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Kinda. If I buy a 1M home at 2.5% interest, I have a $4,000 monthly payment. If rates go to 6%: - Housing prices plummet to $600,000, assuming people are willi

• SilasX 5y ago
  >- My monthly payments are identical to had I bought at $600k at 6%. If I stay there, I'm not much worse off. It's harder to pay off the home quickly. >- If I move out, and I rent out my home, it covers monthly payments approximately exactly. In any situation where interest rates go to 6%, there will probably also be some upheaval that affects your earnings and ability to rent it out at the present rental rate. The risks are correlated.
• xyzzy123 5y ago
  Not sure about the US but fixed-rate term in Australia is about 5 years. Nobody would give you a 30 year fixed rate. You'd eventually have to pay 6% on the $1M.
  • moosedev 5y ago
    30 year fixed rate is actually the “normal”/common mortgage in the US. I moved to the US from the UK, where mortgages look more like Australia’s, and I still find it amazing you can fix such a low rate for so long here.
    • aidenn0 5y ago
      The weird thing is that 5 year adjustable rates are higher then 30yr. fixed. That only makes sense if interest rates will go down over the next 5 years, which seems unlikely to me.
      • hapless 5y ago
        Fixed-rate mortgages are government-subsidized by a range of mechanisms (Fannie, Freddie, FHA, etc) Adjustable-rate mortgages are not.
        • JackFr 5y ago
          As a banker I am perfectly indifferent whether I make a fixed rate loan or a an adjustable rate loan to the borrower. I look my cost of funds, tack on my spread and that is the price you pay.
      • elif 5y ago
        If you look at it from the bank's perspective it makes more sense. I got a 5 year and paid it off early. The bank got about 8% of my home value. My friend has a 30 year and the bank will get ~110% of his home value.
        • aidenn0 5y ago
          This is for 30 year 5/1 ARMs the term is the same, but the rate is not locked
    • zhte415 5y ago
      The Macs drove subsidising the moral hazard of fixed rate loans into the public conscious, a subsidy for home owners, political suicide to take away. Better (politically) to rob from a generation or two to pay for reckless low interest rates.
    • hapless 5y ago
      Fixed rate mortgages are subsidized by the US government, that's why. The mechanism of the subsidy is extremely complicated, but it is not a small effect. Before the creation of the enormous state-owned insurance corporations and government programs to drive down those fixed rate mortgage costs, American mortgages were usually short-term, with giant balloon payments. Those short-term, balloon-payment mortgages went bust in huge numbers during the Great Depression, creating pressure on the government to "do something." Say what you will about American housing policy, but those 15- and 30-year mortgage arrangements are very stable.
  • sbakzbsmx 5y ago
    Ya, the US has fixed 30 year rates. Interest rates are higher going from a 15 year to a 30 year to price in some of the risk to the bank. The difference every time I bought a house was about 1%
    • mywittyname 5y ago
      The difference between a 15- and 30-year mortgage is around one percentage point, or a 30% difference.
  • farmerstan 5y ago
    I have a 30 year fixed rate mortgage of 2.375%. In the US, 30 year fixed is common.
  • sbakzbsmx 5y ago
    @moosedev Ya, my dad in Canada keeps encouraging me to buy property given the mortgages. Has its downsides, but over all its brilliant.
  • jrochkind1 5y ago
    Damn, I would assume houses must be much cheaper in Australia than in the US? Or only the very very rich can afford to buy their own home? (Or is it amortized over more than 5 years, you just have a balloon you need to refinance?) In the US, where 30-year mortgages are standard, the LARGE majority of homeowners would not be able to afford payments on their home amortized over only 5 years.
    • firecall 5y ago
      I dont have information that can compare Apples to Apples as such, as in US vs AU values. But I can say that prices are rising rapidly here in Australia. The already expensive Sydney market rose on average ~$1200 a day over the last quarter! Melbourne isn't far behind! We too have low interest rates! Whats not clear is how people are paying for the houses. Where is the money for deposits coming from, and how are they servicing such huge loans? Dual incomes and parents assisting would account for a lot of it. But what happens if/when the parents need the money back and the DINKies decide to have children and either lose the dual income or get slugged with child care fees! https://www.theguardian.com/business/grogonomics/2021/sep/16/australias-house-prices-are-disconnected-from-reality-and-the-rba-wants-you-to-know-it-isnt-to-blame https://www.theguardian.com/business/grogonomics/2021/sep/16...
    • perl4ever 5y ago
      I don't know about Australia, but it sounds like the comment you responded is saying that mortgages there are something like a US 5/1 ARM, not that they are paid off in five years. That is, the interest rate is guaranteed for five years and then it periodically adjusts.
      • xyzzy123 5y ago
        Yes, this.
    • foldingmoney 5y ago
      >Damn, I would assume houses must be much cheaper in Australia than in the US? The median home price in Australia is about US$725k. So no.
• jrochkind1 5y ago
  > If I move out, and I rent out my home, it covers monthly payments approximately exactly. That's not actually sustainable. You have repairs you're going to need to do, sometimes unexpectedly large ones. You have tenants that move out, and then marketing expenses and/or vacancies. If you're unlucky you have bad tenants that do damage or don't pay or need to be evicted after not paying. It can work temporarily (unless you are unlucky), waiting for a better time to sell. But most people who need to move don't really want to be in the landlord business, and it is a business with financial risk and headaches.
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  • tdfx 5y ago
    I would also add that there's nothing worse than being a landlord of a single unit/property. Pretty much all of the functions that you'll need to fulfill as a landlord take the same amount of time for 2-3+ units as they do for 1, except your potential returns are lower. Setting up a system to collect rent, managing repair requests and vendors, a tenant marketing/screening plan, extended vacancies, etc. are all much more painful to do for a single unit than for a collection of units. I see a lot of people throw the "just rent it out" line without considering any of this.
• stana 5y ago
  "If I move out, and I rent out my home, it covers monthly payments approximately exactly." You cannot borrow for rent, so rents follow income growth more closely. So in some expensive real estate markets, if no income growth, rent might not cover your mortgage repayments.
  • neltnerb 5y ago
    Although true, for sure, when considering cash flow -- it's a fairly big upside that at the end despite having tenants pay most of the principal you end up owning it. Extra risk, etc, but housing prices falling is exactly the risk you're going into with wide eyes open so it's just a gamble. But at the end, there's a decent shot you have full ownership of a house worth even more than you paid, and even if it loses most of its value you still own a place you can live in perpetuity paying only maintenance and property taxes. The renters don't get that, so it does kind of seem fair if they do not, in fact, cover your mortgage for you.
  • matt-attack 5y ago
    This is very true. I have pretty expensive home that I rent out which is in a pretty affluent area. The rent is insanely low relative to the supposed value of the house (3% cap rate). You make s great point as to the reason for this. Rental rates are completely detached from current interest rates.
  • woofie11 5y ago
    Let's say mortgage repayment is $3000, and rent only covers $2500. Let's add another $500 in overhead. I'm paying $12k per year. $36k would break me financially, but $12k is a good investment, since at the same time, two things are happening: 1) I am one year closer to owning the home. Yay! 2) Inflation. Rents next year might be lower, but rents in 10 years will be higher.
• throw123123123 5y ago
  <- My monthly payments are identical to had I bought at $600k at 6%. If I stay there, I'm not much worse off. It's harder to pay off the home quickly. You are a lot worse-off. If you buy at 6%, and then rates go down to 2%, you can refinance and your home is valued at a higher rate. IF you buy at 0%, you bought the house at the peak, and cannot refinance the debt.
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  • enkid 5y ago
    But you would have a lower payment because you bought at a lower rate, no?
    • j7ake 5y ago
      You would have the same payment as someone at a higher rate because at higher rates, someone would would have purchased the same home at a lower price.
• conductr 5y ago
  > what I expect is actually happening here is people are anticipating high inflation That's why price to income is an interesting metric. High inflation without income rise just means people feel worse off and a correction will occur. Housing, along with many other things, are competing for people's wallet. Interestingly, covid is causing a labor shortage and income to rise at the low ends. I suspect stagnating in the "middle income" ranges.
  • lottin 5y ago
    Inflation implies wages rise at the same rate as the price level. Otherwise it's not inflation. Not every price hike is inflation.
    • conductr 5y ago
      I’ve not seen that definition of inflation. I think you’re thinking of some type of equilibrium/market efficiency theory, where to support higher prices there has to be income growth, which is false especially in the short term where prices can rapidly rise faster than income could realistically keep pace and consumer is just worse off.
      • lottin 5y ago
        It's the standard definition, where inflation is a change in the price level, and the nominal GDP is defined as the real GDP times the price level Y×P. Since GDP is a just a sum of income components, of which one is wages, an increase in the price level implies a proportional increase in wages.
  • imtringued 5y ago
    At 5% or more interest more than half your money goes to the bank rather than the house. At 0% all your money goes to the house. You can call this inflation if you want but then you are ignoring that you are paying a million dollars for a less than million dollar house because of interest. The fact that spending and price are decoupled make the inflation idea stupid.
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• jfoutz 5y ago
  It’s a lot easier to come up with a down payment on the cheaper house though.
• raducu 5y ago
  > - My monthly payments are identical to had I bought at $600k at 6% I'm not sure how it works in the US, but where I live, you have a fixed interest rate for a couple of years max, after that you pay the market rate. So in your case, if you had a fixed interest rate for 3-5 years, after those years pass, you'd have also a massive increase in mortgage payment, plus your house severely depreciating.
  • brailsafe 5y ago
    That seems to be the case where I live as well, though I believe there is a way to lock in an interest rate for longer. (Not a homeowner) If interest rates rise to 6% and you've got 2.5%, the advantage would last that long. However, I know interest is front-loaded to the first few amortization periods, so maybe it would be more significant.
  • goodcanadian 5y ago
    The U.S. is unusual in that rates being fixed for the full 30 year term of the mortgage is normal. They do tend to wind up with somewhat higher interest rates as a result, however.
• dunk010 5y ago
  This is the case in the US because rates are the same for the length of the loan. This is decidedly NOT the case in the UK, where the entire market is composed of teaser-rate loans (2, 5, 10 year), which revert eventually and then need refinanced at the prevailing rate. That's going to be a nasty wake-up call for a lot of people.