My theory on if interest rates keep rising. Am I wrong? (insurance, real estate)
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Okay mortgage rates keep rising and I believe it will cause the housing market to tank a bit.
A 300,000 house at 3.25%, $2,500 annual insurance, and $7,500 annual taxes will be cost $2,170/month (VA - 30year loan)
If interest rates go up to 4.25% it would increase the payment to $2,344 ($174/month increase).
I'm sure people are comfortable paying what they are paying now so many may only be comfortable if the home drops in price to make up the difference.
At the same new interest rate (4.25%), the home must drop to $265k to make up the difference to match the monthly payment on a $300k house at 3.25℅.
Admittedly, this doesn't consider that taxes and insurance should lower since the home value has lowered so maybe its not quite that big a difference but it will still tank a large amount.
Is this the proper way to think about it? I don't think buyers should be weary about rates bc they will be paying the same monthly payment but it's going to cause a lot of ppl to be upside down in their mortgage, right?
Your interest will only change if you have a variable interest rate, if you have a fixed interest rate, your interest won't change but the rest of the package might change..
Admittedly, this doesn't consider that taxes and insurance should lower since the home value has lowered so maybe its not quite that big a difference but it will still tank a large amount.
That's a big (and incorrect) assumption if you look at the last 4-5 years. Home values aren't being lowered by the local CADs. A lot are going up the maximum 10% each year. My house was valued at $340k in 2010 after we bought in late 2009. Now? It's $450k. And that is with me fighting and getting the value down every year that it's gone up.
Also, has anyone ever had their homeowner's insurance decrease? I haven't. It hasn't necessarily gone up every year, but it has gone up a few times.
You're correct in your reasoning. I've done quite a bit of reading on the subject as I am wondering the same. However, the consensus based upon what I've read is that rising rates will have less an effect on lower home values because people will just adjust there budgets downwards and there are still plenty of buyers.
So in your example, someone who was previously shopping for a $300k house can now only afford $265k, but the people who were shopping, for example, a $350,000 house can now only afford $300k. In such case, buyers would just shift downwards at all levels (with perhaps some people not adjusting and willing/able to pay more for their original budget). It shouldn't be a problem until you get into the high dollar amounts, because there are so many buyers in DFW and the economy is doing well. Even at the high end of values, there are plenty of buyers well into the $1M+ range.
Barring a huge jump in rates in a short period, it usually takes a recession to bring home prices down. With rates ticking up recently, we may find out for sure in the near future.
That's a big (and incorrect) assumption if you look at the last 4-5 years. Home values aren't being lowered by the local CADs. A lot are going up the maximum 10% each year. My house was valued at $340k in 2010 after we bought in late 2009. Now? It's $450k. And that is with me fighting and getting the value down every year that it's gone up.
Also, has anyone ever had their homeowner's insurance decrease? I haven't. It hasn't necessarily gone up every year, but it has gone up a few times.
My property assessment went down in 2009. I suspect most others did as well.
That's really not how it works at all. A home's value is what the market is willing to pay for it. If interest rates go up and a $300k home costs another $174/mo to buy, as long as buyer still believe the home is worth $300k, the house will sell for that much. There may be a smaller pool of buyers in the $300k price range because the ones who could barely afford the payments at the lower interest rate will be "priced out", but if there are buyers who believe the home is worth $300k, it will sell.
Interest rates and home prices don't automatically have an inverse relationship. And actually, as interest rates begin to climb prices can push even higher as buyers clammor to lock in the 4% interest rates before they become 5% or more. Now if interest rates skyrocketed overnight (say, going from 3.5% to 7%), then it's likely prices will fall, but if that happened there would be many other macro economic factors in play besides real estate.
That's really not how it works at all. A home's value is what the market is willing to pay for it. If interest rates go up and a $300k home costs another $174/mo to buy, as long as buyer still believe the home is worth $300k, the house will sell for that much. There may be a smaller pool of buyers in the $300k price range because the ones who could barely afford the payments at the lower interest rate will be "priced out", but if there are buyers who believe the home is worth $300k, it will sell.
Interest rates and home prices don't automatically have an inverse relationship. And actually, as interest rates begin to climb prices can push even higher as buyers clammor to lock in the 4% interest rates before they become 5% or more. Now if interest rates skyrocketed overnight (say, going from 3.5% to 7%), then it's likely prices will fall, but if that happened there would be many other macro economic factors in play besides real estate.
This is the correct answer. Interest rates will probably only go up a little bit in the next couple years, and gradually at that, which means home prices will be relatively unaffected, especially at the lower and middle price points. If they went up too much and too quickly, the entire economy might crash, leading to greater worries than just real estate. And if the economy really takes off to the point that the Fed is able to increase interest rates significantly, well then the economy will be doing so great that it might push prices up instead of down despite higher interest rates.
In any case, the biggest factor in DFW real estate prices right now is the influx of companies and residents to this area, and that's unlikely to stop anytime soon, which means prices will continue to go up despite increased interest rates.
Ok, great!!! It's nice to know. I'm over here stressing out that the home I just bought will be worth 40k less once interest rates climb.... thanks for the reassurance... now I just hope congress keeps trump on a tight leash... tht guy seems too unpredictable
Ok, great!!! It's nice to know. I'm over here stressing out that the home I just bought will be worth 40k less once interest rates climb.... thanks for the reassurance... now I just hope congress keeps trump on a tight leash... tht guy seems too unpredictable
I think thats a normal fear. When I bought my house a year ago I thought the same thing, but it went from $400k to $440k. I refinanced from a 4.125% rate to 3.5% like 2 months ago so all is good. Even if home prices drop I'm not moving and I'm happy with my monthly payment, if anything I'd welcome a housing drop as I've been waiting for a good opportunity to get into long term rental property investing.. Trust me, life goes on and its not worth worrying about, I was one of the biggest worriers on this site.
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