4 ms·

I don't know the US housing market very well but I think anybody discussing the national market as a whole is talking through their hat. Different areas are ma

I don't know the US housing market very well but I think anybody discussing the national market as a whole is talking through their hat. Different areas are massively different and are going to react differently to stimuli like rate changes.

300bps 13y ago
Different areas are massively different and are going to react differently to stimuli like rate changes. I agree with the first half of your sentence and disagree strongly with the second half. In many ways, a house works like a bond. The price moves inversely with the interest rate. This is because, for most people, what determines affordability is the monthly payment. There are two factors involved in monthly payment: 1. Amount borrowed 2. Interest rate Consider someone that can afford a monthly payment of $2,000 per month. That means that they can afford: $541,097 borrowed @ 2.00% $474,328 borrowed @ 3.00% $418,922 borrowed @ 4.00% $372,563 borrowed @ 5.00% $333,583 borrowed @ 6.00% $300,615 borrowed @ 7.00% $272,566 borrowed @ 8.00% You can see how the price of the house someone can afford is pushed down as interest rates go up. And here's the thing - the affordability population is a bell curve. Once you get above a certain payment per month, there aren't enough people above to replace the people disappearing below. That is, there are fewer people that can afford a $3,000 per month payment than can afford a $2,000 per month payment. The bottom line? The article is spot on. You don't buy a house when interest rates are low and expected to go up.
- kjackson2012 13y ago
  You likely won't get high interest rates like 8% unless you have higher inflation rates. So someone who makes 2000/month right now, by the time the Interest rates increase to 8%, their salary would have Also increased.
  - 300bps 13y ago
    I happen to be an expert on this topic (i.e. I work as the technology person on a fixed income trading desk managing $28 billion of assets including a few billion in mortgage backed securities). You likely won't get high interest rates like 8% unless you have higher inflation rates This is completely wrong. The only thing preserving low interest rates is the Fed purchasing mortgage backed securities (see http://www.newyorkfed.org/markets/mbs_faq.html http://www.newyorkfed.org/markets/mbs_faq.html). When that stops, interest rates will go up dramatically. You could argue that the Fed will only stop doing that once inflation kicks in but that is not true. The Fed is on extremely thin ice as it is now. They're only supposed to purchase and sell Treasuries for their open market operations (http://www.federalreserve.gov/monetarypolicy/openmarket.htm http://www.federalreserve.gov/monetarypolicy/openmarket.htm) and manipulating the mortgage market is significantly outside of their charter. So someone who makes 2000/month right now, by the time the Interest rates increase to 8%, their salary would have Also increased. There are literally millions of possibilities that could happen that don't fit your theory. Never heard of stagflation? My goal is not to write a dissertation in an HN comment so that's enough for me.
- adaml_623 13y ago
  You have a valid point but affordability is the monthly payment as compared to their pay packet. At the moment rates are being held very low to try and help the economy. So if rates do rise that's probably (fingers crossed) because the economy has started improving. So while the basic rule of not buying when rates are expected to go up is true it's possible that larger context may override that rule.
huherto 13y ago
One of the main premises of the article is that Rent prices are based on income level which are local. Also, the house market is local, but the Loan market is national.

300bps 13y ago

Different areas are massively different and are going to react differently to stimuli like rate changes. I agree with the first half of your sentence and disagree strongly with the second half. In many ways, a house works like a bond. The price moves inversely with the interest rate. This is because, for most people, what determines affordability is the monthly payment. There are two factors involved in monthly payment: 1. Amount borrowed 2. Interest rate Consider someone that can afford a monthly payment of $2,000 per month. That means that they can afford: $541,097 borrowed @ 2.00% $474,328 borrowed @ 3.00% $418,922 borrowed @ 4.00% $372,563 borrowed @ 5.00% $333,583 borrowed @ 6.00% $300,615 borrowed @ 7.00% $272,566 borrowed @ 8.00% You can see how the price of the house someone can afford is pushed down as interest rates go up. And here's the thing - the affordability population is a bell curve. Once you get above a certain payment per month, there aren't enough people above to replace the people disappearing below. That is, there are fewer people that can afford a $3,000 per month payment than can afford a $2,000 per month payment. The bottom line? The article is spot on. You don't buy a house when interest rates are low and expected to go up.

kjackson2012 13y ago
You likely won't get high interest rates like 8% unless you have higher inflation rates. So someone who makes 2000/month right now, by the time the Interest rates increase to 8%, their salary would have Also increased.
- 300bps 13y ago
  I happen to be an expert on this topic (i.e. I work as the technology person on a fixed income trading desk managing $28 billion of assets including a few billion in mortgage backed securities). You likely won't get high interest rates like 8% unless you have higher inflation rates This is completely wrong. The only thing preserving low interest rates is the Fed purchasing mortgage backed securities (see http://www.newyorkfed.org/markets/mbs_faq.html http://www.newyorkfed.org/markets/mbs_faq.html). When that stops, interest rates will go up dramatically. You could argue that the Fed will only stop doing that once inflation kicks in but that is not true. The Fed is on extremely thin ice as it is now. They're only supposed to purchase and sell Treasuries for their open market operations (http://www.federalreserve.gov/monetarypolicy/openmarket.htm http://www.federalreserve.gov/monetarypolicy/openmarket.htm) and manipulating the mortgage market is significantly outside of their charter. So someone who makes 2000/month right now, by the time the Interest rates increase to 8%, their salary would have Also increased. There are literally millions of possibilities that could happen that don't fit your theory. Never heard of stagflation? My goal is not to write a dissertation in an HN comment so that's enough for me.
adaml_623 13y ago
You have a valid point but affordability is the monthly payment as compared to their pay packet. At the moment rates are being held very low to try and help the economy. So if rates do rise that's probably (fingers crossed) because the economy has started improving. So while the basic rule of not buying when rates are expected to go up is true it's possible that larger context may override that rule.

huherto 13y ago

One of the main premises of the article is that Rent prices are based on income level which are local. Also, the house market is local, but the Loan market is national.