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How Rising Mortgage Rates Could Affect The Housing Recovery
You know, this whole thing of 'rising interest rates' may have some truth to it, but for those of us who bought our first houses in 1979 or 1980 or 1981, it's almost laughable to look at current mortgage rates and read comments that any movement higher than current rates could kill the housing market. I recal very clearly that my wife and I were happy as clams to lock in a ARM at ONLY 10.25%. Shortly thereafter, rates were easily above 12%. And the housing market did not collapse. I remember people sleeping in line outside mortgage lenders offices to get first-time homebuyer "deals". I am not sure which is the tail or the dog when it comes to the economy and housing. But if 4 or 5% mortgage rates are problems for the housing industry, the economy is a whole lot worse than Washington will admit. The problem here in Central Ohio is a lack of inventory, with mid-priced homes being bought even before they get on the market, or bidding wars STARTING at prices higher than the listing price. A client who owns a plumbing wholesale business says they cannot keep inventory on shelves. So slightly higher rates are not what will hurt the housing market, at least in this area of the country.
Wow Bob, I remember those mortgage rates. We bought our first home in 1978. I can't remember exactly what the rate was, but I think it was in the 12% range. We also had to pay PMI on top of that because we didn't have 20% to put down. One big difference back then though, at least around Rochester N.Y where Kodak and Xerox were expanding big time, was that there was job security and growth. Plus wages were keeping up with sky rocketing inflation. I guess even 4-5% mortgages seem pretty high when it's tough to get a job.
Back in the day, July 1976; I shopped around and obtained a 20 year mortgage, with 20% down for 7.75%. Two items, as requested; were part of the mortgage contract. The mortgage was assumeable/transferable to a new buyer, if and when I chose to sell before the mortgage was paid off; and that the mortgage rate was also fixed to a new buyer, in the event that mortgage rates went up. These inserted items were to help the house have a more favorable sale status going forward. Indeed, rates marched very high during the 1979-1981 time period; although the house was not offered for sale during this time. And golly-gee, the original mortgage actually remained the property of the S&L during its short life; and never hit the secondary markets or being owned by a pension fund in Sweden or elsewhere. Take care, Catch
Reply to @BobC: "Shortly thereafter, rates were easily above 12%. And the housing market did not collapse. I remember people sleeping in line outside mortgage lenders offices to get first-time homebuyer "deals". I am not sure which is the tail or the dog when it comes to the economy and housing. But if 4 or 5% mortgage rates are problems for the housing industry, the economy is a whole lot worse than Washington will admit. "
Thank you, exactly. I have relatives who - in the 70's - were thrilled at 8%, even, and at 8%, they had to make a decision whether they wanted the place right then and there. Additionally, look at a chart of mortgage apps vs sales - mortgage apps down, sales up - a lot of large, institutional cash buyers. This isn't fueled by the average person going out and getting a mortgage.
If you ask me, the mortgage payment is more important than either the price or the rate when a person purchases a house. In a natural environment the price would fluctuate with rate and wage to maintain payments that are affordable to buyers. Yes, my first house had a rate of 11+% too but the asking price of the house left the payment at a little over $300/mo, a price we could afford. Rates were held low after 2007 which kept prices from dropping and mortgage payments affordable. Unless wages increase in proportion to mortgage payments, it seems to me that higher rates will lead to another round of falling prices.
Or as I always say when the subject comes up. Houses are worth no more than people in a particular area can afford in mortgage payments at the existing rate.
A lesson I have learned over the last 30 year as a homeowner is how large a role taxes play in the housing market. A mortgage interest rate, to me, is merely a tax on the availability of money. When inflation hit in the late 70's money became scarce it also becomes more valuable...therefore higher interest rates should apply. Back in the late 70's on our street home prices were forced downward as a result of rates going up.
Today, to a large extent, the Fed's QE actions has allowed housing prices to remain elevated when in realty housing prices should have come down. In the Northeast where there wasn't a huge housing bubble these Fed induced low interest rates have kept a $200,000 house at $200K when if rates where 6-8% would more realisticly be selling for $150K. Buying a house for $150,0000 (at an interest rate of 6-8%) is actually a better deal for the homowner verses the Fed supported $200,000 (at rates of 3.5-4.5%). The Fed action is really creating a better deal for banks ($200k @ 4% nets more interest) and the local tax collector (property tax assessments). Home prices should have come down a lot more than they have.
Also, home ownership is a myth. I have owned my home breifly twice over the last 30 years as a result of paying down my mortgage note early...the rest of the time the bank owned the property and I "rented to own it" from the bank. Even at today's low 4% interest rates, interest payments to the bank (oops...I mean pension fund in Sweden) still outweigh principal payment on the property. There is not much difference between the "myth of home ownership" and "the realty of rent". Renters has taken out a 1 year mortgage (a rental lease agreement) and a "home owner" has taken out a 30 year "rent to own" repayment plan. Most never make it to the tipping point of the 30 year note and pay far more interest to banks than to the principal of the house.
After property taxes, property repair, property maintenance, property insurances, as well as property mortgage payments where as renting and investing the difference makes a lot more sense. Rates should have remained in the 6-8% range for mortgages and property values should have fallen a lot more than they have. This is where the Fed's goal of fighting deflation is good for the banks and local property tax collectors...not so good for young couples starting out in search of the american dream.
Related sentiment from "How Big Institutionalized Money Distorts Housing Prices": "after presenting to a bi-partisan audience in the Capitol building, a gentleman came up to me and introduced himself as a real estate agent. He explained that he’d been seeing something very strange over the past six months, where very well capitalized, out-of-state private equity funds had been buying up huge swaths of residential real estate with cash. He wanted to know if I knew anything about this."
And, "In the past twelve months, Blackstone has raised over $8 billion to buy up medium- and low-priced housing, while JP Morgan has initiated a fund to buy up to 5,000 homes. Morgan Stanley has raised a billion dollars to buy up to 10,000 homes. If it strikes you as odd that the big banks would be bailed out by the taxpayers and then turn around and use that same money to buy homes to then rent back to those same taxpayers, then we hold the same view."
Finally, "Said another way, the Fed prints fake money out of thin air, and some companies use that same money to buy real things like houses and then rent them out to real people trying to live real lives."
Good points Bee. The ratio of housing prices to worker salaries has also gone bonkers. My father purchased a house in the mid seventies for $19,500 and his annual wages were around $12,000.
Nowadays we also have the Chinese buying up properties in certain parts of the country, which is having some effect on prices. Seattle was mentioned recently in the news.
Comments
And golly-gee, the original mortgage actually remained the property of the S&L during its short life; and never hit the secondary markets or being owned by a pension fund in Sweden or elsewhere.
Take care,
Catch
Thank you, exactly. I have relatives who - in the 70's - were thrilled at 8%, even, and at 8%, they had to make a decision whether they wanted the place right then and there. Additionally, look at a chart of mortgage apps vs sales - mortgage apps down, sales up - a lot of large, institutional cash buyers. This isn't fueled by the average person going out and getting a mortgage.
Or as I always say when the subject comes up. Houses are worth no more than people in a particular area can afford in mortgage payments at the existing rate.
Today, to a large extent, the Fed's QE actions has allowed housing prices to remain elevated when in realty housing prices should have come down. In the Northeast where there wasn't a huge housing bubble these Fed induced low interest rates have kept a $200,000 house at $200K when if rates where 6-8% would more realisticly be selling for $150K. Buying a house for $150,0000 (at an interest rate of 6-8%) is actually a better deal for the homowner verses the Fed supported $200,000 (at rates of 3.5-4.5%). The Fed action is really creating a better deal for banks ($200k @ 4% nets more interest) and the local tax collector (property tax assessments). Home prices should have come down a lot more than they have.
Also, home ownership is a myth. I have owned my home breifly twice over the last 30 years as a result of paying down my mortgage note early...the rest of the time the bank owned the property and I "rented to own it" from the bank. Even at today's low 4% interest rates, interest payments to the bank (oops...I mean pension fund in Sweden) still outweigh principal payment on the property. There is not much difference between the "myth of home ownership" and "the realty of rent". Renters has taken out a 1 year mortgage (a rental lease agreement) and a "home owner" has taken out a 30 year "rent to own" repayment plan. Most never make it to the tipping point of the 30 year note and pay far more interest to banks than to the principal of the house.
After property taxes, property repair, property maintenance, property insurances, as well as property mortgage payments where as renting and investing the difference makes a lot more sense. Rates should have remained in the 6-8% range for mortgages and property values should have fallen a lot more than they have. This is where the Fed's goal of fighting deflation is good for the banks and local property tax collectors...not so good for young couples starting out in search of the american dream.
Related link:
advisoranalyst.com/glablog/2013/06/05/how-big-institutional-money-distorts-housing-prices.html
Related sentiment from "How Big Institutionalized Money Distorts Housing Prices":
"after presenting to a bi-partisan audience in the Capitol building, a gentleman came up to me and introduced himself as a real estate agent. He explained that he’d been seeing something very strange over the past six months, where very well capitalized, out-of-state private equity funds had been buying up huge swaths of residential real estate with cash. He wanted to know if I knew anything about this."
And,
"In the past twelve months, Blackstone has raised over $8 billion to buy up medium- and low-priced housing, while JP Morgan has initiated a fund to buy up to 5,000 homes. Morgan Stanley has raised a billion dollars to buy up to 10,000 homes.
If it strikes you as odd that the big banks would be bailed out by the taxpayers and then turn around and use that same money to buy homes to then rent back to those same taxpayers, then we hold the same view."
Finally,
"Said another way, the Fed prints fake money out of thin air, and some companies use that same money to buy real things like houses and then rent them out to real people trying to live real lives."
Link:
how-big-institutional-money-distorts-housing-prices
Nowadays we also have the Chinese buying up properties in certain parts of the country, which is having some effect on prices. Seattle was mentioned recently in the news.