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What is the difference between mortgaging an additional $60K over 30 years at a 5% interest rate vs. mortgaging an additional $30K at a 9 or 10% interest rate? Oh, wait...I'll tell you.
You take out a $300K mortgage at 5% your monthly payment should be around $1610/month. You take out a $270K mortgage (cuz you waitin for the price of the house to "be just right" ) at 9% your monthly payment should be around $2172/month. You do the math.
Rofl, first off, anyone who waited a year also got a low interest rate, so you already failed. Second off, if mortgage rates go higher, it's only going to offset the price more. Homes won't sell unless affordability improves, mining the combination of principle and interest in the form of a monthly payment can only go DOWN. You can play with your little mortgage calculator all you want. Those that wait to buy will be paying less than those who do, regardless of where the interest rate is. Did you ever stop to think why the government is trying to artificially suppress interest rates? It's becase they know that if they go any higher, housing will fall further through the floor.
I believe JerseyG was referring to rising inflation forcing the Fed to raise interest rates. This in turn will cause US 10 and 30 year bond rates to rise thereby raising mortgage rates. Economists are expecting interest rates of 8-10% in the future recovery.
I believe JerseyG was referring to rising inflation forcing the Fed to raise interest rates. This in turn will cause US 10 and 30 year bond rates to rise thereby raising mortgage rates. Economists are expecting interest rates of 8-10% in the future recovery.
I know exactly what JerseyG was referring to. What JerseyG doesn't seem to realize is that affordability will have to improve in order for the inventory on the market to clear. That means housing prices will go down regardless of what happens to interest rates. People who talk about buying now because interest rates will rise always like to assume that the price decline remains the same when they try to make their argument. That's called...setting up a straw man. If interest rates rise, price declines will fall even further in the near future. If people can't afford to pay the principle/interest with rates at 4.5%, they have no shot of paying the same principal at 8%. So prices will fall, end of story.
What is the difference between mortgaging an additional $60K over 30 years at a 5% interest rate vs. mortgaging an additional $30K at a 9 or 10% interest rate? Oh, wait...I'll tell you.
You take out a $300K mortgage at 5% your monthly payment should be around $1610/month. You take out a $270K mortgage (cuz you waitin for the price of the house to "be just right" ) at 9% your monthly payment should be around $2172/month. You do the math.
Historically, the opposite of what you're arguing is true -- housing is more affordable when rates are higher. Higher rates tend to tilt the balance in favor of people who rely less heavily on excessive borrowing (e.g. someone who prepays, and saves a 20% down payment is on much better footing in a high rate environment than someone who relies on an interest-only loan)
Having rates at historical norms brings affordability back to earth by getting rid of this noise from the system (e.g. people who have no capacity to pay bidding up prices)
To put this another way, that 370k house that someone took out a 300k loan for, will fall to whatever it takes for that monthly payment to drop to 1610 a month. For the person who saves a 20% (74k) down payment, it will probably be a little less.
I know exactly what JerseyG was referring to. What JerseyG doesn't seem to realize is that affordability will have to improve in order for the inventory on the market to clear. That means housing prices will go down regardless of what happens to interest rates. People who talk about buying now because interest rates will rise always like to assume that the price decline remains the same when they try to make their argument. That's called...setting up a straw man. If interest rates rise, price declines will fall even further in the near future. If people can't afford to pay the principle/interest with rates at 4.5%, they have no shot of paying the same principal at 8%. So prices will fall, end of story.
I saw a hilarious chart on some realtors website that showed what the monthly payment on a 350k house was in 1995, 2000, and today.
Obviously, the website neglects to mention that these three houses -- the one that cost 350k in 1995, the one that cost 350k in 2000 and the one that cost 350k in 2008 -- are not the same house !
Waiting to Buy a Home May Cost You - Blog - Gina Chirico (http://www.prudentialnewjersey.com/gina.chirico/Blog/Waiting_to_Buy_a_Home_May_Cost_You - broken link)
I saw a hilarious chart on some realtors website that showed what the monthly payment on a 350k house was in 1995, 2000, and today.
Obviously, the website neglects to mention that these three houses -- the one that cost 350k in 1995, the one that cost 350k in 2000 and the one that cost 350k in 2008 -- are not the same house !
Waiting to Buy a Home May Cost You - Blog - Gina Chirico (http://www.prudentialnewjersey.com/gina.chirico/Blog/Waiting_to_Buy_a_Home_May_Cost_You - broken link)
But you can convert them, let's use NYXR Case Shiller numbers (it's a NJ realtor), though replace with any, for times in question:
Feb '09 - 178.16
May '04 - 170.52
Dec '99 - 99.28
Jan '95 - 78.28
So if we take the $350,000 price in Feb 09 (her numbers are 100% financing on a 30-year fixed, which simply doesn't exist but let's go with that) then the equivalent price for those months is:
Feb '09 - $350,000
May '04 - $334,991
Dec '99 - $195,038
Jan '95 - $153,783
Which gives us monthly payments (on that realtor's mythical loan terms) of:
Feb '09 - $1906.78
May '04 - $2066.96
Dec '99 - $1418.90
Jan '95 - $1254.01
Surprise, surprise it's cheapest when the interest rate is highest. Well that's really due to ignoring inflation. so let's factor that in.
Inflation adjusted payments (I used year to 2009 - since the inflation calculator I stumbled across is yearly not monthly):
Feb '09 - $1906.78
May '04 - $2,333.29
Dec '99 - $1,816.12
Jan '95 - $1754.63
Order doesn't change. Other than in the middle of the largest real estate bubble ever seen the higher the interest rate the lower than monthly payment it would seem.
Order doesn't change. Other than in the middle of the largest real estate bubble ever seen the higher the interest rate the lower than monthly payment it would seem.
yep. btw, last time I did an affordability vs rate analysis, there is a local negative correlation (it seems that higher rates == less affordable -- for small changes in rates) but there was a huge drop in affordability numbers when rates dropped.
yep. btw, last time I did an affordability vs rate analysis, there is a local negative correlation (it seems that higher rates == less affordable -- for small changes in rates) but there was a huge drop in affordability numbers when rates dropped.
It should be noted those numbers were 100% financing. If you actually have a 20% deposit then higher rates are even better, since the lower prices mean your deposit is more than 20% so you have even less to borrow that the price reduction would indicate.
The $350,000 number in that idiotic realtor table was 100% financing, suppose it was 20% down. Too leave their number the same make it a $437,500 house with $87,500 down.
So the 1995 equivalent would be $192,229, which we adjust for inflation to $268,969. So we only need to borrow $181,469. Which at 9.15% gives us a $1480/month payment, compared with the $1907/month payment by buying the higher priced house at 5.13%.
But yes you would expect some lag - if interest rates rise a bit you would expect affordability to drop and vice versa. And then it should return to the norm - the current crop of buyers will have locked in the lower rate on their approved loans to give us some lag, plus the usual lag in price changes.
All that is out the window at the moment, since affordability got so out of whack that if doesn't matter what interest rates are prices are going down.
I would expect (without actually checking) that the best time to buy a house is as soon as interest rates drop, before prices have a chance to rise to match. And the worst time would be as soon as interest rates rise, before prices have a chance to drop to match. In normal conditions - right now interests rates are almost irrelevent - they could be 0% and prices would still be too high...
[ I fixed a typo had pre-inflation number for loan total, but not for the monthly so it didn't make a difference to the bottom line anyway ]
I know exactly what JerseyG was referring to. What JerseyG doesn't seem to realize is that affordability will have to improve in order for the inventory on the market to clear. That means housing prices will go down regardless of what happens to interest rates. People who talk about buying now because interest rates will rise always like to assume that the price decline remains the same when they try to make their argument. That's called...setting up a straw man. If interest rates rise, price declines will fall even further in the near future. If people can't afford to pay the principle/interest with rates at 4.5%, they have no shot of paying the same principal at 8%. So prices will fall, end of story.
I agree you with. However, it take a little time, say 6 months to 1 yr, for the higher interest rate to put its heavy weight on house price. Those who buy during that 6mo/1yr transition period will be in bad shape.
it take a little time, say 6 months to 1 yr, for the higher interest rate to put its heavy weight on house price.
you will never convince the super-bears of this fact...
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