Real estate outlook now that mortgage rates are going up (King: renters, refinance)

[NC211]

2003-2007 housing boom wasn't so much about interest rates and health of the economy, as it was about overtly loose credit standards. Want a loan? Here. Don't want a loan? Here's one anyway. I bought my very first home in 2006, and I was approved for my mortgage faster than I could get Dominos to deliver my pizza, honestly. My rate for an "Alt-A" loan was lower than the rate I was going to get with having to go to the bank with two years of tax returns and a bunch of verifications, and it only took 30 minutes and my credit report. Significantly lower (like 1/2 point lower). And even then, it was 5.875%. I paid top of the market for that house in October 2006, in Apex. Sold it in March 2009 for very slightly more than what I paid (unique lot / double - culdesac). Looking at that neighborhood today, houses selling in there now, aren't necessarily out of bounds for what you would expect on typical appreciation levels in general from that period in 2009 to today, regardless of recession.


03-07' boom was due to easy money. 2011 to now is due to what amounts to subsidized rates by the current administration. That's about to change.


If rates are going to go up, which finally it appears they are, then what threatens the housing market now is lending standards. Will those loosen up a bit again to allow debt to income levels to increase a bit to make room for the increased cost of the mortgage debt? That'll be the question. Given Trump's statements about reversing some of these regulations that have been put into place during Obama's term, I'm thinking yes. But, we'll see how loose it gets.


Short term impact on rising rates. Yeah, maybe will slow things down and new construction prices will slide a bit. Long term.....it's all in the mechanicals of the process. What I do know, is that I hope the days of subprime standards are not returned to the playing field. Otherwise, we're not only back on that same track of likely failure, but we've got a TON of new apartment projects around the country that are going to take it on the chin....


1990 recession was caused by commercial real estate over building. 2000 was caused by dot.com. 2008 was caused by residential real estate. Commercial real estate is tee'd up now to cause the next one, if we're not careful. The supply has been built, and renters are there. But if the renter is able to buy instead, that could hurt. Will they buy though? That's the question. The first-time home buyer market isn't nearly as strong as it has been in the past. Many can't qualify. But a large pool, larger than in recent times in the past, also don't want to buy. Don't want the responsibility of ownership. We have a large population base now of "renters by choice" because 2009-2011 traumatized them away. So, we'll see...

[xxrb1]

Level of interest rate quoted for a mortgage are nominal interest rate. What is important to look at is the real interest rate that is equal to the nominal rate minus inflation. For example, if interest rates are at 10%, but inflation is at 12% and your salary catch up with inflation, you are borrowing at -2%. So, you are making money .

In 2008 nominal interest rate were low but inflation was also close to 0 or even negative. Thus real interest rate were low but not so much.

Today, the nominal interest rates for a 30 years mortgage are about 1% more expensive that during the downturn. However, inflation is close to 1.7% (last US inflation figure). So, if inflation was at 0% during the downturn, interest rates for a 30 years mortgage are 0,7% cheaper today than during the downturn in real terms.

Those figure above are approximative and might be not 100% correct, but it give you the idea. This explanation also assumes that your salary follow the inflation which is correct on average but might be wrong for some people.

[michgc]

Originally Posted by MikeJaquish

Way back when, the inlaws were shocked when their 11% Bank CD's expired, shocked at the return they got after that. When rates fell, they fell off a cliff.

I have a 3.8% CD maturing tomorrow, and I'm sad about that.

[ucctgg]

Originally Posted by michgc

I have a 3.8% CD maturing tomorrow, and I'm sad about that.

For long term investing the S&P 500 index has given an average annual rate of return of
6.7% over the last ten years and
7.5% over the last twenty years.


Of course you have the risk you don't have with a CD.


https://dqydj.com/sp-500-return-calculator/

[michgc]

Originally Posted by ucctgg

For long term investing the S&P 500 index has given an average annual rate of return of
6.7% over the last ten years and
7.5% over the last twenty years.


Of course you have the risk you don't have with a CD.


https://dqydj.com/sp-500-return-calculator/

Yes, I have a diversified portfolio with stock mutual funds, bonds, and CDs. Sad that my CDs are now going to be earning sub 2%, though.

[VickiR]

I can't predict the future like some of you; however, I was selling homes back when interest rates were 12% and it didn't stop many from buying homes.

It DID cause them to buy LESS home but people are still getting married and having babies and needing a place to live.

[abgilliam]

What effect do you RE folks think that the likely repeal of mortgage deduction will have in our area?

[wheelsup]

Originally Posted by abgilliam

What effect do you RE folks think that the likely repeal of mortgage deduction will have in our area?

Probably the same effect it will have nationwide - it won't change anything especially with the standard deduction increasing. It's about time we simplified the tax code and this is an excellent start.

[route66]

Originally Posted by wheelsup

Probably the same effect it will have nationwide - it won't change anything especially with the standard deduction increasing. It's about time we simplified the tax code and this is an excellent start.

I think its a bad move unless the plan is to grandfather existing mortgages. My reasoning is:

1. Most people buy a home in order to lock in a predictable payment amount each month and a fixed interest rate. To remove the deduction is in effect the same thing as saying "oh yeah, your interest rate wasn't really fixed anyway, it's going to be a percent or two higher than what you signed up for.".

2. Opponents of the interest deduction say it needs to go because it's not fair to those who can't afford a home, and also since people would have bought homes anyway it's just an unnecessary bonus. This means that a tax advantage for married couples is not fair to people who choose to be single and since they probably would have gotten married anyway, we need to abolish that. It also means abolishing tax advantages for dependents because those people would have probably had kids anyway. If the logic is sound at all, it generally means there can be no tax advantages for anyone for anything. What's good for the goose is good for the gander.

3. Particularly with rising interest rates, it's going to destroy the market for mcmansions. Not that I am a fan of mcmansions but the bottom line is some people who opted for those do not deserve to have their legs kicked out of them after they've already signed up for the purchase. This issue could be mitigated if the fed offered some sort of refinance program at an interest rate that allows them to match the total monthly payment they had prior.

4. It will negatively affect home maintenance in general and all aspects of the construction / remodeling industry. Many homeowners rely on that "bonus check" at tax time to cover unexpected repairs on their home that have occurred throughout the year or pay down higher interest debt. Some would say that wise money management is the responsibility of each homeowner, but keep in mind that the repeal is designed to help those less capable, those less financially responsible, which by the way is the very same crowd of folks who would likely find themselves in a bind with poorly projected maintenance costs and high interest debt.

So basically I think the deduction repeal is a seriously bad idea. If they want to put it in effect for new mortgages, then fine, at least people are aware of what they are signing up for, but unless that money comes back to the homeowner some other way, and all else stays equal, then people are going to start buying much smaller homes, maintaining them less, or making some other tradeoff to make up for the loss.

People have factored in this deduction to their long-term financial plans since the mid 80's, and made choices such as investing in the stock market rather than paying their home off early based on that deduction. To change it now is kind of like just saying "okay if you make over $50k per year, we are going to need to subtract a portion of your 401k and give it to the poor, sorry we didn't tell you about this 30 years ago, but sucks to be you".

[cchampagne232000]

^Not sure if its atypical but my wife and I definitely take a tax hit for being married. There is no benefit here. We miss out on both childcare tax credits and student loan deductions because our combined incomes phases us out while our individual incomes would not.