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A more relevant metric to consider - monthly mortgage payment to monthly income ratio. Average interest rates in 2007 were 6.34% vs ~2.80% today. [1] * 6.34%

A more relevant metric to consider - monthly mortgage payment to monthly income ratio. Average interest rates in 2007 were 6.34% vs ~2.80% today. [1] * 6.34% / $2,000 monthly payment / 20% down (~$65k) >> $328,319 price of home * 2.80% / $2,000 monthly payment / 20% down (~$98k) >> $489,794 price of home Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. When interest rates fall, the home's price goes up but the monthly payment can stay the same. Therefore, increases in home (and other asset, since lower bowering costs can drive institutional investment in assets higher and non-linearly) prices can be driven higher without any change in supply / demand dynamics. Some hypotheticals to consider: * as rates approach and touch 0, what will drive up home prices then? * what happens when rates go up? [1] http://www.freddiemac.com/pmms/pmms30.html http://www.freddiemac.com/pmms/pmms30.html

throwdecro 5y ago
> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. Which is crazy, right? People max out their "borrowing power" at low interest rates and take on huge loans, without considering that the declining interest rates that fueled past appreciation don't have much room left to move down, and that they'll be underwater on that huge loan if interest rates go up* and the value of the property declines. *EDIT: To be clear, I mean interest rates on new loans being higher than they were before, not that the loan is variable-rate.
- pjerem 5y ago
  I don’t know how it works in US but can’t you just opt for fixed interest rates ?
  - mandelbrotwurst 5y ago
    Yes, most people do, it's just that increases in rates have a tendency to cause decreases in homes values because a larger proportion of monthly payments will now have to go towards paying the interest.
  - lolpython 5y ago
    Yeah, you can. A random example I found from Rocket Mortgage is a 3.25% fixed interest rate for a $200,000 house. https://www.rocketmortgage.com/learn/30-year-fixed-mortgage-rate https://www.rocketmortgage.com/learn/30-year-fixed-mortgage-...
    - davidandgoliath 5y ago
      2.1% if you but ~$5k in points right now.
  - deleted 5y ago
    [deleted]
  - roland35 5y ago
    The standard mortgage in the US is a fixed rate 30 year mortgage. You can get lower rates for 10, 15, or 20 year mortgages. Also generally you pay an extra fee (PMI) monthly if you put less than 20% down. Adjustable rate loans and interest-only loans are still available but those are really not a good option unless you are not planning on staying in the home long. There are some other options out there for veterans or first time buyers, but those are the normal options.
  - thaumasiotes 5y ago
    Yes, you can, but it doesn't address the problem mentioned above. >> the declining interest rates that fueled past appreciation don't have much room left to move down, and that they'll be underwater on that huge loan if interest rates go up* and the value of the property declines. The price you can charge for something is related to how much other people can pay for it. If houses are usually bought with loans (which they are), then the availability of loan funding is a major influence on the price of a house. When funding is plentiful -- another way to say this is that interest rates are low -- the price of a house will be high. When funding is hard to find -- or interest rates are high -- the price of a house must drop to compensate for that.
    - nostrademons 5y ago
      In practice, when interest rates went sky high in 1980 the price of home didn't actually drop very much. Instead, liquidity dried up. Nobody bought homes; nobody sold homes. The few people who had to sell their homes got screwed, but in general people rarely have to sell their homes unless they get transferred to a new office and don't have enough to buy a house there in cash (which is very attractive when interest rates are high; when borrowed money is expensive, houses get cheap to match what you can borrow, and if you happen to have money, you just don't borrow and take advantage of the cheap prices to pay cash).
      - throw123123123 5y ago
        It is common for people that can afford to pay the mortgage/house keep it even in a down market. IT makes housing crisis a lot longer to weather out because the vast amount of capital gets locked in an asset that does not yield its prices. The bleeding ends up being slow, a decades wait to see any returns while maybe the stock market soars. I am not very optimistic on homeowners in a downturn, UNLESS the government bails them out.
- lotsofpulp 5y ago
  > Which is crazy, right? No, because this is not accurate: > Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. Homebuyers make their purchasing decisions based on the options available to them. They are not paying $x because they can afford $x+1, they are paying $x because that is how much they are willing to spend on that specific house in that specific location. The latter portion of that statement is important because implicit in it is the competitive nature of humans, and so it manifests as people competing to purchase land and being willing to pay as much as they can afford in exchange for the utility from that specific house in that specific location. That utility can be in the form of access to income opportunities to lower future volatility of income, access to other people of similar or higher income so your kids can go to school with their kids, access to airports, downtowns, outdoor recreation, etc. If you are projecting increased demand during your entire lifetime for the piece of land you are purchasing, then it makes sense to pay as much as you can afford, as it will only get more expensive. If you are projecting a receding economy and/or decreased demand for the land you are buying, then it does not make sense to pay as much as you can afford, but rather scale it to some measure of what utility you will get out of it.
  - barneysversion 5y ago
    > If you are projecting a receding economy and/or decreased demand for the land you are buying, then it does not make sense to pay as much as you can afford... I think this is the above commenter's concern; homebuyers are not adequately pricing the risk of rising interest rates. If interest rates go up, demand falls and you're left in a highly leveraged position that amplifies your losses. Monthly mortgage payments don't make the leverage apparent. Sticker price does.
    - jbjbjbjb 5y ago
      But if you go one move deeper central bankers will factor the high leverage in and therefore won’t increase rates.
      - game_the0ry 5y ago
- jbay808 5y ago
  This is a way bigger problem in Canada, where fixed term mortgages are unavailable (and where price to income ratio is even more absurd than in the US).
  - heavyset_go 5y ago
    If anyone in the US thinks "housing costs can't keep rising, the market will correct itself", then just look at Canada. The average sale price of a home in the US is roughly $375k. In Canada, it is about $700k, and property values continue to rise.
    - hourislate 5y ago
      I guarantee that housing in Toronto will continue to climb at 10%-15 % per year. Housing is the only thing keeping the Canadian economy afloat. The BoC has no choice anymore, they will pay your mortgage if necessary. I dare them to raise rates to just 5%, there will be a collapse that will leave half the country in the streets. If you can afford to buy, buy with both hands. You will double your money in the next 5 years, a house in Toronto will be over 5 million in the next decade.
      - jbay808 5y ago
        Well, it better keep going for another five years after that, and then another five years after that, and so on, because anyone buying a $5 million 4-bed-2-bath house for their family is only more dependent on that trend continuing than the one who paid $2 million. The price tag is only justified when there's no end in sight to the appreciation. Nobody would pay $5 million for that house if its value stops rising, let alone starts dropping. The government can't guarantee real estate, because any 99.9% risk-free investment with 10% annual growth can be levered into a 99% risk-free investment with 100% annual growth, and that's going to absorb all available capital like a black hole. The more the government acts to reduce risk without offsetting that by reducing returns or increasing the cost of debt, the bigger that black hole will grow. At some point, it might be worth biting the bullet and incentivizing investments into sectors of the Canadian economy that aren't housing. If workers can see housing appreciating by multiples of the median salary, and entrepreneurs clue in to the fact that they'd earn more as a real estate agent than by building a tech company, "the Canadian economy depends on housing" becomes a self-fulfilling property. A few more doublings and then there's no point bothering to do anything else like growing food and assembling cars. Then you end up with a Zimbabwe situation where, yes, your house is worth a trillion dollars and rising, but it's not... good. But maybe if we keep pouring enough gasoline on it, we'll be able to put out this fire?
- nostrademons 5y ago
  As long as most people in the U.S. buy houses with 30-year fixed mortgages, the total cost of a house will be 30 * 12 * monthly mortgage payment. When interest rates are low but home prices are high, they don't pay any more over the life of the loan. (Someone who buys when rates are high but prices are low does have the option to refinance, though, which is not available to someone who buys when prices are high.) The change in interest rates effectively shifts which portion of the buyer's income goes to the lender vs. the seller. This is similar to how increases in local incomes are actually captured by landlords rather than workers. If housing is scarce and people need it to live, owners of that housing have the bargaining power to raise prices to capture available income.
  - bink 5y ago
    It's true that a homeowner who pays a higher principal and a lower rate isn't really at a disadvantage if they stay in the home for 30 years (with a 30 year loan). But if rates go up a bit as soon as they need to sell they're going to find far fewer buyers. And their neighbors will have already found out they had to sell for lower amounts, resulting in some others walking away instead of bringing money to the table at a sale. At thus begins the downward cycle.
    - imtringued 5y ago
      The point is that interest rates don't affect the cost of housing which is determined by monthly payment * 360 months, they affect the resale value of housing. If interest rates go up the resale value of your house goes down. If people bet on the resale value of housing to go up they also necessarily bet on lower interest rates.
  - OJFord 5y ago
    Do you really have 30 year fixed rates? They must be ridiculous?
    - topkai22 5y ago
      That’s the standard in the US. Current rates are about 2.75%, although they went below 2.5% for a bit earlier this year. Those rates are for 20% down, good credit primary residences purchases. Rates for investment or vacation properties are generally about 1-2 percentage points higher. Mortgage rates in the US are indirectly and directly subsidized by the government across a huge spectrum of programs- See FHA loans, VA loans, etc. However one of the biggest contributors to low 30 year prices are the government backed corporations like Fannie Mae and Freddie Mac that purchase mortgage debt and repackage it into mortgage backed securities. Way too much the go into here, but a lot of the 2008 financial crisis has its roots in the policies that created Fannie Mae and Freddy Mac. Regardless, they have proven a fairly effective way to keep mortgage rates low.
- spywaregorilla 5y ago
  > without considering that the declining interest rates that fueled past appreciation don't have much room left to move down Negative is inevitable, imo If the value of your home rises, you've effectively taken out a hugely profitable leveraged loan, which is historically pretty common. Which is far from guaranteed of course, but broadly speaking it was an amazingly lucrative move for many many people.
  - civilized 5y ago
    Why would I lend you a million dollars only to be paid back over 30 years and have less than I started with at the end of the 30 years? I'd be better off doing nothing with the money.
    - ytpete 5y ago
      You wouldn't, but the government might - to keep the economy propped up. I think this is what parent meant, anyway. Not sure that's a healthy point for the government or the economy to get to, but with politics the way they are these days it doesn't sound that farfetched of an outcome...
      - civilized 5y ago
        If things get to that point, the government might as well just buy all the housing.
        s1artibartfast 5y ago
        It has already been done. https://www.investopedia.com/articles/personal-finance/051415/5-countries-lowest-interest-rates.asp https://www.investopedia.com/articles/personal-finance/05141...
    - spywaregorilla 5y ago
      Because you don't want to keep 1 million dollars under your mattress.
- gspr 5y ago
  This is my worry too. I just sold, with the intention of buying back into the market (in a different city). I'm terrified by the amount of people maxing out their abilities to handle the mortgage even at today's incredibly low interest rate. I'm making sure I can handle a quadrupling comfortably – but also those of us acting like that suffer (or will suffer, when there's a crash) the consequences of the reckless ones. I don't like the feeling of a market where trying to be a rational actor barely helps.
ubermonkey 5y ago
Yeah, this is how I bought. I looked at what sort of loan terms I qualified for (very favorable), and then figured out what price home resulted in a payment I was comfortable with. I'm pretty debt averse, so that resulted in me buying "less" house than the banks were willing to fund, but it was in the area I wanted, relatively new, styled to my taste, and from a reputable local builder, so from my POV I couldn't figure out why I'd buy MORE house. I still live there, 21 years later.
somehnacct3757 5y ago
If you focus on mortgage payment instead of home price, you also need to take mortgage term length into account for a generational study. 30 year mortgages only came about in the 1950's. Before then the choices were typically 15 and 20 years.
- woobar 5y ago
  And in Europe they have 100 year mortgages. US still have plenty of options to make monthly payments affordable.
  - gspr 5y ago
    Isn't this a uniquely Dutch thing?
    - woobar 5y ago
      I think Sweden and Switzerland also do this
kimburgess 5y ago
While this is accurate, a more concerning secondary impact is the increased deposit. In Australia specifically, house prices are soaring. The most in-demand markets increases are currently ~$1200 per day [1]. For many people their home is a more 'productive' than they are, greatly outpacing their own earning potential. Those who already have wealth can buy in, or continue to buy in and leverage themselves into the market as it skyrockets. Anyone not in this position is left to watch as the ladder disappears into the clouds. Shelter has changed from a base need to a commodity that's traded in a rigged system and the societal implications of this are frankly terrifying. [1] https://www.abc.net.au/news/2021-08-26/fact-check-are-house-prices-rising-by-1200-a-day/100405218 https://www.abc.net.au/news/2021-08-26/fact-check-are-house-...
- quantumBerry 5y ago
  Raw land is cheap. Housing codes are what keep people like myself out of the housing market. If I could just dump a yurt on the land, or a cabin like our forefathers, then housing prices would be a total non issue. But a bunch of selfish NIMBYs are so scared of the poors building a yurt instead of a 2000 sq ft brick house for two people and a dog, they'll never allow it.
  - travoc 5y ago
    There are plenty of trailer parks all over the country that will let you plop your yurt down and even plumb it in to local utilities. You may not enjoy your neighbors very much.
    - game_the0ry 5y ago
      Increasingly those trailer parks are being bought by private equity and institutional investors.
      - Aeolun 5y ago
        What do they do with them? Doesn’t seem like something you renovate and resell?
fcsp 5y ago
This is something that has been keeping me wondering for years. Since the financial crisis the European Central Bank has basically fixed base rate at negative (since 2012), leaving the market flooded with desperate investment money (due to all old school investment options becoming a negative) Now also of course since it's "cheap" the real estate prices have almost doubled in that timespan, having previously hovered around the same mark for the ten years before that. What I wonder is - is there any way out of this curse of growth with all the money spent into those inflated prices at this point that does not mean complete economic collapse?
- moonchrome 5y ago
  Japan like stagflation ?
- lottin 5y ago
  In theory, a fall in nominal interest rates below the real rate of return of capital should spur investment, since entrepreneurs can borrow funds at a low rate to expand production capacity or start new businesses and obtain a higher rate of return. The reality is we don't see much investment going on, and at some point the ECB will have to face up to the fact that the low interest policy doesn't work.
  - imtringued 5y ago
    The reality is that people invest abroad. After all, there is no rule that they must invest in their own country. > at some point the ECB will have to face up to the fact that the low interest policy doesn't work. And repeal the zero lower bound or what? Face up to what? Interest rates will be low as long as supply of labor outstrips demand for labor.
  - snidane 5y ago
    Low ingerest rate resulting in economical growth is a dogma recognized across economic schools, which fails to materialize empirically. Look up Richard Werner on this. The only growth that is observed is businesses which are serving the bubble. Eg. construction industry having a boom as well as cryptocurrency startups.
spaetzleesser 5y ago
That assumes that people want to stay in debt forever. Decades ago you could quickly pay off your house but this is much harder now. Replacing affordable price and decent wages with cheap credit makes banks and companies happy but is a very bad deal for the little guy.
nly 5y ago
Interest rates are irrelevant when you can only borrow 4.5x income but home prices are at 8-9x Interest rates are irrelevant when you need 20% down and it will take you a decade to save that up while renting, because of said multiple.
- llbeansandrice 5y ago
  Why do people think you need 20% down? You don't need 20% down on a mortgage. There are first-time home buyer loans where you can put down as little as 0% and for conventional loans you just have to buy personal mortgage insurance if you're below 20% down. This is such a weird home buying myth and I don't understand how it sticks around.
  - Macha 5y ago
    For some countries, there are legal requirements about maximum LTV. e.g. in Ireland the limit is 90% for a first time buyer of a personal home, and 70% otherwise.
    - llbeansandrice 5y ago
      Fair enough, I made the US-centric mistake but 10% is vastly different than 20%.
  - cronix 5y ago
    > you just have to buy personal mortgage insurance if you're below 20% down. You end up paying more in the long run when you add on PMI. I think they are internally conflating "should be avoided" with "can't." I do that with personal things all the time when I tell myself I can't do something that I shouldn't, but actually can do.
    - ArchOversight 5y ago
      PMI for me is $71 a month. Which meant I could save money and use it towards home improvement to make my house better for me (and also increase its value). Putting down 20% doesn't make sense in my case, since home prices continuing to increase and me adding home improvements that increase the value of my home I will be able to refinance my loan in a little over 2 years to get rid of the PMI, and still have spent way less than the 20% down would have cost me.
Rd6n6 5y ago
Regardless of the cause, I wish we could have nice trustworthy graphs that start the y axis at 0
dzabriskie 5y ago
This. Here's research to back this statement up: Today's House Prices Are Over 40 Percent More Affordable Than The Housing Boom Peak: https://blog.firstam.com/economics/todays-house-prices-are-over-40-percent-more-affordable-than-the-housing-boom-peak https://blog.firstam.com/economics/todays-house-prices-are-o...
- game_the0ry 5y ago
  Awesome, thanks for sharing. Bookmarked.
- bogomipz 5y ago
  And to balance that out, also from your link: >"The affordability gain from increased house-buying power, however, was offset by the third component of the RHPI, nominal house price appreciation, which reached a record 19 percent compared with a year ago, eclipsing the record for price appreciation of 17.5 percent set in 2005."
joppy 5y ago
Whatever the case, what you end up with is an asset whose actual value is tied to the interest rate (interest goes down, people can afford larger loans with the same repayments, therefore houses are worth more). This is a highly leveraged situation: if you take out a $1m loan and then interest rates go up, you're still liable for the whole $1m even though your actual asset might only be worth $900k now. I think this is one of the big dangers of having an essential need like housing cost such a large multiple of income.
- game_the0ry 5y ago
  Agreed
- exporectomy 5y ago
  Home ownership is not an essential need. People aren't excluded from housing because of that risk. They can just rent from a landlord who's taking that risk themselves.
  - deleted 5y ago
    [deleted]
  - thayne 5y ago
    True. Renting has other risks though. The Landlord can increase the price dramatically at least as often as you renew your contract (usually a year in the US), or force you to move out because they sold the property, or really almost any reason. And because moving has such a high transaction cost, landlords can often get away with treating tenants pretty badly, because putting up with a bad landlord is often less bad than having to relocate your home.
    - exporectomy 5y ago
      It's almost as if playing in the rat race isn't easy or fair. Moving to a rural area or living on social welfare is usually also an option but you have to quit the rat-race to do that and miss out on all the wealth and social status.
chuckee 5y ago
> A more relevant metric to consider - monthly mortgage payment to monthly income ratio. I find this attitude baffling. If you bought a car or a phone and paid in monthly installments, you would want to know for how long you'll be paying, not just the monthly amount. Why is a mortgage different? Is it the duration, where your brain sees 20-30 years, and substitutes that with "forever"? How would you feel if, after 30 years, when you thought you finally paid off your mortgage, the bank would say "Oh actually you have to keep paying for another 30 years"?
- mikeryan 5y ago
  The point is that you have more purchasing power with lower income rates. In this example you can buy a house worth 25% more. Pretty much all home buying decisions are normalized on a 30 year fixed mortgage. When figuring out what you can spend its easier to figure out what you can afford per month ans extrapolate your purchase price from there. For that matter most car buying decisions are done the same way based on a five year loan (maybe seven these days).
- potatolicious 5y ago
  The duration of the loan doesn't change based on the interest rate. In both of OP's examples the hypothetical borrower pays the same amount per month, for the same number of months. A lower interest rate does not affect the duration of the loan. In neither case can the bank simply extend the duration of your loan.
- dzabriskie 5y ago
  Because the alternative is usually renting, where the monthly expense is similar, but there is no principal down or asset appreciation.
- XorNot 5y ago
  Generally because the point at which you stop requiring shelter is because you're dead - so forever is a good proxy. You can do this with all your purchases though: anytime you buy anything, don't look at the sticker price - figure out the equivalent monthly cost for the expected lifetime of the item. This can have a dramatic impact on your purchasing habits.
ezoe 5y ago
Currently in Japan, interest rates for home loan are so close to zero. About 1% for fixed rate, 0.5% for 10 year fixed rate, less than 0.4% for variable rate. New homes are built rapidly and supply is plentiful. When we say home, it almost always mean condominium. Yet, the house price is rising in Japan. I can think of a few reasons for that, like mere fact that home loans are available to virtually anyone who is employed and recieve average wage, old homes quickly lose value in Japan or people ditched the countrysides and concentrate to a few major cities. I think home loan interest rate just reflect the inflation rate of the currency in that country. House price goes up simply because anyone can loan a money for. So long as the credit is available, house price stays the maximum amount of money average people can loan for and it's increasing. If rate goes up, it just mean the inflation rate goes up. The house price goes down when 1. No demand. People don't want to live that place anymore. 2. Loan is not available. 3. The government turns into Communism and give all citizen a same house for free.
- yurishimo 5y ago
  Japan is really cool in regards to housing. You have a sort of dichotomy of either really old houses, or brand new. I forget which YouTube video I watched that explained that it's rare to find a house older than a decade or two in a Japanese city because people don't want to live in them. Houses are constantly torn down and replaced with new ones with the latest and greatest features. I think something like that could work to reduce housing costs in the USA, but it would likely require a brand new city to be the guinea pig to prove the concept here. Something like those self-contained retirement towns that spring up, but maybe when the residents die, they rebuild them? Macabre, but interesting!
  - ezoe 5y ago
    You can't just import the foreign culture without the environment that justify the culture. In Japan, the land is scarce and fragile, humidity weather, constantly facing earth quakes, typhoons. So the house will be damaged faster than the typical western countries. Each time we face the massive earthquakes, the house building regulation will be updated to mandate new and improved earthquake resistant structure so building built with old regulation lose market values. The same goes for all disasters like tsunami, flooding, land slide and all. You must also consider the fact that air conditioning wasn't popular 30 years ago. The houses built before that era were optimized for the natural ventilation. it's totally inefficient for the air conditioner. Old houses also has the Internet issues. Most of the house in Japan are massive condominium. The optical fiber was a thing after 2000s. It takes a lot of money to wire optical cable inside the existing building. So most of the buildings in Tokyo are still using VDSL. Other infrastructures like power line, water and gas starting to rust so it must be replaced. The cost of doing that to existing house is expensive in Japan and it doesn't increase the value of house that much. Especially for old houses that need replacing because it had gotten so much damage from humidity, earthquakes, typhoons and remember, it was built before the current housing regulation for the resistance for these. So it's more reasonable to just scrap it and rebuild it. I am living in a standalone old house in Tokyo unlike most of the people. Then, I realized the value of condominium in Tokyo. It works as a gated community, the segregation based on income. We are implicitly achieving the segregation by the condominium.
onlyrealcuzzo 5y ago
Also relevant is the ability to get interest only loans. If central banks are GUARANTEEING asset inflation of >2% - that's an 10% return on 5:1 leverage - that beats the S&P. If you can get an interest only loan, and be cash-flow neutral - as long as central banks keep a mandate for assets to appreciate >2% (spoiler, they have to or irresponsible governments fail) - housing is a good investment. It sucks that they've manipulated the market so much. But when >50% of the economy is debt and the cost of debt is price fixed, that's a lot of manipulation...
baybal2 5y ago
> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. No, because not everybody is so risky to get a mortgage. The prime majority of rational people don't buy such major life assets with debt.
blobbers 5y ago
see my comment above; the 40 year loan will push home prices up further.
thayne 5y ago
> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. That isn't entirely true. For most people, the amount you need for a down payment is a pretty important consideration as well, especially for a first home where you don't have any equity in an existing home that can be used to purchase your new home. I've known people who saved up for years to buy a home, then interest rates dropped and prices went up. The mortgage might be roughly the same with the same percentage of down payment, but they don't have enough cash to make the necessary down payment.
raducu 5y ago
What happens when interest rates go up? That's right, interest rates cannot go up, or else these people will be screwed. The same for stock market. Ok, so we bail out these people/investors at the cost of catastrophic failure in the future. Because money/markets are irrelevant, all that matters is access to cheap money and access to central bank bailouts.
deleted 5y ago
[deleted]
JackFr 5y ago
One thing to note is that the difference between 65K down and 98K down is significant, and absent ‘affordability’ mortgage products, pushes many people out of the market. Then low down payment loans introduce distortions if their own.
elif 5y ago
Why would you compute only one iteration of interest when a full term will result in 60-100% increase in price. One month is hardly even a freeze-frame.

throwdecro 5y ago

> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. Which is crazy, right? People max out their "borrowing power" at low interest rates and take on huge loans, without considering that the declining interest rates that fueled past appreciation don't have much room left to move down, and that they'll be underwater on that huge loan if interest rates go up* and the value of the property declines. *EDIT: To be clear, I mean interest rates on new loans being higher than they were before, not that the loan is variable-rate.

pjerem 5y ago
I don’t know how it works in US but can’t you just opt for fixed interest rates ?
- mandelbrotwurst 5y ago
  Yes, most people do, it's just that increases in rates have a tendency to cause decreases in homes values because a larger proportion of monthly payments will now have to go towards paying the interest.
- lolpython 5y ago
  Yeah, you can. A random example I found from Rocket Mortgage is a 3.25% fixed interest rate for a $200,000 house. https://www.rocketmortgage.com/learn/30-year-fixed-mortgage-rate https://www.rocketmortgage.com/learn/30-year-fixed-mortgage-...
  - davidandgoliath 5y ago
    2.1% if you but ~$5k in points right now.
- deleted 5y ago
  [deleted]
- roland35 5y ago
  The standard mortgage in the US is a fixed rate 30 year mortgage. You can get lower rates for 10, 15, or 20 year mortgages. Also generally you pay an extra fee (PMI) monthly if you put less than 20% down. Adjustable rate loans and interest-only loans are still available but those are really not a good option unless you are not planning on staying in the home long. There are some other options out there for veterans or first time buyers, but those are the normal options.
- thaumasiotes 5y ago
  Yes, you can, but it doesn't address the problem mentioned above. >> the declining interest rates that fueled past appreciation don't have much room left to move down, and that they'll be underwater on that huge loan if interest rates go up* and the value of the property declines. The price you can charge for something is related to how much other people can pay for it. If houses are usually bought with loans (which they are), then the availability of loan funding is a major influence on the price of a house. When funding is plentiful -- another way to say this is that interest rates are low -- the price of a house will be high. When funding is hard to find -- or interest rates are high -- the price of a house must drop to compensate for that.
  - nostrademons 5y ago
    In practice, when interest rates went sky high in 1980 the price of home didn't actually drop very much. Instead, liquidity dried up. Nobody bought homes; nobody sold homes. The few people who had to sell their homes got screwed, but in general people rarely have to sell their homes unless they get transferred to a new office and don't have enough to buy a house there in cash (which is very attractive when interest rates are high; when borrowed money is expensive, houses get cheap to match what you can borrow, and if you happen to have money, you just don't borrow and take advantage of the cheap prices to pay cash).
    - throw123123123 5y ago
      It is common for people that can afford to pay the mortgage/house keep it even in a down market. IT makes housing crisis a lot longer to weather out because the vast amount of capital gets locked in an asset that does not yield its prices. The bleeding ends up being slow, a decades wait to see any returns while maybe the stock market soars. I am not very optimistic on homeowners in a downturn, UNLESS the government bails them out.
lotsofpulp 5y ago
> Which is crazy, right? No, because this is not accurate: > Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. Homebuyers make their purchasing decisions based on the options available to them. They are not paying $x because they can afford $x+1, they are paying $x because that is how much they are willing to spend on that specific house in that specific location. The latter portion of that statement is important because implicit in it is the competitive nature of humans, and so it manifests as people competing to purchase land and being willing to pay as much as they can afford in exchange for the utility from that specific house in that specific location. That utility can be in the form of access to income opportunities to lower future volatility of income, access to other people of similar or higher income so your kids can go to school with their kids, access to airports, downtowns, outdoor recreation, etc. If you are projecting increased demand during your entire lifetime for the piece of land you are purchasing, then it makes sense to pay as much as you can afford, as it will only get more expensive. If you are projecting a receding economy and/or decreased demand for the land you are buying, then it does not make sense to pay as much as you can afford, but rather scale it to some measure of what utility you will get out of it.
- barneysversion 5y ago
  > If you are projecting a receding economy and/or decreased demand for the land you are buying, then it does not make sense to pay as much as you can afford... I think this is the above commenter's concern; homebuyers are not adequately pricing the risk of rising interest rates. If interest rates go up, demand falls and you're left in a highly leveraged position that amplifies your losses. Monthly mortgage payments don't make the leverage apparent. Sticker price does.
  - jbjbjbjb 5y ago
    But if you go one move deeper central bankers will factor the high leverage in and therefore won’t increase rates.
    - game_the0ry 5y ago
jbay808 5y ago
This is a way bigger problem in Canada, where fixed term mortgages are unavailable (and where price to income ratio is even more absurd than in the US).
- heavyset_go 5y ago
  If anyone in the US thinks "housing costs can't keep rising, the market will correct itself", then just look at Canada. The average sale price of a home in the US is roughly $375k. In Canada, it is about $700k, and property values continue to rise.
  - hourislate 5y ago
    I guarantee that housing in Toronto will continue to climb at 10%-15 % per year. Housing is the only thing keeping the Canadian economy afloat. The BoC has no choice anymore, they will pay your mortgage if necessary. I dare them to raise rates to just 5%, there will be a collapse that will leave half the country in the streets. If you can afford to buy, buy with both hands. You will double your money in the next 5 years, a house in Toronto will be over 5 million in the next decade.
    - jbay808 5y ago
      Well, it better keep going for another five years after that, and then another five years after that, and so on, because anyone buying a $5 million 4-bed-2-bath house for their family is only more dependent on that trend continuing than the one who paid $2 million. The price tag is only justified when there's no end in sight to the appreciation. Nobody would pay $5 million for that house if its value stops rising, let alone starts dropping. The government can't guarantee real estate, because any 99.9% risk-free investment with 10% annual growth can be levered into a 99% risk-free investment with 100% annual growth, and that's going to absorb all available capital like a black hole. The more the government acts to reduce risk without offsetting that by reducing returns or increasing the cost of debt, the bigger that black hole will grow. At some point, it might be worth biting the bullet and incentivizing investments into sectors of the Canadian economy that aren't housing. If workers can see housing appreciating by multiples of the median salary, and entrepreneurs clue in to the fact that they'd earn more as a real estate agent than by building a tech company, "the Canadian economy depends on housing" becomes a self-fulfilling property. A few more doublings and then there's no point bothering to do anything else like growing food and assembling cars. Then you end up with a Zimbabwe situation where, yes, your house is worth a trillion dollars and rising, but it's not... good. But maybe if we keep pouring enough gasoline on it, we'll be able to put out this fire?
nostrademons 5y ago
As long as most people in the U.S. buy houses with 30-year fixed mortgages, the total cost of a house will be 30 * 12 * monthly mortgage payment. When interest rates are low but home prices are high, they don't pay any more over the life of the loan. (Someone who buys when rates are high but prices are low does have the option to refinance, though, which is not available to someone who buys when prices are high.) The change in interest rates effectively shifts which portion of the buyer's income goes to the lender vs. the seller. This is similar to how increases in local incomes are actually captured by landlords rather than workers. If housing is scarce and people need it to live, owners of that housing have the bargaining power to raise prices to capture available income.
- bink 5y ago
  It's true that a homeowner who pays a higher principal and a lower rate isn't really at a disadvantage if they stay in the home for 30 years (with a 30 year loan). But if rates go up a bit as soon as they need to sell they're going to find far fewer buyers. And their neighbors will have already found out they had to sell for lower amounts, resulting in some others walking away instead of bringing money to the table at a sale. At thus begins the downward cycle.
  - imtringued 5y ago
    The point is that interest rates don't affect the cost of housing which is determined by monthly payment * 360 months, they affect the resale value of housing. If interest rates go up the resale value of your house goes down. If people bet on the resale value of housing to go up they also necessarily bet on lower interest rates.
- OJFord 5y ago
  Do you really have 30 year fixed rates? They must be ridiculous?
  - topkai22 5y ago
    That’s the standard in the US. Current rates are about 2.75%, although they went below 2.5% for a bit earlier this year. Those rates are for 20% down, good credit primary residences purchases. Rates for investment or vacation properties are generally about 1-2 percentage points higher. Mortgage rates in the US are indirectly and directly subsidized by the government across a huge spectrum of programs- See FHA loans, VA loans, etc. However one of the biggest contributors to low 30 year prices are the government backed corporations like Fannie Mae and Freddie Mac that purchase mortgage debt and repackage it into mortgage backed securities. Way too much the go into here, but a lot of the 2008 financial crisis has its roots in the policies that created Fannie Mae and Freddy Mac. Regardless, they have proven a fairly effective way to keep mortgage rates low.
spywaregorilla 5y ago
> without considering that the declining interest rates that fueled past appreciation don't have much room left to move down Negative is inevitable, imo If the value of your home rises, you've effectively taken out a hugely profitable leveraged loan, which is historically pretty common. Which is far from guaranteed of course, but broadly speaking it was an amazingly lucrative move for many many people.
- civilized 5y ago
  Why would I lend you a million dollars only to be paid back over 30 years and have less than I started with at the end of the 30 years? I'd be better off doing nothing with the money.
  - ytpete 5y ago
    You wouldn't, but the government might - to keep the economy propped up. I think this is what parent meant, anyway. Not sure that's a healthy point for the government or the economy to get to, but with politics the way they are these days it doesn't sound that farfetched of an outcome...
    - civilized 5y ago
      If things get to that point, the government might as well just buy all the housing.
      - s1artibartfast 5y ago
        It has already been done. https://www.investopedia.com/articles/personal-finance/051415/5-countries-lowest-interest-rates.asp https://www.investopedia.com/articles/personal-finance/05141...
  - spywaregorilla 5y ago
    Because you don't want to keep 1 million dollars under your mattress.
gspr 5y ago
This is my worry too. I just sold, with the intention of buying back into the market (in a different city). I'm terrified by the amount of people maxing out their abilities to handle the mortgage even at today's incredibly low interest rate. I'm making sure I can handle a quadrupling comfortably – but also those of us acting like that suffer (or will suffer, when there's a crash) the consequences of the reckless ones. I don't like the feeling of a market where trying to be a rational actor barely helps.

ubermonkey 5y ago

Yeah, this is how I bought. I looked at what sort of loan terms I qualified for (very favorable), and then figured out what price home resulted in a payment I was comfortable with. I'm pretty debt averse, so that resulted in me buying "less" house than the banks were willing to fund, but it was in the area I wanted, relatively new, styled to my taste, and from a reputable local builder, so from my POV I couldn't figure out why I'd buy MORE house. I still live there, 21 years later.

somehnacct3757 5y ago

If you focus on mortgage payment instead of home price, you also need to take mortgage term length into account for a generational study. 30 year mortgages only came about in the 1950's. Before then the choices were typically 15 and 20 years.

woobar 5y ago
And in Europe they have 100 year mortgages. US still have plenty of options to make monthly payments affordable.
- gspr 5y ago
  Isn't this a uniquely Dutch thing?
  - woobar 5y ago
    I think Sweden and Switzerland also do this

kimburgess 5y ago

While this is accurate, a more concerning secondary impact is the increased deposit. In Australia specifically, house prices are soaring. The most in-demand markets increases are currently ~$1200 per day [1]. For many people their home is a more 'productive' than they are, greatly outpacing their own earning potential. Those who already have wealth can buy in, or continue to buy in and leverage themselves into the market as it skyrockets. Anyone not in this position is left to watch as the ladder disappears into the clouds. Shelter has changed from a base need to a commodity that's traded in a rigged system and the societal implications of this are frankly terrifying. [1] https://www.abc.net.au/news/2021-08-26/fact-check-are-house-prices-rising-by-1200-a-day/100405218 https://www.abc.net.au/news/2021-08-26/fact-check-are-house-...

quantumBerry 5y ago
Raw land is cheap. Housing codes are what keep people like myself out of the housing market. If I could just dump a yurt on the land, or a cabin like our forefathers, then housing prices would be a total non issue. But a bunch of selfish NIMBYs are so scared of the poors building a yurt instead of a 2000 sq ft brick house for two people and a dog, they'll never allow it.
- travoc 5y ago
  There are plenty of trailer parks all over the country that will let you plop your yurt down and even plumb it in to local utilities. You may not enjoy your neighbors very much.
  - game_the0ry 5y ago
    Increasingly those trailer parks are being bought by private equity and institutional investors.
    - Aeolun 5y ago
      What do they do with them? Doesn’t seem like something you renovate and resell?

fcsp 5y ago

This is something that has been keeping me wondering for years. Since the financial crisis the European Central Bank has basically fixed base rate at negative (since 2012), leaving the market flooded with desperate investment money (due to all old school investment options becoming a negative) Now also of course since it's "cheap" the real estate prices have almost doubled in that timespan, having previously hovered around the same mark for the ten years before that. What I wonder is - is there any way out of this curse of growth with all the money spent into those inflated prices at this point that does not mean complete economic collapse?

moonchrome 5y ago
Japan like stagflation ?
lottin 5y ago
In theory, a fall in nominal interest rates below the real rate of return of capital should spur investment, since entrepreneurs can borrow funds at a low rate to expand production capacity or start new businesses and obtain a higher rate of return. The reality is we don't see much investment going on, and at some point the ECB will have to face up to the fact that the low interest policy doesn't work.
- imtringued 5y ago
  The reality is that people invest abroad. After all, there is no rule that they must invest in their own country. > at some point the ECB will have to face up to the fact that the low interest policy doesn't work. And repeal the zero lower bound or what? Face up to what? Interest rates will be low as long as supply of labor outstrips demand for labor.
- snidane 5y ago
  Low ingerest rate resulting in economical growth is a dogma recognized across economic schools, which fails to materialize empirically. Look up Richard Werner on this. The only growth that is observed is businesses which are serving the bubble. Eg. construction industry having a boom as well as cryptocurrency startups.

spaetzleesser 5y ago

That assumes that people want to stay in debt forever. Decades ago you could quickly pay off your house but this is much harder now. Replacing affordable price and decent wages with cheap credit makes banks and companies happy but is a very bad deal for the little guy.

nly 5y ago

Interest rates are irrelevant when you can only borrow 4.5x income but home prices are at 8-9x Interest rates are irrelevant when you need 20% down and it will take you a decade to save that up while renting, because of said multiple.

llbeansandrice 5y ago
Why do people think you need 20% down? You don't need 20% down on a mortgage. There are first-time home buyer loans where you can put down as little as 0% and for conventional loans you just have to buy personal mortgage insurance if you're below 20% down. This is such a weird home buying myth and I don't understand how it sticks around.
- Macha 5y ago
  For some countries, there are legal requirements about maximum LTV. e.g. in Ireland the limit is 90% for a first time buyer of a personal home, and 70% otherwise.
  - llbeansandrice 5y ago
    Fair enough, I made the US-centric mistake but 10% is vastly different than 20%.
- cronix 5y ago
  > you just have to buy personal mortgage insurance if you're below 20% down. You end up paying more in the long run when you add on PMI. I think they are internally conflating "should be avoided" with "can't." I do that with personal things all the time when I tell myself I can't do something that I shouldn't, but actually can do.
  - ArchOversight 5y ago
    PMI for me is $71 a month. Which meant I could save money and use it towards home improvement to make my house better for me (and also increase its value). Putting down 20% doesn't make sense in my case, since home prices continuing to increase and me adding home improvements that increase the value of my home I will be able to refinance my loan in a little over 2 years to get rid of the PMI, and still have spent way less than the 20% down would have cost me.

Rd6n6 5y ago

Regardless of the cause, I wish we could have nice trustworthy graphs that start the y axis at 0

dzabriskie 5y ago

This. Here's research to back this statement up: Today's House Prices Are Over 40 Percent More Affordable Than The Housing Boom Peak: https://blog.firstam.com/economics/todays-house-prices-are-over-40-percent-more-affordable-than-the-housing-boom-peak https://blog.firstam.com/economics/todays-house-prices-are-o...

game_the0ry 5y ago
Awesome, thanks for sharing. Bookmarked.
bogomipz 5y ago
And to balance that out, also from your link: >"The affordability gain from increased house-buying power, however, was offset by the third component of the RHPI, nominal house price appreciation, which reached a record 19 percent compared with a year ago, eclipsing the record for price appreciation of 17.5 percent set in 2005."

joppy 5y ago

Whatever the case, what you end up with is an asset whose actual value is tied to the interest rate (interest goes down, people can afford larger loans with the same repayments, therefore houses are worth more). This is a highly leveraged situation: if you take out a $1m loan and then interest rates go up, you're still liable for the whole $1m even though your actual asset might only be worth $900k now. I think this is one of the big dangers of having an essential need like housing cost such a large multiple of income.

game_the0ry 5y ago
Agreed
exporectomy 5y ago
Home ownership is not an essential need. People aren't excluded from housing because of that risk. They can just rent from a landlord who's taking that risk themselves.
- deleted 5y ago
  [deleted]
- thayne 5y ago
  True. Renting has other risks though. The Landlord can increase the price dramatically at least as often as you renew your contract (usually a year in the US), or force you to move out because they sold the property, or really almost any reason. And because moving has such a high transaction cost, landlords can often get away with treating tenants pretty badly, because putting up with a bad landlord is often less bad than having to relocate your home.
  - exporectomy 5y ago
    It's almost as if playing in the rat race isn't easy or fair. Moving to a rural area or living on social welfare is usually also an option but you have to quit the rat-race to do that and miss out on all the wealth and social status.

chuckee 5y ago

> A more relevant metric to consider - monthly mortgage payment to monthly income ratio. I find this attitude baffling. If you bought a car or a phone and paid in monthly installments, you would want to know for how long you'll be paying, not just the monthly amount. Why is a mortgage different? Is it the duration, where your brain sees 20-30 years, and substitutes that with "forever"? How would you feel if, after 30 years, when you thought you finally paid off your mortgage, the bank would say "Oh actually you have to keep paying for another 30 years"?

mikeryan 5y ago
The point is that you have more purchasing power with lower income rates. In this example you can buy a house worth 25% more. Pretty much all home buying decisions are normalized on a 30 year fixed mortgage. When figuring out what you can spend its easier to figure out what you can afford per month ans extrapolate your purchase price from there. For that matter most car buying decisions are done the same way based on a five year loan (maybe seven these days).
potatolicious 5y ago
The duration of the loan doesn't change based on the interest rate. In both of OP's examples the hypothetical borrower pays the same amount per month, for the same number of months. A lower interest rate does not affect the duration of the loan. In neither case can the bank simply extend the duration of your loan.
dzabriskie 5y ago
Because the alternative is usually renting, where the monthly expense is similar, but there is no principal down or asset appreciation.
XorNot 5y ago
Generally because the point at which you stop requiring shelter is because you're dead - so forever is a good proxy. You can do this with all your purchases though: anytime you buy anything, don't look at the sticker price - figure out the equivalent monthly cost for the expected lifetime of the item. This can have a dramatic impact on your purchasing habits.

ezoe 5y ago

Currently in Japan, interest rates for home loan are so close to zero. About 1% for fixed rate, 0.5% for 10 year fixed rate, less than 0.4% for variable rate. New homes are built rapidly and supply is plentiful. When we say home, it almost always mean condominium. Yet, the house price is rising in Japan. I can think of a few reasons for that, like mere fact that home loans are available to virtually anyone who is employed and recieve average wage, old homes quickly lose value in Japan or people ditched the countrysides and concentrate to a few major cities. I think home loan interest rate just reflect the inflation rate of the currency in that country. House price goes up simply because anyone can loan a money for. So long as the credit is available, house price stays the maximum amount of money average people can loan for and it's increasing. If rate goes up, it just mean the inflation rate goes up. The house price goes down when 1. No demand. People don't want to live that place anymore. 2. Loan is not available. 3. The government turns into Communism and give all citizen a same house for free.

yurishimo 5y ago
Japan is really cool in regards to housing. You have a sort of dichotomy of either really old houses, or brand new. I forget which YouTube video I watched that explained that it's rare to find a house older than a decade or two in a Japanese city because people don't want to live in them. Houses are constantly torn down and replaced with new ones with the latest and greatest features. I think something like that could work to reduce housing costs in the USA, but it would likely require a brand new city to be the guinea pig to prove the concept here. Something like those self-contained retirement towns that spring up, but maybe when the residents die, they rebuild them? Macabre, but interesting!
- ezoe 5y ago
  You can't just import the foreign culture without the environment that justify the culture. In Japan, the land is scarce and fragile, humidity weather, constantly facing earth quakes, typhoons. So the house will be damaged faster than the typical western countries. Each time we face the massive earthquakes, the house building regulation will be updated to mandate new and improved earthquake resistant structure so building built with old regulation lose market values. The same goes for all disasters like tsunami, flooding, land slide and all. You must also consider the fact that air conditioning wasn't popular 30 years ago. The houses built before that era were optimized for the natural ventilation. it's totally inefficient for the air conditioner. Old houses also has the Internet issues. Most of the house in Japan are massive condominium. The optical fiber was a thing after 2000s. It takes a lot of money to wire optical cable inside the existing building. So most of the buildings in Tokyo are still using VDSL. Other infrastructures like power line, water and gas starting to rust so it must be replaced. The cost of doing that to existing house is expensive in Japan and it doesn't increase the value of house that much. Especially for old houses that need replacing because it had gotten so much damage from humidity, earthquakes, typhoons and remember, it was built before the current housing regulation for the resistance for these. So it's more reasonable to just scrap it and rebuild it. I am living in a standalone old house in Tokyo unlike most of the people. Then, I realized the value of condominium in Tokyo. It works as a gated community, the segregation based on income. We are implicitly achieving the segregation by the condominium.

onlyrealcuzzo 5y ago

Also relevant is the ability to get interest only loans. If central banks are GUARANTEEING asset inflation of >2% - that's an 10% return on 5:1 leverage - that beats the S&P. If you can get an interest only loan, and be cash-flow neutral - as long as central banks keep a mandate for assets to appreciate >2% (spoiler, they have to or irresponsible governments fail) - housing is a good investment. It sucks that they've manipulated the market so much. But when >50% of the economy is debt and the cost of debt is price fixed, that's a lot of manipulation...

baybal2 5y ago

> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. No, because not everybody is so risky to get a mortgage. The prime majority of rational people don't buy such major life assets with debt.

blobbers 5y ago

see my comment above; the 40 year loan will push home prices up further.

thayne 5y ago

> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. That isn't entirely true. For most people, the amount you need for a down payment is a pretty important consideration as well, especially for a first home where you don't have any equity in an existing home that can be used to purchase your new home. I've known people who saved up for years to buy a home, then interest rates dropped and prices went up. The mortgage might be roughly the same with the same percentage of down payment, but they don't have enough cash to make the necessary down payment.

raducu 5y ago

What happens when interest rates go up? That's right, interest rates cannot go up, or else these people will be screwed. The same for stock market. Ok, so we bail out these people/investors at the cost of catastrophic failure in the future. Because money/markets are irrelevant, all that matters is access to cheap money and access to central bank bailouts.

deleted 5y ago

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JackFr 5y ago

One thing to note is that the difference between 65K down and 98K down is significant, and absent ‘affordability’ mortgage products, pushes many people out of the market. Then low down payment loans introduce distortions if their own.

elif 5y ago

Why would you compute only one iteration of interest when a full term will result in 60-100% increase in price. One month is hardly even a freeze-frame.