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Mortgage rates just hit 5%. Buying a home has become a lot more expensive

69 points by Victerius 5y ago

mupuff1234 5y ago
It's gonna take more than %5 to cool down the market when real estate prices are going up 10%+ YoY.
- voisin 5y ago
  I concur. In Canada, 10% YoY would be a welcome change. It’s been more like 25-35% YoY in many, many markets (including tertiary markets with stagnant economies).
deleted 5y ago
[deleted]
RocketOne 5y ago
I think that was the point. There are many markets that are overheated and it was time to turn down the temperature. 5% should help. (We lived through 18% in the 80's. This is barely tapping the brakes.)
- globular-toast 5y ago
  Yes but it was 18% of a much a smaller amount. In terms of potatoes or shoes the amount of interest they were paying back then was probably the same.
  - HarryHirsch 5y ago
    In the 80's a much smaller chunk of paycheck went into housing.
    - refurb 5y ago
      Not really. https://www.brookings.edu/wp-content/uploads/2016/08/where_does_all_the_money_go.pdf https://www.brookings.edu/wp-content/uploads/2016/08/where_d... Percent of income spent on housing for low income households went from 35% (1984) to 41% (2014). So higher, yes, but it wasn’t “much smaller”.
      - voisin 5y ago
        I’d love to see the stats today or closer to today. Prices have skyrocketed since 2014.
        refurb 5y ago
        Sure but current prices in many areas have only returned to their 2007 peak.
      - beeboop 5y ago
        What these stats often miss, including this one at a glance, is that they're looking at average housing cost across the entire country. Housing in Detroit is definitely a lot cheaper than it was 20 years ago, but in Seattle and Portland and Denver and places people actually want to live, it's soared. These stats also often don't address how many people in a household are working and how that's changed over time. There's a lot more dual incomes for a "household budget" in 2014 than there was in 1984. If your household income has nearly doubled, and you're going from 35% of your household budget to 41%, this could mean the cost of housing has actually doubled or more.
      - HarryHirsch 5y ago
        35 % on a single income vs 41 % on a double income. That's "antifragile", as they say, an unsafe position to be in, especially when the next recession is on the doorstep. Me? Trying to find a property to buy in Western Massachusetts that's affordable on one income. Not looking good.
        refurb 5y ago
- spamizbad 5y ago
  Yes, but unlike the 1980s we've been underbuilding housing since the 90s. There were also more first-time buyer incentives available in the 1980s.
  - deleted 5y ago
    [deleted]
  - HarryHirsch 5y ago
    Exactly that - it's not clear how interest raises in a time of shortage will do something about the shortage. If anything, they discourage investment. And what's with buyer incentives? They are just a conduit from the taxpayer to Big Finance.
  - JKCalhoun 5y ago
    At the same time, the higher interest rate will causes existing home-owners to "stay put" rather than jump to another home and pay 5% (unless they are down-sizing and able to make a cash offer). So the supply problem is not addressed. Might make new construction cheaper though?
- gr8tnwz 5y ago
  Now that speculators have driven up prices while interest was and money printers went brrr, time to drive up the interest. And we should be happy to have been born after others earned all the wealth. https://youtu.be/bUl5rSpfCeI https://youtu.be/bUl5rSpfCeI
bdcravens 5y ago
Tell me about it. I have the worst timing: started building a house in November, so I bought near the top, and then when it came time to get financing (I close next month), it's the first time that rates have risen significantly in years.
- sp332 5y ago
  I think we are still near the bottom on interest rates. Look again at the end of the year and see if you still think your timing was bad :)
  - tomatowurst 5y ago
    you might correct with this assessment, currently the geopolitical situation of the US dollar is headed for an existential crisis as Russia-centric countries like BRICS, some european countries and Saudi are now looking to move away from pegging to USD. It's not clear whether they will succeed but should be enough of a threat that the only way to combat an attack on USD would be to raise rates significant enough on top of the pressure from inflation (nobody is buying that we have only 8% inflation, many economists are putting it at about 17%, which is absolutely unprecedented and we can no longer print money, somewhere around over half of the current USD supply was printed post 2020!!!! this is not sustainable!) Recall that in the 70s, 80s, we had double digit interest rates. 14%: The GDP was 3.2% in 1979, unemployment was 6.0%, and inflation was 11.3%. and the next year immediately: 20%!!!!: The GDP was -0.3% in 1980, unemployment was 7.2%, and inflation was 13.5%. Even through out the 90s we had 6% to 9% range with inflation at around low single digits! In fact it took from 1979 to 2002 for rates to come low to what we have had 1.25%: The GDP was 1.7% in 2002, unemployment was 6.0%, and inflation was 1.6%. The following tables have data taken from The Federal Reserve. it rose to 4, 5% again until 2008 hit and you know the rest. 0.25% !!!: In 2008, The GDP was 0.1%, unemployment was 7.3%, and inflation was 3.8%. As of Dec. 16, 2008, the target funds rate became a range, represented in the tables by the upper limit. and during those times, real estate markets struggled while booming in emerging markets.
    - mrep 5y ago
ivanche 5y ago
Home prices will just go down soon so that average monthly payment for new buyers stays about the same as for the old ones with "high home price" + "low rate" combo. Of course, in a transition period a handful of people will be unlucky enough to be stuck with "high home price" + "high rate" combo.
- crate_barre 5y ago
  This will not be true in certain select markets. It will be high home price and high rate in those places whether you like it or not.
  - CapmCrackaWaka 5y ago
    Why? I know we aren’t supposed to apply anecdotal experience to macroeconomics, but I have 6 different friends and 3 coworkers in my department who have all bought multiple houses. They did this because debt was so cheap and they essentially bought as much house as they could. They ALL plan on flipping or renting. I have a feeling that losing access to cheap debt is going to have a bigger impact than people realize. None of these people would have bought these houses if they couldn’t get a 3% interest rate and a 30 year loan.
    - segmondy 5y ago
      I bought all the house I could, not because I plan on flipping or renting but because the money supply is ridiculous. So much money has been pumped into the economy that I firmly believe inflation is here to stay. If inflation stays that will put upwards pressure on price of everything, houses included too.
      - mirceal 5y ago
        keyword from GP is multiple. If you buy multiple houses than you probably plan on renting them out/flipping them.
    - crate_barre 5y ago
anonymouse008 5y ago
Nope, buying a home has not gotten more expensive. Financing a home purchase has. Few understand this.
- pnut 5y ago
  Pretty sure house prices are at all time highs also?
- brutus1213 5y ago
  You are right but they are linked. The proportion of people who don't take a mortgage as a fraction of buyers isn't that high I think? (myth of the all-cash foreign buyer)
  - anonymouse008 5y ago
    That is exactly the point. Though a relationship exists, the mindset that believes “it’s now more expensive” is the mindset that creates financial instability through decisions and behaviors made over time in more markets than just housing.
  - JKCalhoun 5y ago
    I don't think it's a myth — well the "foreign buyer" part is probably in the noise. Talk to a realtor in any U.S. locality (I happen to be working with a realtor in a mid-west state) and ask them how many homes are seeing all-cash offers. I suspect it is also institutional/corporate buyers and people who cashed out of their home-in-expensive-region and are moving to less expensive communities. I don't think there's any myth there.
- hotpotamus 5y ago
  Housing affordability is obviously multifactorial and mortgage rate is one of those factors. https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index
- TrackerFF 5y ago
  Building a home as definitely become more expensive, supplies have become more expensive all over the line. But financing has also become more expensive, and will probably continue if/when the fed raises the interest rate.
brutus1213 5y ago
In Canada, the govt is pulling the brakes via policy (foreign buyer ban, non-resident tax, etc.) amid the rise in rates. Unlike the US, we have max 5 year fixed rate mortgages for the most part. The govt initiatives are a drop in the bucket but the impact of rate increases is very concerning. On the flip side, govt policies are fueling the fire as they help first time buyers with more tax incentives. I wonder if anyone in charge passed econ 101. As others have commented, the rate increase in the US is nuts. People were paying the max monthly payments their income would give them in some markets (e.g. Bay area). With rates doubling so fast, I worry about fiscal solvency of anyone who did not get a long-term locked rate.
- andrewmcwatters 5y ago
  It sounds like the mortgage situation is quite sane in Canada compared to the US. Over US history, mortgage periods continued to bleed upwards.
  - rpeden 5y ago
    Mortgages in Canada are typically amortized over 25 years. The 5 year term is the length of your contract with your current lender. Once that is up, you can renew with them or shop around for a better deal or better service. At once point in the not-too-distant past we had mortgages with 40 year amortization periods but they eventually pared that back down to 25 years - unless you put 20% down, in which case you can push it to 30 years.
    - toxik 5y ago
      In Sweden there is a rule that new loans must be amortized 1% per annum (2% if your principal is more than 60% of the value), so I guess that’s basically saying “pay it in 100 years”? Edit: actually the rule is 1% if principal to value is above I think 40%, so not even that is true. We are basically not expected to pay it off entirely unless we want to.
    - wiredfool 5y ago
      Max amortization in Ireland is years to retirement age, which is pretty much universally at 65. This was a bit of a shock when buying a house, but it does help push the principal/interest split in the right direction. No idea how that works if you need to relocate at 55+. Mortgages can be fixed rate for a few years, but are typically month to month adjustable. If you do opt for a fixed rate, it's generally lower than the adjustable, but there are penalties for selling before the term is up, or refinancing out of it.
joshstrange 5y ago
That's crazy, I'm glad I, and a number of my friends, refinanced in 2020-2021 for rates in the 2.25-2.75 range. Going from 2.25 (my rate) to 5 would result in ~$300 more a month on my mortgage.
- tomatowurst 5y ago
  congrats! but risk is obviously that property prices as a whole will start to deflate but if its your primary residence and you are going to live in forever it will be fine, you are on the hook for whatever you bought the property for vs market price. people that were using cheap mortgages to purchase additional properties with the aim of flipping it, who were also leveraged, are screwed. the last bit of bad news is that property prices may not rise for people who buy the dip, we are entering into a global recession and the world's biggest real estate market have declined with no hope of making a comeback.
  - toomuchtodo 5y ago
    > people that were using cheap mortgages to purchase additional properties with the aim of flipping it, who were also leveraged, are screwed. They'll convert to rentals and make back any acquisition overpayment over time. Even if we hit a recession, with so many people having left the workforce and continuing to leave over time through retirement, rental demand should remain firm.
    - tomatowurst 5y ago
      it would be a renters market and you would be bidding down to the point you are making marginal impact on your debt repayment.
  - Nbox9 5y ago
    This comment is too bleak. If they refinanced in 2020 then they likely bought in 2019 or earlier. If prices fell to 2019 levels it would be a crash —- and probably merit all sorts of government response including lowering interest rates. No one that entered the market before 2020 is “screwed”. Housing prices even in the markets hit hardest by 2008 recovered in ten years. You aren’t stuck living in your current home forever. If you bought an investment property then relax, there’s no indicator that rents are going to decrease anytime soon.
nine_zeros 5y ago
Hopefully, this will cause a lot of institutional investors to sell their homes and cause a decline in housing prices.
- mywittyname 5y ago
  Why would it? Especially cash buyers? I can't see institutional investors selling. If house prices fall, they are going to hold on to houses to prevent the losses from being shown on their books. If rent prices fall, they are going to focus on appreciation to cover the losses (and taking advantage of favorable tax treatment that landlords enjoy). Really, the only way it makes sense for an institutional investor to sell is if the prices reach so high, then plateau, such that even the most optimistic projections show there's not much money to be made in rents+appreciation over the next 10 years.
  - chii 5y ago
    > the only way it makes sense for an institutional investor to sell ... they sell if they see another, higher return opportunity.
  - harambae 5y ago
    > If house prices fall, they are going to hold on to houses to prevent the losses from being shown on their books. And yet Zillow did the exact opposite of this very recently. Also, after Zillow did so, everyone on real estate forums seemed to explain that it's so so obvious that this would happen ("of course, with carrying costs, they had to sell") It's almost like no one knows the future but backwards rationalizes whatever happens as obvious.
- mirceal 5y ago
  hahaha. nope. why would they do that when the inventory is so limited? the only solution that I think could work is rezoning + building more. That’s the only thing that could dampen this mad market.
- cronix 5y ago
  It doesn't really affect them because the tenant is defacto paying the mortgage, and there is no shortage of tenants. It will just further increase rent rates during the next rental contract renewal, but buried in with all of the other regular inflation (increase in building materials for repairs, labor rates, etc).
mywittyname 5y ago
5% isn't so bad. I bought during the rate spike of 18 at around 5%, then had to watch as rates immediately fell again and I couldn't refinance until my mortgage "seasoned" for 10 months. Back during the housing boom, rates were 5-6%. So I'm not sure that this will cool the market all that much.
- onlyrealcuzzo 5y ago
  During the housing boom - everyone was getting balloon payment mortgages to avoid the 5-6% rates... That's what caused the housing bust. I'm sure - if allowed - we could see something similar. But IIUC this type of financing isn't currently plausible.
- symlinkk 5y ago
  5% is that bad when you’re combining it with doubled house prices over the last 2 years
  - mywittyname 5y ago
    The issue is the doubling of housing prices though, not the interest rates. Historical evidence suggests that 5% is more than low enough to fuel a house-building boom. Plus, if you buy into the idea that interest rates dictate housing prices, then 5% rates should lower housing prices. I personally don't see this happening in our specific climate, but there's ample evidence that the two are negatively correlated.
    - voisin 5y ago
      I think 5% is just the start unless inflation rapidly reverses. I suspect the nominal rate is a lot less important than the effective real rate.
      - mywittyname 5y ago
        Agreed. Which is why I don't think 5% is that bad. It's barely above the average rate between the GFC and the pandemic (~4.25%). But inflation is much, much higher. The nominal rate should be important right now. The nominal rate in the before times was like 4% interest - 1-2% inflation. Now the nominal rate is 5% with 7-12% inflation. Normal people are absolutely going to start factoring inflation into the equation. Especially if inflation continues to drive wage growth.
mooreds 5y ago
If you'd prefer the content without the images: https://text.npr.org/1091398386 https://text.npr.org/1091398386
phendrenad2 5y ago
This is probably because banks consider home loans a riskier investment. With inflation high, there's the risk that the home loan could become seriously devalued. Also, the CoL increase due to inflation could outstrip pay increases, making homeowners more prone to default.
DoubleDerper 5y ago
"Luxury" buyers are less sensitive to interest rate increases due to the amount of cash they can deploy. If more housing stock isn't injected amidst a housing shortage, raising interest rates will disproportionately affects Buyers who really need affordability. Crappy deal. In cities like Seattle or Austin or Denver, 5% mortgage rates are unlikely to cool the market off in any meaningful way.
mattbrewsbytes 5y ago
> Unlike rates on credit cards or other types of loans, mortgage rates move early and dramatically in anticipation of what the market expects Interesting piece of information for tracking economic movements. I wonder what the ratio is on adjustable rate mortgages vs. fixed. If there are a lot of ARM out there then there might be potential for a bubble popping where people can't afford the mortgage and fixed rates are also higher where a re-fi won't help.
- kipchak 5y ago
  They were at 10% January 2022, up from 4% Jan 2021. [1]https://www.cbsnews.com/news/mortgage-rates-4-percent-adjustable-rate-mortgages-housing/ https://www.cbsnews.com/news/mortgage-rates-4-percent-adjust...
- next_xibalba 5y ago
  According to [1], ARMs have multiple caps on their interest rates. They cannot be freely floated along with prevailing interest rates. Rather, they have a cap on how much the rate can go up at each adjustment period, and a cap on the maximum total increase over the lifetime of the loan. So if you had an ARM at an initial rate of 3%, you're probably gonna hit 5% very soon. But even if inflation hits early 1980s levels and the Fed acts similarly by mercilessly raising rates, ARM borrowers won't see their rates go anywhere near >20%. Additionally, lending standards over the last decade were nowhere near as loose as before the financial crisis. Though apparently they were beginning to ease in Q3 and Q4 of last year. [2] All this to say, I'm sure you're right, borrowers at the margins of lending standards will have a much harder time, and we'll see an increase in foreclosures. But it shouldn't the tsunami that we saw in '06-'09. One does wonder though, with the trend of increasing economic headwinds (inflation, ongoing supply chain bottlenecks, etc.), how close we are to a recession. [1] https://www.bankrate.com/mortgages/federal-reserve-decision-heloc-arms/ https://www.bankrate.com/mortgages/federal-reserve-decision-... [2] https://www.pymnts.com/loans/2021/banks-loosen-lending-standards-in-race-to-loan-money/ https://www.pymnts.com/loans/2021/banks-loosen-lending-stand...
tetrahedrix 5y ago
Looking at historic US housing data, during periods of rate increases prices did not drop, with 2008-2009 being the exception. However, during the previous recessions price discovery was difficult, one needed to go through an agent who interfaced with disjoint MLS systems. I suspect that price discovery through zillow/corelogic might cause faster repricing in the housing market today. Second home purchases in the reached historic levels over the last two years. There is a lot of inventory that could be listed quickly in comparison to owner occupied homes. It's not clear that a correction will happen though, wage increases, in particular at lower incomes can sustain higher rates and higher prices for homes below the median. At the high end most buyers are likely asset rich and can also sustain higher prices. The price segment that may be most vulnerable due to higher rates is in the middle.
pavlov 5y ago
For European readers, a bit of useful context that surprised me when I moved to USA. Most Americans buy their homes on 30-year mortgages with fixed interest rate. So rate increases generally only affect those buying, not those who already own. In Europe (at least the parts I'm familiar with), it's more common for mortgages to be on adjustable rates, basically the European Central Bank rate + a fixed margin. This has been an excellent deal for the past 10+ years, as the ECB rate sunk below zero. (I have a mortgage in Finland that I took in 2011, and for many years I've paid zero interest on it because ECB rate + the loan margin added up to a negative rate. Sadly my bank clamps it at zero.)
- cmrdporcupine 5y ago
  Canada is more like Europe in this sense, too. The American mortgage market is a bit weird from a distance. Here you have your choice between a variable rate mortgage (floats at BoC rate +- some %) or a "fixed" rate on a term (e.g. 3% for 5 years) and then you renew at whatever rate is current at the end of the term.
  - s1artibartfast 5y ago
    I couldn't imagine buying a house without 30 year fixed. Do many people loose their houses when rates go up? I would be terrified.
    - pja 5y ago
      30 fixes only exist in the US thanks to government intervention in the mortgage market to underwrite that risk for the banks. In most western countries, fixed mortgages do exist, but the bank has to go out and buy the relevant interest rate swap in the open market, so availability fluctuates & is biased towards short term fixes. Most people are either on a variable rate or are on a short term fix that expires in a couple of years. I remember when interest rates hit 15% in the UK in the 80s. My parents did worry they were going to lose our house!
      - 5y ago
throwawayffffas 5y ago
Kind of makes sense inflation has been over 5% for almost a year now.
merrywhether 5y ago
High mortgage rates mean that is only more expensive for “poor” people, while the wealthy will continue on their merry way. The US desperately needs a land-value tax as a step towards making home ownership costly and depreciating, removing the home-as-investment angle. Who wants a nest egg that means giving up your dwelling in the case of actually needing to liquidate it anyway? (Oops, got expensive medical bills? Now you’re sick _and_ homeless!) Actions like this will unfortunately destroy a lot of older middle-class wealth in the short-term, but longer term it would hurt the upper-classes the most (and even short-term it’s not like the upper classes haven’t been winning every transaction anyway). And the longer we let this problem fester, the more lives we disrupt of the younger generations who have seen countless ladders pulled up in front of them.
- hellisothers 5y ago
  How is it only more expensive for poor people but not wealthy people? Did you mean less accessible?
  - sauwan 5y ago
    Not OP, but guessing he means wealthy people have more opportunities to buy without financing when the cost of financing seems to overtake other opportunities.
  - goalieca 5y ago
    How many rich people take out a mortgage?
    - xboxnolifes 5y ago
      Most of them
    - hellisothers 5y ago
      Yea, even if you pay with cash you’re probably financing it after you own the property.
    - 5y ago
ldiracdelta 5y ago
No it hasn't become more expensive due to hitting 5%, though it may be more expensive for other reasons. The market will equilabrate. There's a couple who live at the peak of the bell curve that defines your market. They can spend $X,000 per month on a house. 2.5% vs 5% just changes how much of their money goes to paying down principle vs the interest. With that the price of the house will fluctuate to account for this reality.
- tallclair 5y ago
  This doesn’t account for all the people who can afford to pay in cash. That will shift the equilibrium.
  - ivanche 5y ago
    I don’t have hard data on this; however, I believe that cash buyers are minority, maybe even significant minority. It would be awesome if someone could share concrete numbers on this.
    - beembeem 5y ago
      A local realtor in my hot market on the west coast indicated to me that it was as much as a third of sales they saw in the last year FWIW.
      - dariusj18 5y ago
        That's partially because there is a whole new industry of preapproved loans that you can treat as cash when negotiating to buy a home.
jcomis 5y ago
It's quite depressing. Attempting to buy since August. When I started my rate was 2.7 and today it's 5.2 and climbing extremely fast in the past month. Inventory continues to be a problem. There just has been so little on the market. What's interesting in my observation is the rate increases have actually created even more competition. People are straight up desperate right now. Also now that overlapping showings are happening I spend nearly every viewing with 2-5 realtors who are showing over zoom to buyers looking to move from a HCOL to my city (Denver). I found it hard enough to make a major decision after a 20 minute viewing, but to do so over a poorly narrated zoom/facetime walkthrough? Can't imagine.
- DamnYuppie 5y ago
  Honest question do you need a home right now? I too have been looking and when interest rates jumped I decided I was going to sit on the sidelines for the next 1 to 2 years and just stack cash/invest in various markets.
  - 11101010001100 5y ago
    I did some back of the envelope calculations comparing housing in my area vs market. Taking the long view, accounting for property taxes and mortgage interest payments, housing did not beat the market.
    - refurb 5y ago
      I bought a few years ago and did the same calculation. Despite prices up 30%, my down payment would have produced higher returns if I had invested it. Plus stocks are almost immediately liquid and have almost no transaction and no maintenance costs and no annual property tax.
      - symlinkk 5y ago
        Are you accounting for the equity you’re building by paying a mortgage vs paying rent?
lukewrites 5y ago
If this helps stops high earners from buying second or third homes, as seems common in the sections of the software engineer community in my area, I am all for it.
mikewarot 5y ago
Maybe this marks the start of a return to rational pricing of capital? It's a bit too late for a lot of older folks who were counting on interest from savings accounts to fund their retirement, but maybe we can start encouraging saving again for the future? I hope this brings the price of housing back down to earth. A house is a depreciating asset in any sane world. It requires constant maintenance.
lamontcg 5y ago
5% is still historically very low. Rates hit 18% in 1980, and an 8% rate would be more in line with historical averages. I wonder if rates readjusting pops the housing bubble though.

69 points by Victerius 5y ago

mupuff1234 5y ago

It's gonna take more than %5 to cool down the market when real estate prices are going up 10%+ YoY.

voisin 5y ago
I concur. In Canada, 10% YoY would be a welcome change. It’s been more like 25-35% YoY in many, many markets (including tertiary markets with stagnant economies).

deleted 5y ago

[deleted]

RocketOne 5y ago

I think that was the point. There are many markets that are overheated and it was time to turn down the temperature. 5% should help. (We lived through 18% in the 80's. This is barely tapping the brakes.)

globular-toast 5y ago
Yes but it was 18% of a much a smaller amount. In terms of potatoes or shoes the amount of interest they were paying back then was probably the same.
- HarryHirsch 5y ago
  In the 80's a much smaller chunk of paycheck went into housing.
  - refurb 5y ago
    Not really. https://www.brookings.edu/wp-content/uploads/2016/08/where_does_all_the_money_go.pdf https://www.brookings.edu/wp-content/uploads/2016/08/where_d... Percent of income spent on housing for low income households went from 35% (1984) to 41% (2014). So higher, yes, but it wasn’t “much smaller”.
    - voisin 5y ago
      I’d love to see the stats today or closer to today. Prices have skyrocketed since 2014.
      - refurb 5y ago
        Sure but current prices in many areas have only returned to their 2007 peak.
    - beeboop 5y ago
      What these stats often miss, including this one at a glance, is that they're looking at average housing cost across the entire country. Housing in Detroit is definitely a lot cheaper than it was 20 years ago, but in Seattle and Portland and Denver and places people actually want to live, it's soared. These stats also often don't address how many people in a household are working and how that's changed over time. There's a lot more dual incomes for a "household budget" in 2014 than there was in 1984. If your household income has nearly doubled, and you're going from 35% of your household budget to 41%, this could mean the cost of housing has actually doubled or more.
    - HarryHirsch 5y ago
      35 % on a single income vs 41 % on a double income. That's "antifragile", as they say, an unsafe position to be in, especially when the next recession is on the doorstep. Me? Trying to find a property to buy in Western Massachusetts that's affordable on one income. Not looking good.
      - refurb 5y ago
spamizbad 5y ago
Yes, but unlike the 1980s we've been underbuilding housing since the 90s. There were also more first-time buyer incentives available in the 1980s.
- deleted 5y ago
  [deleted]
- HarryHirsch 5y ago
  Exactly that - it's not clear how interest raises in a time of shortage will do something about the shortage. If anything, they discourage investment. And what's with buyer incentives? They are just a conduit from the taxpayer to Big Finance.
- JKCalhoun 5y ago
  At the same time, the higher interest rate will causes existing home-owners to "stay put" rather than jump to another home and pay 5% (unless they are down-sizing and able to make a cash offer). So the supply problem is not addressed. Might make new construction cheaper though?
gr8tnwz 5y ago
Now that speculators have driven up prices while interest was and money printers went brrr, time to drive up the interest. And we should be happy to have been born after others earned all the wealth. https://youtu.be/bUl5rSpfCeI https://youtu.be/bUl5rSpfCeI

bdcravens 5y ago

Tell me about it. I have the worst timing: started building a house in November, so I bought near the top, and then when it came time to get financing (I close next month), it's the first time that rates have risen significantly in years.

sp332 5y ago
I think we are still near the bottom on interest rates. Look again at the end of the year and see if you still think your timing was bad :)
- tomatowurst 5y ago
  you might correct with this assessment, currently the geopolitical situation of the US dollar is headed for an existential crisis as Russia-centric countries like BRICS, some european countries and Saudi are now looking to move away from pegging to USD. It's not clear whether they will succeed but should be enough of a threat that the only way to combat an attack on USD would be to raise rates significant enough on top of the pressure from inflation (nobody is buying that we have only 8% inflation, many economists are putting it at about 17%, which is absolutely unprecedented and we can no longer print money, somewhere around over half of the current USD supply was printed post 2020!!!! this is not sustainable!) Recall that in the 70s, 80s, we had double digit interest rates. 14%: The GDP was 3.2% in 1979, unemployment was 6.0%, and inflation was 11.3%. and the next year immediately: 20%!!!!: The GDP was -0.3% in 1980, unemployment was 7.2%, and inflation was 13.5%. Even through out the 90s we had 6% to 9% range with inflation at around low single digits! In fact it took from 1979 to 2002 for rates to come low to what we have had 1.25%: The GDP was 1.7% in 2002, unemployment was 6.0%, and inflation was 1.6%. The following tables have data taken from The Federal Reserve. it rose to 4, 5% again until 2008 hit and you know the rest. 0.25% !!!: In 2008, The GDP was 0.1%, unemployment was 7.3%, and inflation was 3.8%. As of Dec. 16, 2008, the target funds rate became a range, represented in the tables by the upper limit. and during those times, real estate markets struggled while booming in emerging markets.
  - mrep 5y ago

ivanche 5y ago

Home prices will just go down soon so that average monthly payment for new buyers stays about the same as for the old ones with "high home price" + "low rate" combo. Of course, in a transition period a handful of people will be unlucky enough to be stuck with "high home price" + "high rate" combo.

crate_barre 5y ago
This will not be true in certain select markets. It will be high home price and high rate in those places whether you like it or not.
- CapmCrackaWaka 5y ago
  Why? I know we aren’t supposed to apply anecdotal experience to macroeconomics, but I have 6 different friends and 3 coworkers in my department who have all bought multiple houses. They did this because debt was so cheap and they essentially bought as much house as they could. They ALL plan on flipping or renting. I have a feeling that losing access to cheap debt is going to have a bigger impact than people realize. None of these people would have bought these houses if they couldn’t get a 3% interest rate and a 30 year loan.
  - segmondy 5y ago
    I bought all the house I could, not because I plan on flipping or renting but because the money supply is ridiculous. So much money has been pumped into the economy that I firmly believe inflation is here to stay. If inflation stays that will put upwards pressure on price of everything, houses included too.
    - mirceal 5y ago
      keyword from GP is multiple. If you buy multiple houses than you probably plan on renting them out/flipping them.
  - crate_barre 5y ago

anonymouse008 5y ago

Nope, buying a home has not gotten more expensive. Financing a home purchase has. Few understand this.

pnut 5y ago
Pretty sure house prices are at all time highs also?
brutus1213 5y ago
You are right but they are linked. The proportion of people who don't take a mortgage as a fraction of buyers isn't that high I think? (myth of the all-cash foreign buyer)
- anonymouse008 5y ago
  That is exactly the point. Though a relationship exists, the mindset that believes “it’s now more expensive” is the mindset that creates financial instability through decisions and behaviors made over time in more markets than just housing.
- JKCalhoun 5y ago
  I don't think it's a myth — well the "foreign buyer" part is probably in the noise. Talk to a realtor in any U.S. locality (I happen to be working with a realtor in a mid-west state) and ask them how many homes are seeing all-cash offers. I suspect it is also institutional/corporate buyers and people who cashed out of their home-in-expensive-region and are moving to less expensive communities. I don't think there's any myth there.
hotpotamus 5y ago
Housing affordability is obviously multifactorial and mortgage rate is one of those factors. https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index
TrackerFF 5y ago
Building a home as definitely become more expensive, supplies have become more expensive all over the line. But financing has also become more expensive, and will probably continue if/when the fed raises the interest rate.

brutus1213 5y ago

In Canada, the govt is pulling the brakes via policy (foreign buyer ban, non-resident tax, etc.) amid the rise in rates. Unlike the US, we have max 5 year fixed rate mortgages for the most part. The govt initiatives are a drop in the bucket but the impact of rate increases is very concerning. On the flip side, govt policies are fueling the fire as they help first time buyers with more tax incentives. I wonder if anyone in charge passed econ 101. As others have commented, the rate increase in the US is nuts. People were paying the max monthly payments their income would give them in some markets (e.g. Bay area). With rates doubling so fast, I worry about fiscal solvency of anyone who did not get a long-term locked rate.

andrewmcwatters 5y ago
It sounds like the mortgage situation is quite sane in Canada compared to the US. Over US history, mortgage periods continued to bleed upwards.
- rpeden 5y ago
  Mortgages in Canada are typically amortized over 25 years. The 5 year term is the length of your contract with your current lender. Once that is up, you can renew with them or shop around for a better deal or better service. At once point in the not-too-distant past we had mortgages with 40 year amortization periods but they eventually pared that back down to 25 years - unless you put 20% down, in which case you can push it to 30 years.
  - toxik 5y ago
    In Sweden there is a rule that new loans must be amortized 1% per annum (2% if your principal is more than 60% of the value), so I guess that’s basically saying “pay it in 100 years”? Edit: actually the rule is 1% if principal to value is above I think 40%, so not even that is true. We are basically not expected to pay it off entirely unless we want to.
  - wiredfool 5y ago
    Max amortization in Ireland is years to retirement age, which is pretty much universally at 65. This was a bit of a shock when buying a house, but it does help push the principal/interest split in the right direction. No idea how that works if you need to relocate at 55+. Mortgages can be fixed rate for a few years, but are typically month to month adjustable. If you do opt for a fixed rate, it's generally lower than the adjustable, but there are penalties for selling before the term is up, or refinancing out of it.

joshstrange 5y ago

That's crazy, I'm glad I, and a number of my friends, refinanced in 2020-2021 for rates in the 2.25-2.75 range. Going from 2.25 (my rate) to 5 would result in ~$300 more a month on my mortgage.

tomatowurst 5y ago
congrats! but risk is obviously that property prices as a whole will start to deflate but if its your primary residence and you are going to live in forever it will be fine, you are on the hook for whatever you bought the property for vs market price. people that were using cheap mortgages to purchase additional properties with the aim of flipping it, who were also leveraged, are screwed. the last bit of bad news is that property prices may not rise for people who buy the dip, we are entering into a global recession and the world's biggest real estate market have declined with no hope of making a comeback.
- toomuchtodo 5y ago
  > people that were using cheap mortgages to purchase additional properties with the aim of flipping it, who were also leveraged, are screwed. They'll convert to rentals and make back any acquisition overpayment over time. Even if we hit a recession, with so many people having left the workforce and continuing to leave over time through retirement, rental demand should remain firm.
  - tomatowurst 5y ago
    it would be a renters market and you would be bidding down to the point you are making marginal impact on your debt repayment.
- Nbox9 5y ago
  This comment is too bleak. If they refinanced in 2020 then they likely bought in 2019 or earlier. If prices fell to 2019 levels it would be a crash —- and probably merit all sorts of government response including lowering interest rates. No one that entered the market before 2020 is “screwed”. Housing prices even in the markets hit hardest by 2008 recovered in ten years. You aren’t stuck living in your current home forever. If you bought an investment property then relax, there’s no indicator that rents are going to decrease anytime soon.

nine_zeros 5y ago

Hopefully, this will cause a lot of institutional investors to sell their homes and cause a decline in housing prices.

mywittyname 5y ago
Why would it? Especially cash buyers? I can't see institutional investors selling. If house prices fall, they are going to hold on to houses to prevent the losses from being shown on their books. If rent prices fall, they are going to focus on appreciation to cover the losses (and taking advantage of favorable tax treatment that landlords enjoy). Really, the only way it makes sense for an institutional investor to sell is if the prices reach so high, then plateau, such that even the most optimistic projections show there's not much money to be made in rents+appreciation over the next 10 years.
- chii 5y ago
  > the only way it makes sense for an institutional investor to sell ... they sell if they see another, higher return opportunity.
- harambae 5y ago
  > If house prices fall, they are going to hold on to houses to prevent the losses from being shown on their books. And yet Zillow did the exact opposite of this very recently. Also, after Zillow did so, everyone on real estate forums seemed to explain that it's so so obvious that this would happen ("of course, with carrying costs, they had to sell") It's almost like no one knows the future but backwards rationalizes whatever happens as obvious.
mirceal 5y ago
hahaha. nope. why would they do that when the inventory is so limited? the only solution that I think could work is rezoning + building more. That’s the only thing that could dampen this mad market.
cronix 5y ago
It doesn't really affect them because the tenant is defacto paying the mortgage, and there is no shortage of tenants. It will just further increase rent rates during the next rental contract renewal, but buried in with all of the other regular inflation (increase in building materials for repairs, labor rates, etc).

mywittyname 5y ago

5% isn't so bad. I bought during the rate spike of 18 at around 5%, then had to watch as rates immediately fell again and I couldn't refinance until my mortgage "seasoned" for 10 months. Back during the housing boom, rates were 5-6%. So I'm not sure that this will cool the market all that much.

onlyrealcuzzo 5y ago
During the housing boom - everyone was getting balloon payment mortgages to avoid the 5-6% rates... That's what caused the housing bust. I'm sure - if allowed - we could see something similar. But IIUC this type of financing isn't currently plausible.
symlinkk 5y ago
5% is that bad when you’re combining it with doubled house prices over the last 2 years
- mywittyname 5y ago
  The issue is the doubling of housing prices though, not the interest rates. Historical evidence suggests that 5% is more than low enough to fuel a house-building boom. Plus, if you buy into the idea that interest rates dictate housing prices, then 5% rates should lower housing prices. I personally don't see this happening in our specific climate, but there's ample evidence that the two are negatively correlated.
  - voisin 5y ago
    I think 5% is just the start unless inflation rapidly reverses. I suspect the nominal rate is a lot less important than the effective real rate.
    - mywittyname 5y ago
      Agreed. Which is why I don't think 5% is that bad. It's barely above the average rate between the GFC and the pandemic (~4.25%). But inflation is much, much higher. The nominal rate should be important right now. The nominal rate in the before times was like 4% interest - 1-2% inflation. Now the nominal rate is 5% with 7-12% inflation. Normal people are absolutely going to start factoring inflation into the equation. Especially if inflation continues to drive wage growth.

mooreds 5y ago

If you'd prefer the content without the images: https://text.npr.org/1091398386 https://text.npr.org/1091398386

phendrenad2 5y ago

This is probably because banks consider home loans a riskier investment. With inflation high, there's the risk that the home loan could become seriously devalued. Also, the CoL increase due to inflation could outstrip pay increases, making homeowners more prone to default.

DoubleDerper 5y ago

"Luxury" buyers are less sensitive to interest rate increases due to the amount of cash they can deploy. If more housing stock isn't injected amidst a housing shortage, raising interest rates will disproportionately affects Buyers who really need affordability. Crappy deal. In cities like Seattle or Austin or Denver, 5% mortgage rates are unlikely to cool the market off in any meaningful way.

mattbrewsbytes 5y ago

> Unlike rates on credit cards or other types of loans, mortgage rates move early and dramatically in anticipation of what the market expects Interesting piece of information for tracking economic movements. I wonder what the ratio is on adjustable rate mortgages vs. fixed. If there are a lot of ARM out there then there might be potential for a bubble popping where people can't afford the mortgage and fixed rates are also higher where a re-fi won't help.

kipchak 5y ago
They were at 10% January 2022, up from 4% Jan 2021. [1]https://www.cbsnews.com/news/mortgage-rates-4-percent-adjustable-rate-mortgages-housing/ https://www.cbsnews.com/news/mortgage-rates-4-percent-adjust...
next_xibalba 5y ago
According to [1], ARMs have multiple caps on their interest rates. They cannot be freely floated along with prevailing interest rates. Rather, they have a cap on how much the rate can go up at each adjustment period, and a cap on the maximum total increase over the lifetime of the loan. So if you had an ARM at an initial rate of 3%, you're probably gonna hit 5% very soon. But even if inflation hits early 1980s levels and the Fed acts similarly by mercilessly raising rates, ARM borrowers won't see their rates go anywhere near >20%. Additionally, lending standards over the last decade were nowhere near as loose as before the financial crisis. Though apparently they were beginning to ease in Q3 and Q4 of last year. [2] All this to say, I'm sure you're right, borrowers at the margins of lending standards will have a much harder time, and we'll see an increase in foreclosures. But it shouldn't the tsunami that we saw in '06-'09. One does wonder though, with the trend of increasing economic headwinds (inflation, ongoing supply chain bottlenecks, etc.), how close we are to a recession. [1] https://www.bankrate.com/mortgages/federal-reserve-decision-heloc-arms/ https://www.bankrate.com/mortgages/federal-reserve-decision-... [2] https://www.pymnts.com/loans/2021/banks-loosen-lending-standards-in-race-to-loan-money/ https://www.pymnts.com/loans/2021/banks-loosen-lending-stand...

tetrahedrix 5y ago

Looking at historic US housing data, during periods of rate increases prices did not drop, with 2008-2009 being the exception. However, during the previous recessions price discovery was difficult, one needed to go through an agent who interfaced with disjoint MLS systems. I suspect that price discovery through zillow/corelogic might cause faster repricing in the housing market today. Second home purchases in the reached historic levels over the last two years. There is a lot of inventory that could be listed quickly in comparison to owner occupied homes. It's not clear that a correction will happen though, wage increases, in particular at lower incomes can sustain higher rates and higher prices for homes below the median. At the high end most buyers are likely asset rich and can also sustain higher prices. The price segment that may be most vulnerable due to higher rates is in the middle.

pavlov 5y ago

For European readers, a bit of useful context that surprised me when I moved to USA. Most Americans buy their homes on 30-year mortgages with fixed interest rate. So rate increases generally only affect those buying, not those who already own. In Europe (at least the parts I'm familiar with), it's more common for mortgages to be on adjustable rates, basically the European Central Bank rate + a fixed margin. This has been an excellent deal for the past 10+ years, as the ECB rate sunk below zero. (I have a mortgage in Finland that I took in 2011, and for many years I've paid zero interest on it because ECB rate + the loan margin added up to a negative rate. Sadly my bank clamps it at zero.)

cmrdporcupine 5y ago
Canada is more like Europe in this sense, too. The American mortgage market is a bit weird from a distance. Here you have your choice between a variable rate mortgage (floats at BoC rate +- some %) or a "fixed" rate on a term (e.g. 3% for 5 years) and then you renew at whatever rate is current at the end of the term.
- s1artibartfast 5y ago
  I couldn't imagine buying a house without 30 year fixed. Do many people loose their houses when rates go up? I would be terrified.
  - pja 5y ago
    30 fixes only exist in the US thanks to government intervention in the mortgage market to underwrite that risk for the banks. In most western countries, fixed mortgages do exist, but the bank has to go out and buy the relevant interest rate swap in the open market, so availability fluctuates & is biased towards short term fixes. Most people are either on a variable rate or are on a short term fix that expires in a couple of years. I remember when interest rates hit 15% in the UK in the 80s. My parents did worry they were going to lose our house!
    - 5y ago

throwawayffffas 5y ago

Kind of makes sense inflation has been over 5% for almost a year now.

merrywhether 5y ago

High mortgage rates mean that is only more expensive for “poor” people, while the wealthy will continue on their merry way. The US desperately needs a land-value tax as a step towards making home ownership costly and depreciating, removing the home-as-investment angle. Who wants a nest egg that means giving up your dwelling in the case of actually needing to liquidate it anyway? (Oops, got expensive medical bills? Now you’re sick _and_ homeless!) Actions like this will unfortunately destroy a lot of older middle-class wealth in the short-term, but longer term it would hurt the upper-classes the most (and even short-term it’s not like the upper classes haven’t been winning every transaction anyway). And the longer we let this problem fester, the more lives we disrupt of the younger generations who have seen countless ladders pulled up in front of them.

hellisothers 5y ago
How is it only more expensive for poor people but not wealthy people? Did you mean less accessible?
- sauwan 5y ago
  Not OP, but guessing he means wealthy people have more opportunities to buy without financing when the cost of financing seems to overtake other opportunities.
- goalieca 5y ago
  How many rich people take out a mortgage?
  - xboxnolifes 5y ago
    Most of them
  - hellisothers 5y ago
    Yea, even if you pay with cash you’re probably financing it after you own the property.
  - 5y ago

ldiracdelta 5y ago

No it hasn't become more expensive due to hitting 5%, though it may be more expensive for other reasons. The market will equilabrate. There's a couple who live at the peak of the bell curve that defines your market. They can spend $X,000 per month on a house. 2.5% vs 5% just changes how much of their money goes to paying down principle vs the interest. With that the price of the house will fluctuate to account for this reality.

tallclair 5y ago
This doesn’t account for all the people who can afford to pay in cash. That will shift the equilibrium.
- ivanche 5y ago
  I don’t have hard data on this; however, I believe that cash buyers are minority, maybe even significant minority. It would be awesome if someone could share concrete numbers on this.
  - beembeem 5y ago
    A local realtor in my hot market on the west coast indicated to me that it was as much as a third of sales they saw in the last year FWIW.
    - dariusj18 5y ago
      That's partially because there is a whole new industry of preapproved loans that you can treat as cash when negotiating to buy a home.

jcomis 5y ago

It's quite depressing. Attempting to buy since August. When I started my rate was 2.7 and today it's 5.2 and climbing extremely fast in the past month. Inventory continues to be a problem. There just has been so little on the market. What's interesting in my observation is the rate increases have actually created even more competition. People are straight up desperate right now. Also now that overlapping showings are happening I spend nearly every viewing with 2-5 realtors who are showing over zoom to buyers looking to move from a HCOL to my city (Denver). I found it hard enough to make a major decision after a 20 minute viewing, but to do so over a poorly narrated zoom/facetime walkthrough? Can't imagine.

DamnYuppie 5y ago
Honest question do you need a home right now? I too have been looking and when interest rates jumped I decided I was going to sit on the sidelines for the next 1 to 2 years and just stack cash/invest in various markets.
- 11101010001100 5y ago
  I did some back of the envelope calculations comparing housing in my area vs market. Taking the long view, accounting for property taxes and mortgage interest payments, housing did not beat the market.
  - refurb 5y ago
    I bought a few years ago and did the same calculation. Despite prices up 30%, my down payment would have produced higher returns if I had invested it. Plus stocks are almost immediately liquid and have almost no transaction and no maintenance costs and no annual property tax.
    - symlinkk 5y ago
      Are you accounting for the equity you’re building by paying a mortgage vs paying rent?

lukewrites 5y ago

If this helps stops high earners from buying second or third homes, as seems common in the sections of the software engineer community in my area, I am all for it.

mikewarot 5y ago

Maybe this marks the start of a return to rational pricing of capital? It's a bit too late for a lot of older folks who were counting on interest from savings accounts to fund their retirement, but maybe we can start encouraging saving again for the future? I hope this brings the price of housing back down to earth. A house is a depreciating asset in any sane world. It requires constant maintenance.

lamontcg 5y ago

5% is still historically very low. Rates hit 18% in 1980, and an 8% rate would be more in line with historical averages. I wonder if rates readjusting pops the housing bubble though.