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An interesting perspective I heard recently from a housing developer: rising interest rates may cause housing to get more expensive, not less. Getting a loan n

An interesting perspective I heard recently from a housing developer: rising interest rates may cause housing to get more expensive, not less. Getting a loan now for developing multifamily or single-family properties is significantly higher than it was last year. That means fewer projects are starting. Rent has already been rising, but may rise even faster next year as new supply dries up. Single family houses may go down in price -- but we all know that isn't really what people care about if they're buying. They usually care about their monthly mortgage payment. And, obviously, that is likely to go up with raising rates, unless there is a very significant downturn in home prices. The Fed's primary tool is interest rates -- but while we could use a cooling of investment into bubbly areas (like, maybe tech equities and crypto) -- we still desperately need more investment into housing. It's a shame that they will likely move in tandem and we'll just get less investment in everything.

mirntyfirty 4y ago
From the salary and debt levels I’ve observed, it seems as though there will be a lack of demand at the high prices for rent or purchase.
solaxun 4y ago
I'm not sure I understand the point being made here. Are you simply saying that higher rates means a higher monthly payment, and that the amount that prices have fallen is still not enough to offset the increase in the mortgage payment? That's fairly obvious.... for now. The old "it's a supply constraint" argument will not age will IMO. FWIW, the fed agrees:https://www.federalreserve.gov/econres/feds/volatility-in-home-sales-and-prices-supply-or-demand.htm https://www.federalreserve.gov/econres/feds/volatility-in-ho...
- carom 4y ago
  Their argument is that there are fewer houses being built. In the long term, this will constrain supply far more than rising interest rates will push down prices.
- majormajor 4y ago
  How does saying that demand increased more than supply reduced in 2020 contradict the idea the the overall size of supply in in-demand parts of the country is lower than the overall size of demand in those areas? Like, if you look at 50-year price histories in SF or LA, how can you conclude that supply has kept up with demand? I think we've now just seen that same pattern catch up with more places. I know people in Austin and Houston who were complaining that prices were already getting too high before 2020. That's where the folks priced out of CA were going even then.
  - solaxun 4y ago
    I think the point is that given typical demand, the amount of supply would have been sufficient to not cause meteoric price increases. Demand exploded due to incompetent monetary policy driving a speculative mania, and that demand was what gave the appearance of a supply constraint. Until recently housing starts were at a 10 year high, and they are still on the higher-end of the past decade: https://fred.stlouisfed.org/graph/?g=Rzky https://fred.stlouisfed.org/graph/?g=Rzky
    - majormajor 4y ago
      But Covid was just a blip in a decades-long trend. I wouldn't argue that two years of insanity will correct itself. But that doesn't mean the overall housing market is going to go anywhere but "still up and up" in most major US markets. Austin median price in January of a few years (from https://www.recenter.tamu.edu/data/housing-activity/#!/activity/MSA/Austin-Round_Rock https://www.recenter.tamu.edu/data/housing-activity/#!/activ...): 1990: 71,000 2000: 132,872 (+87%) 2010: 174,386 (+31%) 2020: 305,000 (+74%) (pre-covid, January 2020) 2022: 476,000 That 2022 number ramped up hard over that 2020 one, but that overall trend is still nuts. Even with the huge bust towards the end of the 2000s the decade ended well up. Inflation calculator here (https://www.usdinflation.com/amount/305000/1990 https://www.usdinflation.com/amount/305000/1990) tells me 71,000 in 1990 would otherwise be worth 156K today, so housing has been getting more expensive more quickly than most things for quite a while. That's a supply issue (EDIT: or total market/policy failure creating an artificial one. Or at least a "construction issue" - you might say the population increase means its a demand one instead, but on this time frame... it's a failure to not serve the continually growing population.)
- noduerme 4y ago
  I don't see how home prices can really fall enough to keep the cost of housing equal as interest rates rise. Because don't higher rates also disincentivize sellers and create more of a supply shortage as well, by taking more homes off the market, apart from disincentivizing new construction? I'm admittedly a little daft at economics but... e.g. I've got a fixed rate mortgage around 4%. Suppose I wanted to sell and I think we're at the top of the housing market... my options would be to buy something else now at the top of the market and pay a higher interest rate, or rent for a year until prices come down and probably still pay a higher rate. Certainly, low mortgage rates drove home prices way up... but does that mean high rates could drive them down? I mean, maybe over a long period of time as existing mortgages get paid off (?) but for now while the vast majority of mortgages out there are lower than the going rate, won't that just keep constraining the supply and prevent the price of houses from dropping significantly?
  - majormajor 4y ago
    This is pretty close to the most common counter-argument I've seen to the "this is another 2000s housing bubble" claim - the bubble burst when people had to sell or got foreclosed on, people taking out the mortgages today, or purchasing in cash, appear to be in much better financial shape to weather things and not have to sell. You'll still have sales - some people will die, some people will have to move for various reason, etc - but how much it will fall seems like a very hard to predict question.
    - yucky 4y ago
      A TON of investment properties were purchased over the last few years, so those may be sold as investors need to balance out the huge losses they took on stocks, crypto, etc. With rising rates, the counter pressure on prices from buyers may not exist in large enough supply to prevent the investors selling from driving prices down.
      - noduerme 4y ago
        Just anecdotally, a friend who took an enormous shellacking in crypto told me the other day he's glad he'd bought two rental houses before getting into DeFi. He seems totally disinclined at this point to make any high risk moves with what remains of his savings. I suppose if he had to sell that would be another thing, but I don't think most even-marginally-sane people in that position are going to sell property and chase higher returns in the market.
tehlike 4y ago
This is a dynamic of multiple things. Rising interest rates would reduce demand at higher price ranges, for example, causing a drop. At the end of the day costs are only part of the equation.
01100011 4y ago
There is some logic to the idea that rising rates makes supply-side issues worse across the board because it curtails investments needed to resolve those supply issues. I don't think that means the fed is doing the wrong thing though. Fixing our energy bottlenecks will take a decade or more(regardless of rates. refineries and nuke plants take 10+ years to build), so pulling back demand to be in line with that supply seems like the right thing to do. It will hurt, but it is better than entrenched inflation and wage-price spirals. > They usually care about their monthly mortgage payment. True, but not for me. I care about price, because the price never changes yet I can always refinance. Also, your initial assessed value, at least in California, is a big factor in the lifetime(or more) amount of property taxes you'll be paying. I would much, much rather have lower prices and high interest rates. Overall I think housing will sort itself out. We already have plenty of units in the pipeline. Also, we're going to grudgingly transition, as a nation, towards more efficient, higher density housing whether we like it or not. Energy prices combined with policies to combat AGW will, over the long term, incentivize more urban living. I'm not a fan of it, being a suburban lover, but it is what it is.
- pertymcpert 4y ago
  It's a risk though, because you may not be able to refinance for a long time. In that time, the interest you paid will also compound.
  - nostromo 4y ago
    And people often forget that rates go down at the same time people get laid off and the market crashes and house prices go down. If you're unfortunate enough to be out of work, you won't be able to refinance your loan. And if you're upside down on your loan, you can't refinance either.
    - whimsicalism 4y ago
      > And people often forget that rates go down at the same time people get laid off and the market crashes and house prices go down. This is really difficult to describe as a general trend due to endogenous actors like the Fed. Recessions can co-occur with low rates as the Fed expands to try to spur investment in the economy. They can also co-occur with high rates that choke investment. Never reason from a price change
teeray 4y ago
> Single family houses may go down in price -- but we all know that isn't really what people care about if they're buying. But sellers do care deeply about this number. If they added on a $50k garage, they want to see that money come back. It may cause some potential sellers to decide to become landlords instead.
- Ancalagon 4y ago
  if you as an owner have a <3% rate loan you are beating inflation permanently anyways, never really need to sell. Hold onto it as long as you can and rent it out.
jack_pp 4y ago
In Romania we have the First House mortgage which has lower rates than a normal one. It might make sense to have special rates for people who don't own a house yet
- whimsicalism 4y ago
  This already exists in the US. My guess is many financialization programs in Europe are modeled (or improved) off of existing ones in the US given that we were the loan/financialization innovator for most of the 20th century.
  - cvhashim 4y ago
    What’s it called?
    - whimsicalism 4y ago
      FHA program is the federal name and is not just for first time buyers, but then states will have FHA options that are discounted for first time buyers. Example for California: https://www.calhfa.ca.gov/homebuyer/programs/index.htm https://www.calhfa.ca.gov/homebuyer/programs/index.htm
- atlasunshrugged 4y ago
  Some specific states and localities also have programs to help first time homeowners, Nevada used to have an incredible one that only required something like 5% down but I don't see it anymore (they do still have other programs) https://business.nv.gov/Homeowner/Homeowner__Assistance_Programs/ https://business.nv.gov/Homeowner/Homeowner__Assistance_Prog...
whimsicalism 4y ago
Is difficulty finding financing capital the major barrier for new development? Seems to me the best way to get markets to allocate more capital towards housing would be to eliminate costly restrictions on building.
findthewords 4y ago
The housing developer seems to be a purely supply-side economist. The argument that ever lowering interest rates lead to "affordable" homes is not evident in any real world data that I've looked at. Evidence points to the contrary. Houses are always priced at what people can afford to pay for them. The median price of a house is directly linked to size of the mortgage a couple working for median wage can be cleared to loan by a bank. 5% mortgage rate? For a $200k home that's $10k per annum to cover the interest. 2% mortgage rate? That $200k home is now $500k. The devious detail here is that the time to pay off the loan changes completely. The $200k home can be paid off in 25 years with $670/mo plus interest. The $500k home? 62.5 years with $670/mo plus interest. It gets even better - assume the 5% mortgage rate equals 5% inflation rate. In a high inflation, high interest rate environment, the $200k home is devalued by 5% per annum. Assuming wages keep up with inflation, the $670/mo payment is smaller and smaller piece of the total income. A couple earning $100k together per year spend $18k or 18% of their (pre-tax) income on their $200k home during the first year. If their income stays the same but is corrected for inflation, 25 years later their income will be $338k in inflated dollars but their mortgage payments will be $18k / $338k = 5.3% ! Eaten by inflation! Compare this to a scenario where another couple buys a $500k home in a low interest rate, low mortgage rate environment. During the first year, their payment is equal to the other couple. After 25 years of 2% inflation/interest rates/mortgage rates assume their wages keep up with inflation as well. The couple's combined income will be $164k in inflated dollars. The mortgage payment will be 10.9% of their total income. The "2%" couple pays over twice as much as share of their income as the "5%" couple after 25 years and the "2%" couple is expected to keep paying the loan down 2.5x longer (62.5 years vs 25 years). This is basic high school math with nothing fancier than exponentials, so I'll leave the equations as an exercise to the reader.

mirntyfirty 4y ago

From the salary and debt levels I’ve observed, it seems as though there will be a lack of demand at the high prices for rent or purchase.

solaxun 4y ago

I'm not sure I understand the point being made here. Are you simply saying that higher rates means a higher monthly payment, and that the amount that prices have fallen is still not enough to offset the increase in the mortgage payment? That's fairly obvious.... for now. The old "it's a supply constraint" argument will not age will IMO. FWIW, the fed agrees:https://www.federalreserve.gov/econres/feds/volatility-in-home-sales-and-prices-supply-or-demand.htm https://www.federalreserve.gov/econres/feds/volatility-in-ho...

carom 4y ago
Their argument is that there are fewer houses being built. In the long term, this will constrain supply far more than rising interest rates will push down prices.
majormajor 4y ago
How does saying that demand increased more than supply reduced in 2020 contradict the idea the the overall size of supply in in-demand parts of the country is lower than the overall size of demand in those areas? Like, if you look at 50-year price histories in SF or LA, how can you conclude that supply has kept up with demand? I think we've now just seen that same pattern catch up with more places. I know people in Austin and Houston who were complaining that prices were already getting too high before 2020. That's where the folks priced out of CA were going even then.
- solaxun 4y ago
  I think the point is that given typical demand, the amount of supply would have been sufficient to not cause meteoric price increases. Demand exploded due to incompetent monetary policy driving a speculative mania, and that demand was what gave the appearance of a supply constraint. Until recently housing starts were at a 10 year high, and they are still on the higher-end of the past decade: https://fred.stlouisfed.org/graph/?g=Rzky https://fred.stlouisfed.org/graph/?g=Rzky
  - majormajor 4y ago
    But Covid was just a blip in a decades-long trend. I wouldn't argue that two years of insanity will correct itself. But that doesn't mean the overall housing market is going to go anywhere but "still up and up" in most major US markets. Austin median price in January of a few years (from https://www.recenter.tamu.edu/data/housing-activity/#!/activity/MSA/Austin-Round_Rock https://www.recenter.tamu.edu/data/housing-activity/#!/activ...): 1990: 71,000 2000: 132,872 (+87%) 2010: 174,386 (+31%) 2020: 305,000 (+74%) (pre-covid, January 2020) 2022: 476,000 That 2022 number ramped up hard over that 2020 one, but that overall trend is still nuts. Even with the huge bust towards the end of the 2000s the decade ended well up. Inflation calculator here (https://www.usdinflation.com/amount/305000/1990 https://www.usdinflation.com/amount/305000/1990) tells me 71,000 in 1990 would otherwise be worth 156K today, so housing has been getting more expensive more quickly than most things for quite a while. That's a supply issue (EDIT: or total market/policy failure creating an artificial one. Or at least a "construction issue" - you might say the population increase means its a demand one instead, but on this time frame... it's a failure to not serve the continually growing population.)
noduerme 4y ago
I don't see how home prices can really fall enough to keep the cost of housing equal as interest rates rise. Because don't higher rates also disincentivize sellers and create more of a supply shortage as well, by taking more homes off the market, apart from disincentivizing new construction? I'm admittedly a little daft at economics but... e.g. I've got a fixed rate mortgage around 4%. Suppose I wanted to sell and I think we're at the top of the housing market... my options would be to buy something else now at the top of the market and pay a higher interest rate, or rent for a year until prices come down and probably still pay a higher rate. Certainly, low mortgage rates drove home prices way up... but does that mean high rates could drive them down? I mean, maybe over a long period of time as existing mortgages get paid off (?) but for now while the vast majority of mortgages out there are lower than the going rate, won't that just keep constraining the supply and prevent the price of houses from dropping significantly?
- majormajor 4y ago
  This is pretty close to the most common counter-argument I've seen to the "this is another 2000s housing bubble" claim - the bubble burst when people had to sell or got foreclosed on, people taking out the mortgages today, or purchasing in cash, appear to be in much better financial shape to weather things and not have to sell. You'll still have sales - some people will die, some people will have to move for various reason, etc - but how much it will fall seems like a very hard to predict question.
  - yucky 4y ago
    A TON of investment properties were purchased over the last few years, so those may be sold as investors need to balance out the huge losses they took on stocks, crypto, etc. With rising rates, the counter pressure on prices from buyers may not exist in large enough supply to prevent the investors selling from driving prices down.
    - noduerme 4y ago
      Just anecdotally, a friend who took an enormous shellacking in crypto told me the other day he's glad he'd bought two rental houses before getting into DeFi. He seems totally disinclined at this point to make any high risk moves with what remains of his savings. I suppose if he had to sell that would be another thing, but I don't think most even-marginally-sane people in that position are going to sell property and chase higher returns in the market.

tehlike 4y ago

This is a dynamic of multiple things. Rising interest rates would reduce demand at higher price ranges, for example, causing a drop. At the end of the day costs are only part of the equation.

01100011 4y ago

There is some logic to the idea that rising rates makes supply-side issues worse across the board because it curtails investments needed to resolve those supply issues. I don't think that means the fed is doing the wrong thing though. Fixing our energy bottlenecks will take a decade or more(regardless of rates. refineries and nuke plants take 10+ years to build), so pulling back demand to be in line with that supply seems like the right thing to do. It will hurt, but it is better than entrenched inflation and wage-price spirals. > They usually care about their monthly mortgage payment. True, but not for me. I care about price, because the price never changes yet I can always refinance. Also, your initial assessed value, at least in California, is a big factor in the lifetime(or more) amount of property taxes you'll be paying. I would much, much rather have lower prices and high interest rates. Overall I think housing will sort itself out. We already have plenty of units in the pipeline. Also, we're going to grudgingly transition, as a nation, towards more efficient, higher density housing whether we like it or not. Energy prices combined with policies to combat AGW will, over the long term, incentivize more urban living. I'm not a fan of it, being a suburban lover, but it is what it is.

pertymcpert 4y ago
It's a risk though, because you may not be able to refinance for a long time. In that time, the interest you paid will also compound.
- nostromo 4y ago
  And people often forget that rates go down at the same time people get laid off and the market crashes and house prices go down. If you're unfortunate enough to be out of work, you won't be able to refinance your loan. And if you're upside down on your loan, you can't refinance either.
  - whimsicalism 4y ago
    > And people often forget that rates go down at the same time people get laid off and the market crashes and house prices go down. This is really difficult to describe as a general trend due to endogenous actors like the Fed. Recessions can co-occur with low rates as the Fed expands to try to spur investment in the economy. They can also co-occur with high rates that choke investment. Never reason from a price change

teeray 4y ago

> Single family houses may go down in price -- but we all know that isn't really what people care about if they're buying. But sellers do care deeply about this number. If they added on a $50k garage, they want to see that money come back. It may cause some potential sellers to decide to become landlords instead.

Ancalagon 4y ago
if you as an owner have a <3% rate loan you are beating inflation permanently anyways, never really need to sell. Hold onto it as long as you can and rent it out.

jack_pp 4y ago

In Romania we have the First House mortgage which has lower rates than a normal one. It might make sense to have special rates for people who don't own a house yet

whimsicalism 4y ago
This already exists in the US. My guess is many financialization programs in Europe are modeled (or improved) off of existing ones in the US given that we were the loan/financialization innovator for most of the 20th century.
- cvhashim 4y ago
  What’s it called?
  - whimsicalism 4y ago
    FHA program is the federal name and is not just for first time buyers, but then states will have FHA options that are discounted for first time buyers. Example for California: https://www.calhfa.ca.gov/homebuyer/programs/index.htm https://www.calhfa.ca.gov/homebuyer/programs/index.htm
atlasunshrugged 4y ago
Some specific states and localities also have programs to help first time homeowners, Nevada used to have an incredible one that only required something like 5% down but I don't see it anymore (they do still have other programs) https://business.nv.gov/Homeowner/Homeowner__Assistance_Programs/ https://business.nv.gov/Homeowner/Homeowner__Assistance_Prog...

whimsicalism 4y ago

Is difficulty finding financing capital the major barrier for new development? Seems to me the best way to get markets to allocate more capital towards housing would be to eliminate costly restrictions on building.

findthewords 4y ago

The housing developer seems to be a purely supply-side economist. The argument that ever lowering interest rates lead to "affordable" homes is not evident in any real world data that I've looked at. Evidence points to the contrary. Houses are always priced at what people can afford to pay for them. The median price of a house is directly linked to size of the mortgage a couple working for median wage can be cleared to loan by a bank. 5% mortgage rate? For a $200k home that's $10k per annum to cover the interest. 2% mortgage rate? That $200k home is now $500k. The devious detail here is that the time to pay off the loan changes completely. The $200k home can be paid off in 25 years with $670/mo plus interest. The $500k home? 62.5 years with $670/mo plus interest. It gets even better - assume the 5% mortgage rate equals 5% inflation rate. In a high inflation, high interest rate environment, the $200k home is devalued by 5% per annum. Assuming wages keep up with inflation, the $670/mo payment is smaller and smaller piece of the total income. A couple earning $100k together per year spend $18k or 18% of their (pre-tax) income on their $200k home during the first year. If their income stays the same but is corrected for inflation, 25 years later their income will be $338k in inflated dollars but their mortgage payments will be $18k / $338k = 5.3% ! Eaten by inflation! Compare this to a scenario where another couple buys a $500k home in a low interest rate, low mortgage rate environment. During the first year, their payment is equal to the other couple. After 25 years of 2% inflation/interest rates/mortgage rates assume their wages keep up with inflation as well. The couple's combined income will be $164k in inflated dollars. The mortgage payment will be 10.9% of their total income. The "2%" couple pays over twice as much as share of their income as the "5%" couple after 25 years and the "2%" couple is expected to keep paying the loan down 2.5x longer (62.5 years vs 25 years). This is basic high school math with nothing fancier than exponentials, so I'll leave the equations as an exercise to the reader.