High mortgage rates mean that is only more expensive for “poor” people, while the wealthy will continue on their merry way. The US desperately needs a land-value tax as a step towards making home ownership costly and depreciating, removing the home-as-investment angle. Who wants a nest egg that means giving up your dwelling in the case of actually needing to liquidate it anyway? (Oops, got expensive medical bills? Now you’re sick _and_ homeless!)
Actions like this will unfortunately destroy a lot of older middle-class wealth in the short-term, but longer term it would hurt the upper-classes the most (and even short-term it’s not like the upper classes haven’t been winning every transaction anyway). And the longer we let this problem fester, the more lives we disrupt of the younger generations who have seen countless ladders pulled up in front of them.
States have property taxes. You can argue how they're implemented, every state is different, but to completely dismiss that they exist doesn't help. If your solution is to unfortunately destroy a large group of people than maybe you don't have the best solution.
Any serious conversation about changing the equation needs to start from the perspective of capacity utilization. We certainly need to increase the number of housing units, however, if the utilization rate remains the same or drops, you've really not created any new housing. In southern California we see new projects being built that are $3,600 / month for a 600 sqft 1br/1ba apartment in mediocre neighborhoods or next to freeways. From a bay area perspective, this may seem cheap, but wages are lower here and IPO opportunities are not as rich. Looking at public documents for the REIT that owns one of these aforementioned luxury properties showed a 40% occupancy rate, which wasn't a surprise given the price.
So until municipalities want to really study the overall capacity and exactly how it is being used, changing tax policies will be unlikely to address whatever the real issue happens to be. Our problem is not simply "supply and demand", it's more subtle than that.
If I were still in the multi-family residential marketplace I'd be buying and converting to short-term rentals in cute neighborhoods. It would be the highest and best use of capital deployment under current legal structures.
Wouldn't a SANKEY diagram showing incoming units and utilization of such units be a nice way of seeing the problem and making adjustments? Having such data would be fascinating.
Why? Who would this system benefit? You destroy the housing market to replace it with rich landlords owning apartment buildings and charging increasing amounts of rent to more poorer people who accumulate no equity. In your get sick scenario, you are still homeless but owe massive medical bills.
After paying off the medical bills with appreciating uome ownership, your credit is still good, and you can eventually buy another house. All your land-value tax does is punish wealth accumulation. What is the reform you wish to create? How does this help anyone?
Part of the reason people like Trump have very fancy residences is because they are exempt under bankruptcy laws. So he can store his wealth as gold plating on his toilet, file for bankruptcy, get out of all the loans he can't pay, then continue on with his lackluster investing. I bet even a tax on the value won't remove that very lucrative use of it.
What a principal residence as an investment does for most middle to upper-middle class Americans is force them to save some money so that they have some amount of wealth when they retire. I don't know if that is important or not, since it's not very liquid and has dire consequences if you lose it.
It's quite depressing. Attempting to buy since August. When I started my rate was 2.7 and today it's 5.2 and climbing extremely fast in the past month. Inventory continues to be a problem. There just has been so little on the market. What's interesting in my observation is the rate increases have actually created even more competition. People are straight up desperate right now.
Also now that overlapping showings are happening I spend nearly every viewing with 2-5 realtors who are showing over zoom to buyers looking to move from a HCOL to my city (Denver). I found it hard enough to make a major decision after a 20 minute viewing, but to do so over a poorly narrated zoom/facetime walkthrough? Can't imagine.
Honest question do you need a home right now? I too have been looking and when interest rates jumped I decided I was going to sit on the sidelines for the next 1 to 2 years and just stack cash/invest in various markets.
For European readers, a bit of useful context that surprised me when I moved to USA. Most Americans buy their homes on 30-year mortgages with fixed interest rate. So rate increases generally only affect those buying, not those who already own.
In Europe (at least the parts I'm familiar with), it's more common for mortgages to be on adjustable rates, basically the European Central Bank rate + a fixed margin. This has been an excellent deal for the past 10+ years, as the ECB rate sunk below zero.
(I have a mortgage in Finland that I took in 2011, and for many years I've paid zero interest on it because ECB rate + the loan margin added up to a negative rate. Sadly my bank clamps it at zero.)
That's interesting. Generally those would be called Adjustable-Rate Mortgages in the US and they are seen as pretty toxic. A major cause of the 07-08 crash can be attributed to those loans and their rates suddenly skyrocketing over a short period of time to the point that millions could no longer afford their monthly payments and defaulted.
Canada is more like Europe in this sense, too. The American mortgage market is a bit weird from a distance.
Here you have your choice between a variable rate mortgage (floats at BoC rate +- some %) or a "fixed" rate on a term (e.g. 3% for 5 years) and then you renew at whatever rate is current at the end of the term.
No it hasn't become more expensive due to hitting 5%, though it may be more expensive for other reasons. The market will equilabrate.
There's a couple who live at the peak of the bell curve that defines your market. They can spend $X,000 per month on a house. 2.5% vs 5% just changes how much of their money goes to paying down principle vs the interest. With that the price of the house will fluctuate to account for this reality.
In Canada, the govt is pulling the brakes via policy (foreign buyer ban, non-resident tax, etc.) amid the rise in rates. Unlike the US, we have max 5 year fixed rate mortgages for the most part. The govt initiatives are a drop in the bucket but the impact of rate increases is very concerning. On the flip side, govt policies are fueling the fire as they help first time buyers with more tax incentives. I wonder if anyone in charge passed econ 101.
As others have commented, the rate increase in the US is nuts. People were paying the max monthly payments their income would give them in some markets (e.g. Bay area). With rates doubling so fast, I worry about fiscal solvency of anyone who did not get a long-term locked rate.
I think that was the point. There are many markets that are overheated and it was time to turn down the temperature. 5% should help.
(We lived through 18% in the 80's. This is barely tapping the brakes.)
5% isn't so bad. I bought during the rate spike of 18 at around 5%, then had to watch as rates immediately fell again and I couldn't refinance until my mortgage "seasoned" for 10 months.
Back during the housing boom, rates were 5-6%. So I'm not sure that this will cool the market all that much.
That's crazy, I'm glad I, and a number of my friends, refinanced in 2020-2021 for rates in the 2.25-2.75 range. Going from 2.25 (my rate) to 5 would result in ~$300 more a month on my mortgage.
congrats! but risk is obviously that property prices as a whole will start to deflate but if its your primary residence and you are going to live in forever it will be fine, you are on the hook for whatever you bought the property for vs market price.
people that were using cheap mortgages to purchase additional properties with the aim of flipping it, who were also leveraged, are screwed.
the last bit of bad news is that property prices may not rise for people who buy the dip, we are entering into a global recession and the world's biggest real estate market have declined with no hope of making a comeback.
Same - I refi'd to lock in at 2.65 in September 2020. I consider myself very fortunate. In the 1980s my parent's rate was something like 18% - it was crazy...but it did keep the housing cheap.
I got hit from a 1.9% to 2.5% change while in the process of closing last month :( About $150 per month wasted, meanwhile natural gas and electricity prices are also going to the moon (as a Europoor).
I got in just under the wire, closed at 3.125% (refi from 4% 2yrs ago). Considering rates in the 80s were like 11% it's still all "relatively" cheap financing, but home prices per se are another thing altogether.
If this helps stops high earners from buying second or third homes, as seems common in the sections of the software engineer community in my area, I am all for it.
Home prices will just go down soon so that average monthly payment for new buyers stays about the same as for the old ones with "high home price" + "low rate" combo. Of course, in a transition period a handful of people will be unlucky enough to be stuck with "high home price" + "high rate" combo.
You're just speculating. Have you ever considered that home prices didn't go up, that inflation went up. Perhaps what needs to balance things out, isn't home prices coming down, but wages going up to keep up with inflation?
Such events have happened in other countries, and if it happens here, home prices will keep going up, wages will go up, and folks will at best be able to afford the same things but most likely less.
they wont go down that much, but inflation will keep going up and in australia we've had very poor wages growth while hiding unemployment rates under a cover of "part time and casual" jobs. (ie very very low unemployment but not talking about how so many people have to work multiple jobs to get by.)
it’s cute how people predict the housing market going down / crashing every time something happens.
I don’t think a crash will happen (maybe it’s going down, maybe not, but definitely not a crash) and I believe we are moving in a direction where less and less people will own the home they are living in. It’s sad really but this is what late stage capitalism looks like.
As for people that want to buy a home? buy one if you can afford it. don’t try to time the market, don’t worry about crashes and bad deals. Just do it. In 10 years what happens right now will not matter.
I think that's true too. Home prices should work like bonds.
However it will likely keep going and then crash more than fizzle.
As long as the interest rate is below the rate of inflation, you'll make money by borrowing money and trading that money for something pegged to inflation, like a house.
This will work in the short term, and so I think people will keep buying.
Looking at historic US housing data, during periods of rate increases prices did not drop, with 2008-2009 being the exception. However, during the previous recessions price discovery was difficult, one needed to go through an agent who interfaced with disjoint MLS systems. I suspect that price discovery through zillow/corelogic might cause faster repricing in the housing market today.
Second home purchases in the reached historic levels over the last two years. There is a lot of inventory that could be listed quickly in comparison to owner occupied homes.
It's not clear that a correction will happen though, wage increases, in particular at lower incomes can sustain higher rates and higher prices for homes below the median. At the high end most buyers are likely asset rich and can also sustain higher prices. The price segment that may be most vulnerable due to higher rates is in the middle.
I can't see institutional investors selling. If house prices fall, they are going to hold on to houses to prevent the losses from being shown on their books. If rent prices fall, they are going to focus on appreciation to cover the losses (and taking advantage of favorable tax treatment that landlords enjoy).
Really, the only way it makes sense for an institutional investor to sell is if the prices reach so high, then plateau, such that even the most optimistic projections show there's not much money to be made in rents+appreciation over the next 10 years.
It doesn't really affect them because the tenant is defacto paying the mortgage, and there is no shortage of tenants. It will just further increase rent rates during the next rental contract renewal, but buried in with all of the other regular inflation (increase in building materials for repairs, labor rates, etc).
hahaha. nope. why would they do that when the inventory is so limited? the only solution that I think could work is rezoning + building more. That’s the only thing that could dampen this mad market.
I concur. In Canada, 10% YoY would be a welcome change. It’s been more like 25-35% YoY in many, many markets (including tertiary markets with stagnant economies).
> Unlike rates on credit cards or other types of loans, mortgage rates move early and dramatically in anticipation of what the market expects
Interesting piece of information for tracking economic movements. I wonder what the ratio is on adjustable rate mortgages vs. fixed. If there are a lot of ARM out there then there might be potential for a bubble popping where people can't afford the mortgage and fixed rates are also higher where a re-fi won't help.
According to [1], ARMs have multiple caps on their interest rates. They cannot be freely floated along with prevailing interest rates. Rather, they have a cap on how much the rate can go up at each adjustment period, and a cap on the maximum total increase over the lifetime of the loan. So if you had an ARM at an initial rate of 3%, you're probably gonna hit 5% very soon. But even if inflation hits early 1980s levels and the Fed acts similarly by mercilessly raising rates, ARM borrowers won't see their rates go anywhere near >20%.
Additionally, lending standards over the last decade were nowhere near as loose as before the financial crisis. Though apparently they were beginning to ease in Q3 and Q4 of last year. [2]
All this to say, I'm sure you're right, borrowers at the margins of lending standards will have a much harder time, and we'll see an increase in foreclosures. But it shouldn't the tsunami that we saw in '06-'09.
One does wonder though, with the trend of increasing economic headwinds (inflation, ongoing supply chain bottlenecks, etc.), how close we are to a recession.
Maybe this marks the start of a return to rational pricing of capital? It's a bit too late for a lot of older folks who were counting on interest from savings accounts to fund their retirement, but maybe we can start encouraging saving again for the future?
I hope this brings the price of housing back down to earth. A house is a depreciating asset in any sane world. It requires constant maintenance.
"Luxury" buyers are less sensitive to interest rate increases due to the amount of cash they can deploy.
If more housing stock isn't injected amidst a housing shortage, raising interest rates will disproportionately affects Buyers who really need affordability. Crappy deal.
In cities like Seattle or Austin or Denver, 5% mortgage rates are unlikely to cool the market off in any meaningful way.
This is probably because banks consider home loans a riskier investment. With inflation high, there's the risk that the home loan could become seriously devalued. Also, the CoL increase due to inflation could outstrip pay increases, making homeowners more prone to default.
[+] [-] merrywhether|4 years ago|reply
Actions like this will unfortunately destroy a lot of older middle-class wealth in the short-term, but longer term it would hurt the upper-classes the most (and even short-term it’s not like the upper classes haven’t been winning every transaction anyway). And the longer we let this problem fester, the more lives we disrupt of the younger generations who have seen countless ladders pulled up in front of them.
[+] [-] frumper|4 years ago|reply
[+] [-] Justin_K|4 years ago|reply
[+] [-] dano|4 years ago|reply
So until municipalities want to really study the overall capacity and exactly how it is being used, changing tax policies will be unlikely to address whatever the real issue happens to be. Our problem is not simply "supply and demand", it's more subtle than that.
If I were still in the multi-family residential marketplace I'd be buying and converting to short-term rentals in cute neighborhoods. It would be the highest and best use of capital deployment under current legal structures.
Wouldn't a SANKEY diagram showing incoming units and utilization of such units be a nice way of seeing the problem and making adjustments? Having such data would be fascinating.
[+] [-] jackcviers3|4 years ago|reply
After paying off the medical bills with appreciating uome ownership, your credit is still good, and you can eventually buy another house. All your land-value tax does is punish wealth accumulation. What is the reform you wish to create? How does this help anyone?
[+] [-] queuebert|4 years ago|reply
What a principal residence as an investment does for most middle to upper-middle class Americans is force them to save some money so that they have some amount of wealth when they retire. I don't know if that is important or not, since it's not very liquid and has dire consequences if you lose it.
[+] [-] hellisothers|4 years ago|reply
[+] [-] IanDrake|4 years ago|reply
You know what really killed the rich? SALT deduction limits in the Trump tax plan. That policy actually caused the rich to pay more in taxes.
That's why CA tried to work around it by trying to classify property taxes as a charitable donation.
Wait and see, the Dems will pass a new sweeping tax plan that won't include the SALT deduction limit and they'll claim that it taxes the rich more.
[+] [-] jcomis|4 years ago|reply
Also now that overlapping showings are happening I spend nearly every viewing with 2-5 realtors who are showing over zoom to buyers looking to move from a HCOL to my city (Denver). I found it hard enough to make a major decision after a 20 minute viewing, but to do so over a poorly narrated zoom/facetime walkthrough? Can't imagine.
[+] [-] DamnYuppie|4 years ago|reply
[+] [-] pavlov|4 years ago|reply
In Europe (at least the parts I'm familiar with), it's more common for mortgages to be on adjustable rates, basically the European Central Bank rate + a fixed margin. This has been an excellent deal for the past 10+ years, as the ECB rate sunk below zero.
(I have a mortgage in Finland that I took in 2011, and for many years I've paid zero interest on it because ECB rate + the loan margin added up to a negative rate. Sadly my bank clamps it at zero.)
[+] [-] adamsmith143|4 years ago|reply
[+] [-] cmrdporcupine|4 years ago|reply
Here you have your choice between a variable rate mortgage (floats at BoC rate +- some %) or a "fixed" rate on a term (e.g. 3% for 5 years) and then you renew at whatever rate is current at the end of the term.
[+] [-] ldiracdelta|4 years ago|reply
There's a couple who live at the peak of the bell curve that defines your market. They can spend $X,000 per month on a house. 2.5% vs 5% just changes how much of their money goes to paying down principle vs the interest. With that the price of the house will fluctuate to account for this reality.
[+] [-] tallclair|4 years ago|reply
[+] [-] brutus1213|4 years ago|reply
As others have commented, the rate increase in the US is nuts. People were paying the max monthly payments their income would give them in some markets (e.g. Bay area). With rates doubling so fast, I worry about fiscal solvency of anyone who did not get a long-term locked rate.
[+] [-] RocketOne|4 years ago|reply
[+] [-] spamizbad|4 years ago|reply
[+] [-] globular-toast|4 years ago|reply
[+] [-] gr8tnwz|4 years ago|reply
And we should be happy to have been born after others earned all the wealth.
https://youtu.be/bUl5rSpfCeI
[+] [-] mywittyname|4 years ago|reply
Back during the housing boom, rates were 5-6%. So I'm not sure that this will cool the market all that much.
[+] [-] joshstrange|4 years ago|reply
[+] [-] tomatowurst|4 years ago|reply
people that were using cheap mortgages to purchase additional properties with the aim of flipping it, who were also leveraged, are screwed.
the last bit of bad news is that property prices may not rise for people who buy the dip, we are entering into a global recession and the world's biggest real estate market have declined with no hope of making a comeback.
[+] [-] binarymax|4 years ago|reply
[+] [-] nivenkos|4 years ago|reply
[+] [-] chrisweekly|4 years ago|reply
[+] [-] lukewrites|4 years ago|reply
[+] [-] ivanche|4 years ago|reply
[+] [-] Nbox9|4 years ago|reply
1. There is a fixed amount of realestate that must be shared by a growing population.
2. Inflation means the cost of everything is increasing. Why wouldn’t that provide significant upward pressure on homes?
3. Local governments spend a lot of effort maintaining high real-estate values. You can’t fight city hall.
[+] [-] segmondy|4 years ago|reply
Such events have happened in other countries, and if it happens here, home prices will keep going up, wages will go up, and folks will at best be able to afford the same things but most likely less.
[+] [-] crate_barre|4 years ago|reply
[+] [-] senectus1|4 years ago|reply
[+] [-] mirceal|4 years ago|reply
I don’t think a crash will happen (maybe it’s going down, maybe not, but definitely not a crash) and I believe we are moving in a direction where less and less people will own the home they are living in. It’s sad really but this is what late stage capitalism looks like.
As for people that want to buy a home? buy one if you can afford it. don’t try to time the market, don’t worry about crashes and bad deals. Just do it. In 10 years what happens right now will not matter.
[+] [-] IanDrake|4 years ago|reply
However it will likely keep going and then crash more than fizzle.
As long as the interest rate is below the rate of inflation, you'll make money by borrowing money and trading that money for something pegged to inflation, like a house.
This will work in the short term, and so I think people will keep buying.
[+] [-] tetrahedrix|4 years ago|reply
Second home purchases in the reached historic levels over the last two years. There is a lot of inventory that could be listed quickly in comparison to owner occupied homes.
It's not clear that a correction will happen though, wage increases, in particular at lower incomes can sustain higher rates and higher prices for homes below the median. At the high end most buyers are likely asset rich and can also sustain higher prices. The price segment that may be most vulnerable due to higher rates is in the middle.
[+] [-] nine_zeros|4 years ago|reply
[+] [-] mywittyname|4 years ago|reply
I can't see institutional investors selling. If house prices fall, they are going to hold on to houses to prevent the losses from being shown on their books. If rent prices fall, they are going to focus on appreciation to cover the losses (and taking advantage of favorable tax treatment that landlords enjoy).
Really, the only way it makes sense for an institutional investor to sell is if the prices reach so high, then plateau, such that even the most optimistic projections show there's not much money to be made in rents+appreciation over the next 10 years.
[+] [-] cronix|4 years ago|reply
[+] [-] mirceal|4 years ago|reply
[+] [-] mupuff1234|4 years ago|reply
[+] [-] voisin|4 years ago|reply
[+] [-] mooreds|4 years ago|reply
[+] [-] lamontcg|4 years ago|reply
I wonder if rates readjusting pops the housing bubble though.
[+] [-] matt_s|4 years ago|reply
Interesting piece of information for tracking economic movements. I wonder what the ratio is on adjustable rate mortgages vs. fixed. If there are a lot of ARM out there then there might be potential for a bubble popping where people can't afford the mortgage and fixed rates are also higher where a re-fi won't help.
[+] [-] next_xibalba|4 years ago|reply
Additionally, lending standards over the last decade were nowhere near as loose as before the financial crisis. Though apparently they were beginning to ease in Q3 and Q4 of last year. [2]
All this to say, I'm sure you're right, borrowers at the margins of lending standards will have a much harder time, and we'll see an increase in foreclosures. But it shouldn't the tsunami that we saw in '06-'09.
One does wonder though, with the trend of increasing economic headwinds (inflation, ongoing supply chain bottlenecks, etc.), how close we are to a recession.
[1] https://www.bankrate.com/mortgages/federal-reserve-decision-...
[2] https://www.pymnts.com/loans/2021/banks-loosen-lending-stand...
[+] [-] kipchak|4 years ago|reply
[1]https://www.cbsnews.com/news/mortgage-rates-4-percent-adjust...
[+] [-] unknown|4 years ago|reply
[deleted]
[+] [-] mikewarot|4 years ago|reply
I hope this brings the price of housing back down to earth. A house is a depreciating asset in any sane world. It requires constant maintenance.
[+] [-] DoubleDerper|4 years ago|reply
If more housing stock isn't injected amidst a housing shortage, raising interest rates will disproportionately affects Buyers who really need affordability. Crappy deal.
In cities like Seattle or Austin or Denver, 5% mortgage rates are unlikely to cool the market off in any meaningful way.
[+] [-] phendrenad2|4 years ago|reply