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> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. Which is crazy, right? People max out their "b

> 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.

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.