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Housing downturn in an environment of rising interest rates doesn’t help affordability

by charlieyu1 4y ago

bboygravity 4y ago
It does for those with savings in things that the government can't print.
- charlieyu1 4y ago
  High interest means high mortgage payments. Unless you already saved enough to buy without mortgage
- deleted 4y ago
  [deleted]
- pavlov 4y ago
  Seems like it’s the other way around? Real estate is a thing the government can’t print. When its value goes down, it becomes more affordable to people with savings in fiat.
  - candiodari 4y ago
    Except for most people monthly cost is the metric that matters. So let's compare housing going up 10% per year with 0.5% interest rates to housing going down 10% per year with 5% interest rates: Least extreme loans: Euro style mortgages (fixed monthly payment, capital repaid over loan duration) 300k house, 0.5% interest rates, 10y: monthly payment of 2563$ 270k house, 5% interest rates, 10y: monthly payment of 2865$ Most extreme loans: Interest only loans (note: duration doesn't matter): 300k house, 0.5% interest rates: monthly payment of 125$ 270k house, 5% interest rates: monthly payment of 1125$ The whole point of inflation AND of the measures the central bank takes to combat inflation is to reduce usage of goods relative to labor. Meaning the same work will buy less Big Macs, less education, less housing. More work less pay. Not less pay in money. Less pay in housing, medical care, pizza, ... I hope you do see WHY the central bank interferes. It does not fundamentally change the situation, that's done by people, the international situation (more COVID in China, which is not over yet, than the situation in Ukraine. Although the situation in Ukraine definitely doesn't help), ... the central bank is protecting the currency, NOT your living standard. You see the way to win in this system: if there is a housing (or X) downturn ... and you buy with high interest rates, DURING the crisis (which will be scary, of course), is the way to win big. That's the point. We want to limit the damage done to everything backed by loans. That is fully intentional. The point is to stimulate loaning money to use productively. We want people to buy houses, start new restaurants, build new shopping malls, hospitals, bridges, ...
  - kerbs 4y ago
    If you’re the kind of person who has cash to buy a house (or a significant down payment), what are the odds those assets were in cash and didn’t go down with the greater market? Feels like a very narrow slice that would be cash-heavy over the last 1-2 years that would benefit from whatever size a house drop ends up being.
    - pavlov 4y ago
      Sure, but the poster seemed to imply there as an asset class of “savings in things that the government can't print” which has done well lately. And I don’t understand what they’re talking about because cash is clearly the best performer. It sounds like a goldbug/crypto argument, but gold is down and Bitcoin is down the toilet, so that can’t be it…
snapplebobapple 4y ago
This is not true over the lifespan of the loan (especially in the US market where interest rates are set for the whole period but can be easily refinanced), although it is possibly true in the immediate term around house purchase. In the immediate term it depends how the affordability of the downpayment changes relative to the affordability of the payments for the individual buyer. in the longer term it depends where interest rates are likely to go. Given they are now relatively balanced vs history it's tougher to say but as we raise interest rates further to combat inflation the likelihood interest rates will go down and the buyer will be able to renegotiate later become very likely.

Housing downturn in an environment of rising interest rates doesn’t help affordability

bboygravity 4y ago

It does for those with savings in things that the government can't print.

charlieyu1 4y ago
High interest means high mortgage payments. Unless you already saved enough to buy without mortgage
deleted 4y ago
[deleted]
pavlov 4y ago
Seems like it’s the other way around? Real estate is a thing the government can’t print. When its value goes down, it becomes more affordable to people with savings in fiat.
- candiodari 4y ago
  Except for most people monthly cost is the metric that matters. So let's compare housing going up 10% per year with 0.5% interest rates to housing going down 10% per year with 5% interest rates: Least extreme loans: Euro style mortgages (fixed monthly payment, capital repaid over loan duration) 300k house, 0.5% interest rates, 10y: monthly payment of 2563$ 270k house, 5% interest rates, 10y: monthly payment of 2865$ Most extreme loans: Interest only loans (note: duration doesn't matter): 300k house, 0.5% interest rates: monthly payment of 125$ 270k house, 5% interest rates: monthly payment of 1125$ The whole point of inflation AND of the measures the central bank takes to combat inflation is to reduce usage of goods relative to labor. Meaning the same work will buy less Big Macs, less education, less housing. More work less pay. Not less pay in money. Less pay in housing, medical care, pizza, ... I hope you do see WHY the central bank interferes. It does not fundamentally change the situation, that's done by people, the international situation (more COVID in China, which is not over yet, than the situation in Ukraine. Although the situation in Ukraine definitely doesn't help), ... the central bank is protecting the currency, NOT your living standard. You see the way to win in this system: if there is a housing (or X) downturn ... and you buy with high interest rates, DURING the crisis (which will be scary, of course), is the way to win big. That's the point. We want to limit the damage done to everything backed by loans. That is fully intentional. The point is to stimulate loaning money to use productively. We want people to buy houses, start new restaurants, build new shopping malls, hospitals, bridges, ...
- kerbs 4y ago
  If you’re the kind of person who has cash to buy a house (or a significant down payment), what are the odds those assets were in cash and didn’t go down with the greater market? Feels like a very narrow slice that would be cash-heavy over the last 1-2 years that would benefit from whatever size a house drop ends up being.
  - pavlov 4y ago
    Sure, but the poster seemed to imply there as an asset class of “savings in things that the government can't print” which has done well lately. And I don’t understand what they’re talking about because cash is clearly the best performer. It sounds like a goldbug/crypto argument, but gold is down and Bitcoin is down the toilet, so that can’t be it…

snapplebobapple 4y ago

This is not true over the lifespan of the loan (especially in the US market where interest rates are set for the whole period but can be easily refinanced), although it is possibly true in the immediate term around house purchase. In the immediate term it depends how the affordability of the downpayment changes relative to the affordability of the payments for the individual buyer. in the longer term it depends where interest rates are likely to go. Given they are now relatively balanced vs history it's tougher to say but as we raise interest rates further to combat inflation the likelihood interest rates will go down and the buyer will be able to renegotiate later become very likely.