us or message me on twitter @mac01021 or we can go off topic and talk right here!