10 ms·

If rates go from a low of 2% up to, say, 9%, then in order to keep the mortgage payment the same, the price of a $400,000 house would have to drop to around $23

If rates go from a low of 2% up to, say, 9%, then in order to keep the mortgage payment the same, the price of a $400,000 house would have to drop to around $230,000. This assumes a 30-year fixed rate mortgage, and the details will vary depending on money down, etc. but the basic fact remains that house prices will need to fall by a lot, down to levels of 5 years ago or more, before the current interest rate hiking cycle ends. I don't think most people who invested in housing in the last couple years, are ready to believe that yet.

khuey 4y ago
A lot of people simply won't sell in that situation which is going to further constrain supply.
- gedy 4y ago
  I hear this every cycle, but people forget even if the person who bought high won't, their neighbor who bought low (maybe a long time ago) will. And a lot of people end up having to sell.
  - dont__panic 4y ago
    And dropping prices mean that someone who's been holding out over the last few years of insane price growth might finally find a home elsewhere that they can afford. As someone who was too young to climb aboard the price bubble of the last 5 years: here's hoping.
    - falcolas 4y ago
      The price would have to drop dramatically (30%, the amount the last bubble dropped, would not be enough) to get a lower monthly mortgage payment.
      - gedy 4y ago
        Your downpayment goes a lot further though.
- _huayra_ 4y ago
  This is another thing people don't consider: housing is priced at the margin. One house has to sell in the neighborhood because of divorce / death / etc, and boom you have the one comp that everything else is tied to. Even if they stay in their home, people over-levered on their fake housing equity through HELOCs are in trouble.
  - ghastmaster 4y ago
    You are very correct. HELOCs, however, are not as big a factor as they used to be. They will become more popular though. Wolf Richter shows some nice graphs in the article linked below. He states that mortgages in Q2 were $11.4T and HELOCs a mere $320B. https://wolfstreet.com/2022/08/04/trip-back-to-reality-starts-mortgages-helocs-balances-delinquencies-foreclosures-in-q2/ https://wolfstreet.com/2022/08/04/trip-back-to-reality-start...
    - bushbaba 4y ago
      Low rates meant that people could cash out refi at lower rates. Don’t forget there’s a small but still notable number of homeowners with ARM mortgages.
- conception 4y ago
  There isn’t a supply issue. There is a corporations buying property issue.
  - refurb 4y ago
    So too many buyers and not enough houses? Sounds like a supply issue.
  - diogenescynic 4y ago
    You've got it backwards. The bigger issue is that we aren't building new supply to meet demand. Corporations buying property is only an issue because we've stopped/slowed new home development/supply to not keep up with demand. Allow supply to meet demand and the corporations don't have a market to monopolize. This is the law of supply and demand 101. But the same people that are usually against corporations buying properties, are usually against new home development and increased housing density. I saw many housing activists in the Bay Area who were against new housing at market rates and thought all new housing should be at below-market-rate prices--which simply isn't possible.
  - epistasis 4y ago
    I sometimes hear people say this, but it makes zero sense to me, and I can never get anybody to explain what they mean by it. Could you try to explain how we have enough houses but somehow corporations are the problem?
    - kitsunesoba 4y ago
      Corporate buyers are one of the many exacerbating factors, and I think that’s what most are saying when they say corporate home buying is a problem. In other words, there aren’t enough homes and corporations sitting on some percentage of them is making the situation that much worse.
      - epistasis 4y ago
        I don't understand how a corporate purchaser is worse than any other investor; I live in an area with almost only single family homes, and a huge fraction of them are investor owned and rented out. The small time land lords have a huge variance in how well they behave, but I'm not sure why corporate landlords are worse.
- ren_engineer 4y ago
  you think people are going to pay mortgages they are massively underwater on? This also ignores the fact that the Fed's stated goal with raising interests rates is to increase unemployment to slow inflation. You are already seeing the results in quarterly financials. Once layoffs start happening people won't have an option but to sell when they can't make payments
  - kotlin2 4y ago
    In most states, lenders have recourse. So if you stop paying your mortgage, the bank will foreclose on your home and then come after your other assets to make up the difference in what you owe vs. what the home is currently worth.
    - toomuchtodo 4y ago
      I’ve defaulted on two mortgages in a recourse state, one primary residence, one investment property. Neither was pursued. While extreme, you can always move to Texas or Florida; they have incredibly strong creditor protections making you mostly judgement proof. Depends on your threat model, exposure, and risk tolerance. (not legal advice, educational purposes only)
      - kotlin2 4y ago
        How much did you owe after the properties were sold?
        toomuchtodo 4y ago
        Zero. And I was eligible for a new FHA mortgage 3 years after.
        kotlin2 4y ago
        I mean what was the difference between your outstanding mortgage principal and the value of the homes at the time of default?
- saiya-jin 4y ago
  Exactly, prices don't fall in symmetrical ways as they rise in happy times due to people's greed (or patience to wait). Seen it in 2008 and even before. Now it we are facing truly cataclysmic long term situation down the road never ever seen before (or at least comparable to 1929) that's a different story, but few insiders believe that now.
- thatfrenchguy 4y ago
  And no more building because rates are high there so the next time rates go down there’s no supply…
  - seanmcdirmid 4y ago
    Even worse than that: people in construction will change career paths, and apprentices won't enter the industry for the next 5-10 years leading to a dearth of experience when it comes time to build houses again.
- qqqwerty 4y ago
  Most people only own one home and when they sell their current home they need to buy or rent another one. So for these owners, the supply/demand balance should be minimally impacted by their actions. This is certainly an over simplification of how things work, for example during COVID a flight to the burbs caused a drop in urban condos and rise in single family homes. But on balance, I think it is a good rule of thumb to consider when trying to evaluate the real estate market. This means that prices are more likely going to be determined by the supply-demand balance between first time buyers, investor activity, new home builders, life events (death, divorce, etc...) and immigration vs emigration. I personally think that if employment holds steady, we will see more of a sideways market with some regional variances, but if employment starts going down then do does housing.
brink 4y ago
I don't see how they're going to go down that low. To do that, you need to have oversupply, or you need to be able to build a house for that price (building prices are up and will likely stay up due to prices of materials, living cost, and energy). Employers are having trouble finding labor, the government has its foot on the neck of the non-green energy sector, the world is not producing like it used to when prices fell in the past.
- trashtester 4y ago
  One thing about housing, is that if more people live in each unit, demand can go down quite a bit. This isn't happening during a 2 year bust, but if inflation becomes endemic, people may be forced to. Some unhappy couples may continue to live together, children don't leave their parents' homes, students that shared an apartment while studying continue to do so after they start working, etc. Also, more people who own houses may decide to rent out half. The price at the margin will never exceed what the marginal buyer is able to pay, regardless of supply. What you get in a case like thiswhere even parts of the middle class may be essentially homeless, is widespread social unrest. At that point, expect regulators and governments to take measures to make sure the supply of housing becomes big and cheap enough for at least the lower middle class to be able to afford a place to live (even if they have to rent). Unrest is more damaging to them than some unhappy homeowner lobbyists. And by cutting the red tape, it's possible to make housing MUCH cheaper than it is today (at least per housing unit, if not by area).
tonmoy 4y ago
People would just rent instead of buying house. Rent should not go down that much. So buyers with cash will just buy houses and rent it out.
- rossdavidh 4y ago
  I do see evidence of people renting, because they intend to buy next year when the prices are lower. So I do think rent will be a lagging indicator, and will keep going up for a while. That will keep the inflationary pressure on the Fed to raise rates higher and for longer.
- deathanatos 4y ago
  Rents aren't going to go down. Raising mortgage rates makes housing more expensive, by raising the cost of the mortgage. That's going to force some would-be buyers to not be buyers, and to instead, rent. More demand on rent => prices go up.
algoatecorn 4y ago
Most of the people I speak to who locked in <3.5% are not planning on selling in the next 10 years or more. Then to consider the scenario of renting throughout this period; how much cash is being torched compared to a mortgage payment? How will they save for a down payment during a period of inflation like this? Current renters will have lower potential to save on a monthly basis, only to get 30-40% off on their first home with a >7% interest rate. If you sum the lost savings from rent plus the additional interest payment, it is uncertain whether that is the best strategy. That is also assuming real estate prices in certain regions wont hold stronger value, which they probably will. Some areas in the South East, Midwest, and Front Range will likely not see such a drop in value with respect to interest rates and mortgage payments. The demand is just too high. Not to mention that rent is collected by people who are now in a better position to purchase newly discounted real estate without loans, further fueling price demand by competing against each other and shortening supply.
- diogenescynic 4y ago
  >Current renters will have lower potential to save on a monthly basis It's cheaper to rent than to buy in many markets and if you own you have to factor in maintenance, property taxes, and insurance. It's definitely not as black and white as you're making it out to be.
  - Beldin 4y ago
    > if you own you have to factor in maintenance, property taxes, and insurance. Around here, if you rent, your landlord factors those things into the rental price. Admittedly not necessarily the insurance; that typically is just a requirement of the lease.
    - diogenescynic 4y ago
      The price to rent ratio compares the price to rent vs own. It’s definitely cheaper to rent than to own in many places. You can also get rent control in many cities so comparing renting to owning is going to vary with the specific situation.
blhack 4y ago
>I don't think most people who invested in housing in the last couple years, are ready to believe that yet. Because it isn't going to happen. The people who invested in houses years ago locked in a low interest rate, and will happily just rent them out to cover the cost until they appreciate again.
irrational 4y ago
We purchased a year ago with a 2.4% mortgage. We are planning on staying here till retirement. I don’t much care where home prices go in the short term, but I do wonder where they will be in decades from now.
allemagne 4y ago
Prices don't have to fall back down to pre-inflation levels for inflation to end. I'm not at all following why it's obvious that mortgage payments will have to be the same for the same house as they were at ~2021 for rate hiking to stop.
bjornsing 4y ago
Why only to $230,000? Wouldn’t the price have to drop to 400*(2/9)=89k to keep mortgage payments the same?
- simantel 4y ago
  Because some of your payment goes to principal, it's not all interest.
  - bjornsing 4y ago
    Of course. Thanks. Didn’t realize that was standardized. Here in Sweden the terms are government mandated and different depending on your salary and money down.
teeray 4y ago
So everyone’s equity is now converted into more bank profits. Neat.
caeril 4y ago
> people who invested in housing in the last couple years If you "invested" in housing, you get what you deserve. My house serves a functional purpose. It is not a status symbol, it is not a means of extracting rents from others. It shelters and operates as a home base for my family. Real estate "investors" who lose everything in this next cycle will elicit precisely zero tears.

khuey 4y ago

A lot of people simply won't sell in that situation which is going to further constrain supply.

gedy 4y ago
I hear this every cycle, but people forget even if the person who bought high won't, their neighbor who bought low (maybe a long time ago) will. And a lot of people end up having to sell.
- dont__panic 4y ago
  And dropping prices mean that someone who's been holding out over the last few years of insane price growth might finally find a home elsewhere that they can afford. As someone who was too young to climb aboard the price bubble of the last 5 years: here's hoping.
  - falcolas 4y ago
    The price would have to drop dramatically (30%, the amount the last bubble dropped, would not be enough) to get a lower monthly mortgage payment.
    - gedy 4y ago
      Your downpayment goes a lot further though.
_huayra_ 4y ago
This is another thing people don't consider: housing is priced at the margin. One house has to sell in the neighborhood because of divorce / death / etc, and boom you have the one comp that everything else is tied to. Even if they stay in their home, people over-levered on their fake housing equity through HELOCs are in trouble.
- ghastmaster 4y ago
  You are very correct. HELOCs, however, are not as big a factor as they used to be. They will become more popular though. Wolf Richter shows some nice graphs in the article linked below. He states that mortgages in Q2 were $11.4T and HELOCs a mere $320B. https://wolfstreet.com/2022/08/04/trip-back-to-reality-starts-mortgages-helocs-balances-delinquencies-foreclosures-in-q2/ https://wolfstreet.com/2022/08/04/trip-back-to-reality-start...
  - bushbaba 4y ago
    Low rates meant that people could cash out refi at lower rates. Don’t forget there’s a small but still notable number of homeowners with ARM mortgages.
conception 4y ago
There isn’t a supply issue. There is a corporations buying property issue.
- refurb 4y ago
  So too many buyers and not enough houses? Sounds like a supply issue.
- diogenescynic 4y ago
  You've got it backwards. The bigger issue is that we aren't building new supply to meet demand. Corporations buying property is only an issue because we've stopped/slowed new home development/supply to not keep up with demand. Allow supply to meet demand and the corporations don't have a market to monopolize. This is the law of supply and demand 101. But the same people that are usually against corporations buying properties, are usually against new home development and increased housing density. I saw many housing activists in the Bay Area who were against new housing at market rates and thought all new housing should be at below-market-rate prices--which simply isn't possible.
- epistasis 4y ago
  I sometimes hear people say this, but it makes zero sense to me, and I can never get anybody to explain what they mean by it. Could you try to explain how we have enough houses but somehow corporations are the problem?
  - kitsunesoba 4y ago
    Corporate buyers are one of the many exacerbating factors, and I think that’s what most are saying when they say corporate home buying is a problem. In other words, there aren’t enough homes and corporations sitting on some percentage of them is making the situation that much worse.
    - epistasis 4y ago
      I don't understand how a corporate purchaser is worse than any other investor; I live in an area with almost only single family homes, and a huge fraction of them are investor owned and rented out. The small time land lords have a huge variance in how well they behave, but I'm not sure why corporate landlords are worse.
ren_engineer 4y ago
you think people are going to pay mortgages they are massively underwater on? This also ignores the fact that the Fed's stated goal with raising interests rates is to increase unemployment to slow inflation. You are already seeing the results in quarterly financials. Once layoffs start happening people won't have an option but to sell when they can't make payments
- kotlin2 4y ago
  In most states, lenders have recourse. So if you stop paying your mortgage, the bank will foreclose on your home and then come after your other assets to make up the difference in what you owe vs. what the home is currently worth.
  - toomuchtodo 4y ago
    I’ve defaulted on two mortgages in a recourse state, one primary residence, one investment property. Neither was pursued. While extreme, you can always move to Texas or Florida; they have incredibly strong creditor protections making you mostly judgement proof. Depends on your threat model, exposure, and risk tolerance. (not legal advice, educational purposes only)
    - kotlin2 4y ago
      How much did you owe after the properties were sold?
      - toomuchtodo 4y ago
        Zero. And I was eligible for a new FHA mortgage 3 years after.
        kotlin2 4y ago
        I mean what was the difference between your outstanding mortgage principal and the value of the homes at the time of default?
saiya-jin 4y ago
Exactly, prices don't fall in symmetrical ways as they rise in happy times due to people's greed (or patience to wait). Seen it in 2008 and even before. Now it we are facing truly cataclysmic long term situation down the road never ever seen before (or at least comparable to 1929) that's a different story, but few insiders believe that now.
thatfrenchguy 4y ago
And no more building because rates are high there so the next time rates go down there’s no supply…
- seanmcdirmid 4y ago
  Even worse than that: people in construction will change career paths, and apprentices won't enter the industry for the next 5-10 years leading to a dearth of experience when it comes time to build houses again.
qqqwerty 4y ago
Most people only own one home and when they sell their current home they need to buy or rent another one. So for these owners, the supply/demand balance should be minimally impacted by their actions. This is certainly an over simplification of how things work, for example during COVID a flight to the burbs caused a drop in urban condos and rise in single family homes. But on balance, I think it is a good rule of thumb to consider when trying to evaluate the real estate market. This means that prices are more likely going to be determined by the supply-demand balance between first time buyers, investor activity, new home builders, life events (death, divorce, etc...) and immigration vs emigration. I personally think that if employment holds steady, we will see more of a sideways market with some regional variances, but if employment starts going down then do does housing.

brink 4y ago

I don't see how they're going to go down that low. To do that, you need to have oversupply, or you need to be able to build a house for that price (building prices are up and will likely stay up due to prices of materials, living cost, and energy). Employers are having trouble finding labor, the government has its foot on the neck of the non-green energy sector, the world is not producing like it used to when prices fell in the past.

trashtester 4y ago
One thing about housing, is that if more people live in each unit, demand can go down quite a bit. This isn't happening during a 2 year bust, but if inflation becomes endemic, people may be forced to. Some unhappy couples may continue to live together, children don't leave their parents' homes, students that shared an apartment while studying continue to do so after they start working, etc. Also, more people who own houses may decide to rent out half. The price at the margin will never exceed what the marginal buyer is able to pay, regardless of supply. What you get in a case like thiswhere even parts of the middle class may be essentially homeless, is widespread social unrest. At that point, expect regulators and governments to take measures to make sure the supply of housing becomes big and cheap enough for at least the lower middle class to be able to afford a place to live (even if they have to rent). Unrest is more damaging to them than some unhappy homeowner lobbyists. And by cutting the red tape, it's possible to make housing MUCH cheaper than it is today (at least per housing unit, if not by area).

tonmoy 4y ago

People would just rent instead of buying house. Rent should not go down that much. So buyers with cash will just buy houses and rent it out.

rossdavidh 4y ago
I do see evidence of people renting, because they intend to buy next year when the prices are lower. So I do think rent will be a lagging indicator, and will keep going up for a while. That will keep the inflationary pressure on the Fed to raise rates higher and for longer.
deathanatos 4y ago
Rents aren't going to go down. Raising mortgage rates makes housing more expensive, by raising the cost of the mortgage. That's going to force some would-be buyers to not be buyers, and to instead, rent. More demand on rent => prices go up.

algoatecorn 4y ago

Most of the people I speak to who locked in <3.5% are not planning on selling in the next 10 years or more. Then to consider the scenario of renting throughout this period; how much cash is being torched compared to a mortgage payment? How will they save for a down payment during a period of inflation like this? Current renters will have lower potential to save on a monthly basis, only to get 30-40% off on their first home with a >7% interest rate. If you sum the lost savings from rent plus the additional interest payment, it is uncertain whether that is the best strategy. That is also assuming real estate prices in certain regions wont hold stronger value, which they probably will. Some areas in the South East, Midwest, and Front Range will likely not see such a drop in value with respect to interest rates and mortgage payments. The demand is just too high. Not to mention that rent is collected by people who are now in a better position to purchase newly discounted real estate without loans, further fueling price demand by competing against each other and shortening supply.

diogenescynic 4y ago
>Current renters will have lower potential to save on a monthly basis It's cheaper to rent than to buy in many markets and if you own you have to factor in maintenance, property taxes, and insurance. It's definitely not as black and white as you're making it out to be.
- Beldin 4y ago
  > if you own you have to factor in maintenance, property taxes, and insurance. Around here, if you rent, your landlord factors those things into the rental price. Admittedly not necessarily the insurance; that typically is just a requirement of the lease.
  - diogenescynic 4y ago
    The price to rent ratio compares the price to rent vs own. It’s definitely cheaper to rent than to own in many places. You can also get rent control in many cities so comparing renting to owning is going to vary with the specific situation.

blhack 4y ago

>I don't think most people who invested in housing in the last couple years, are ready to believe that yet. Because it isn't going to happen. The people who invested in houses years ago locked in a low interest rate, and will happily just rent them out to cover the cost until they appreciate again.

irrational 4y ago

We purchased a year ago with a 2.4% mortgage. We are planning on staying here till retirement. I don’t much care where home prices go in the short term, but I do wonder where they will be in decades from now.

allemagne 4y ago

Prices don't have to fall back down to pre-inflation levels for inflation to end. I'm not at all following why it's obvious that mortgage payments will have to be the same for the same house as they were at ~2021 for rate hiking to stop.

bjornsing 4y ago

Why only to $230,000? Wouldn’t the price have to drop to 400*(2/9)=89k to keep mortgage payments the same?

simantel 4y ago
Because some of your payment goes to principal, it's not all interest.
- bjornsing 4y ago
  Of course. Thanks. Didn’t realize that was standardized. Here in Sweden the terms are government mandated and different depending on your salary and money down.

teeray 4y ago

So everyone’s equity is now converted into more bank profits. Neat.

caeril 4y ago

> people who invested in housing in the last couple years If you "invested" in housing, you get what you deserve. My house serves a functional purpose. It is not a status symbol, it is not a means of extracting rents from others. It shelters and operates as a home base for my family. Real estate "investors" who lose everything in this next cycle will elicit precisely zero tears.