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I’m thinking out loud here but: Lets game this out. Let’s say that interest rates go up significantly- say, to 12% or something. Ok, so then naively you would
by fallingfrog 5y ago
I’m thinking out loud here but: Lets game this out. Let’s say that interest rates go up significantly- say, to 12% or something. Ok, so then naively you would probably expect house prices to fall, because people won’t be able to make payments otherwise.
But what if you’re someone who bought a house in the low rates/high price era. Are you going to sell? No, because your mortgage is underwater- you can’t afford to sell. Or let’s say you’re one of those investment firms buying up everything. Can they sell? Not really, because again, they’d be technically insolvent as their debts would be much more than their assets. They paid cash for an asset and they won’t sell that asset at a loss.
So, if nobody is selling, do prices actually fall? Maybe not! In that case, financing a house for a first time homebuyer becomes truly impossible- high prices and high rates. The only buying that will get done is for cash, by the investment firms which own a lot of their housing stock outright, and have rental income to supply cash to buy even more of them. Interest rates don’t matter when you can pay cash.
So my prediction is that in a high rate/high price market, the era when a family could own their own home is coming to a swift close.
- frumper 5y agoLife forces home sales. Change of jobs, loss of job, retirement, marriage, divorce, and death are all common reasons people move. If you’re underwater in these situations it forces either a short sale or foreclosure and eventual bank sale. You are correct that people won’t want to sell, but circumstances will force enough hands that it happens. Then you might start getting in a situation where if it drops enough people will walk away instead of being so underwater causing more foreclosures.
- imtringued 5y agoHigh interest rates turning into bankruptcy and people selling their land to the rich is as old as time itself.
- fallingfrog 5y agoIt’s how the Roman republic became the empire as small farmers were bought out by huge landowners, financed by the spoils of war which went mostly to the 1% at the time. Then family farms became replaced by slave labor. History doesn’t repeat but it often rhymes.
- Armisael16 5y agoYou generally don’t actually have to pay your mortgage - you just lose the house if you don’t (well, and take a hit to your credit score). People can and do walk away from a place when they’re underwater.
- llampx 5y agoDoesn't your credit take a major hit though? Then you'd have a harder time buying a new place for some years.
- BirdieNZ 5y agoThis is country-dependent. In New Zealand, you cannot walk away from the mortgage. You might be able to if you declare bankruptcy, perhaps.
- aaomidi 5y agoThe whole point of the mortgage is that it's backed by the property.