People are bringing up that past rates were higher but leaving out how much lower past prices were. Have a look at rates over time[1] vs median home price[2].
Yes rates were 16% in 1980 but the median home was $64,000. That's $230,000 in today's dollars.
If you'd prefer to pick a time when rates were more comparable, how about 2001 at 7%. The median home price was $180,000. $301,000 in today's dollars.
Today's median home is selling for $440,000. It's small wonder that people are upset.
Economists need to figure out how people are buying these expensive houses. I work in big tech and probably in 1-2% and I am still priced out of market even outside of CA. How do other people not in big tech do it? My guess is that most people buying houses are double-income families which wasn't the case in 1980s. Note to self: If you want Ameican dream, make sure you marry someone who makes as good income as you :).
I guess it depends on your standards but to say you’re priced out everywhere with no context is a wild exaggeration if you’re in the top 5% of earners.
a $1M house or condo bought at 3% rates would have been under $5k all in a month. I’m fairly certain a single person with mid six figure income could easily afford that. It’s now around $6k which should also be doable.
I think the housing situation is causing a great deal of pain in the country right now. I see manifestations of it all around me. Collectively we seem unable to do anything but continue doing what we've always done -- bid higher.
If your family owned real estate in 1980, then odds are good that generational wealth provides the needed liquidity. As has been discussed elsewhere in this thread, the monthly payments haven't changed much as a function of income - it's only the nominal price and the associated down payment that's changed over time.
Yeah, people price housing in terms of the monthly payment, not the dollar amount so much... higher interest rates mean people can afford less principal. And mortgage rates have doubled in less than a year.
(of course, in practice, once they've bought, people tend to be averse to their "investment" losing 20% or 30%, even if they did lock in a good interest rate they'll be paying for years to make up the fall. this has always been one of the giant gotchas with keeping interest rates so eternally low... also the cost of financing the national debt just zoomed up too.)
> of course, in practice, once they've bought, people tend to be averse to their "investment" losing 20% or 30%, even if they did lock in a good interest rate they'll be paying for years to make up the fall.
This is not entirely irrational. The median length of hone ownership is about 13 years. With stable value and interest rates, this is not a big issue. People can role their equity into their next home and just pay the transaction cost of selling. With rising rates and falling prices, you would also need to realize the loss, and give up on the counteracting benefit of a low rate.
The net effect of this is to make people more reluctant to move than they otherwise would be.
Wouldn't you agree the dollar amount plus the interest rate broadly determine the monthly payment? So we can compare a 2001 home at $300,000 for 7% vs a 2020 home at $440,000. Someone buying a home today will pay more month to month for a median home.
Hasn't square footage also trended up? That's why you use something like the Case-Shiller index to chart housing prices. I know those components go into it and perhaps others.
I have been wanting to ladder up to a bigger house for a few years now.
For a US$1M house, which is the going rate near my area, the jump from 6% to 7% is $5000/month apr interest to $5834/month apr (not including fees, taxes, and insurance).
So to go back to the monthly of $5000 (which is out of my budget), a US$1M house would need to fall to $857,153. That is NOT happening around here.
I have no idea who is buying houses at these prices, if it's not BlackRock-type firms (corrected company name, thank you). I can't fathom how new homeowners are fairing in this market.
> I have no idea who is buying houses at these prices, if it's not Blackwater-type firms.
US housing at 2% 15-year fixed is the biggest handout the world has ever seen. That's why Blackrock-type firms GOBBLED up real estate.
They were the first ones to back out when interest rates started going up.
They're not the ones buying.
I'm guessing the people who are buying are either 1) completely desperate, 2) oblivious, or 3) are willing to bet they'll have a chance to refinance at a much lower rate within a year or two and don't mind the extra carry-cost until then.
You'll see a lot of comments in these kinds of threads by posters who say that they're just buying now and don't care since they're in it for the long term and will just ride it out. Not sure if those people are paying mostly cash or if they're just not factoring in that they may lose their jobs in ~12 months.
This is such a common confusion, someone made a handy diagram for telling apart the firms comprising the cross product of {"Black", "Bridge"} x {"rock", "water", "stone"}.
Correction to the minor correction, Blackrock, the asset manager/ETF provider, does not engage in institutional purchasing of SFH homes. For a little while BlackStone, the Private Equity firm, had an ownership interest in company that did this, but I’m not sure they still do.
1) You lock your mortgage rate for 90 days, so 90 days ago rates were significantly lower. These will be rolling off soon and by early next year the prevailing rates will obviously be much higher.
2) People are paying points up front to buy down the interest rate.
3) Jumbo mortgages are still much cheaper than conforming (I think a full point).
4) Lots of people buying with all-cash or mostly-cash. You're not at all rate-sensitive if you're a cash buyer.
5) A lot of these cash-heavy buyers are powered by generational wealth.
6) The housing shortage in the US is incredibly acute, so much so that the market will continue chugging along even as borrowing conditions worsen considerably. I bought a couple of years ago when the market was red-hot largely because a family-sized property was unrentable - to get anything big enough for my needs there was no choice but to buy. I imagine others are in the same position now.
People with adjustable rates haven't been adjusted yet. People that locked in rates at the lows are just fine. Only some small percent of people with mortgages would be affected right now, and optimistic people that think they can pay the rates have a few months before they realize their budget didn't fit. The cash buyers have slowed down. Just not a flood of foreclosures yet.
I don't expect prices to drop much because they are based on the assumption that interest rates will drop and new homeowners can refinance later. We see that with the inverted Treasury yield curve where long term interest rates are projected to be lower than today's rates. Also, with current homeowners locked into their low rates, there will be a shortage of houses on the market (you can't take your low mortgage rate to a new house). So the people buying now will be buyers that absolutely need to and/or buyers with lots of cash that expect to refinance later. The only people selling now are people that absolutely need to.
The economics of housing are weird. Someone who bought the 1MM house at 2.5% still has a payment based on 2.5%. This individual's house might be nominally underwater, but they are still comfortably making payments. If they were to move, then they would lose both the downpayment and their monthly payment would increase. So the best bet for them is to stay put. However this might mean that they put the house up for sale, and let it stay for sale for the next 2 years.
It gets even weirder if that person loses their ability to continue to pay their relatively comfortable mortgage and they have to put their house on the market. In this tremulous economy being underwater is still a very uncomfortable place to be, unless one has plenty of cash reserves — which may be unwise to spend on an overvalued asset.
It's likely that most people willing to pay $5,000 a month to get a million dollar house are at least able to pay an additional $800 a month. They may not like it, but people in million dollar houses can usually find a grand a month extra if they really need to. Buyers already at the absolute upper edge of their possible budget are a non-zero proportion of total buyers, but not a large enough proportion to force prices to drop, at least not yet, at least not at that already lofty price range. Price elasticity of demand is likely greater at lower prices, where the buyers don't have much in the way of reserves and excess income.
Where do you live? I live in Santa Barbara, a notoriously expensive area, and our housing prices are dropping / housing on market for way longer. Not that it's a fantastic barometer but the monthly email from Zillow for our zip-code usually forecasts some outrageous 1yr growth figure (ex. forecasted increase of 15%) and yesterday the monthly email predicts a 1yr housing price decline of ~2%. Things move slowly in large assets. Hell, the dot com bubble and 08' housing crash both took over 2 years to unwind.
> I have no idea who is buying houses at these prices
Only the most richest parts of the US have homes that start at $1m. And only a fraction of the people rich enough to live there can afford to purchase.
Can't you buy now at high APR and then refinance later? I would think these large rates would not last more than 2-3 years. You will take some hit for short period but also might get better deal as there are not a lot of buyers. After rates come down, you might easily end up paying 5-10% over asking price. Is there any issues in refinancing later?
I tend to agree with your logic but a lot of people think they know what rates will be like and what a home will be worth and any number of things in 2 to 3 years. I'd say that they everyone is always gonna pay more then they want and only question is if it's going to the seller or the bank.
My dad gave me these rules for home buying:
* can I make the monthly payment for as long as I own the home?
* don't buy unless you expect not to sell for 5 years
If there is a chance you will want to move in the next 10 years, then the numbers are even worse! Not only are you paying more every month with higher rates, but the amortization schedule is not in your favor. For your hypothetical $1M house and a 6->7% rate change you build about 20% less equity each year also.
90th percentile US individual income is 130k. Median house is around 440. You can afford a 440k house on 130k income, even if you have a small amount of other debt.
This is the part where scraping the bottom of the barrel must become a lifestyle in order to scrape together the ginormous down payment toward a home mortgage.
Once done, it gets easier.
Of course, that is easier said than done, but it took me 10 years to save up for that first-time 20% down payment.
I too was a 90% percentile. And it also … afterward … took several homes upward before I can tap out for a bigger down payment for a 3,200 sq. ft. in “cushy” California while attaining just 25% of take-home pay toward mortgage+insurance.
First home was a killer 48% of take-home pay toward house payment.
I can’t comment on Mortgage News Daily but the FHLMC, affectionately called Freddie Mac, is a pretty good source. They have a decent graph on their homepage. 30yr fixed rates are currently at 6.29%.
Zillow is saying 6.54% (actually down 6 basis points, though still up 39bps from last week). Zillow does break things down into categories more with Jumbo loans having a lower than average rate at 6.36% while FHA loans are at 7.05%.
It's hard to estimate what the average loan rate is (or really anything in the real world where you don't have complete data). What's the average price of a gallon of milk in your city? I mean, it sounds like a simple question, but quickly becomes complicated. There are 5 supermarkets in my city. Do I just look at the price at each of them and take the mean? Do I weight the prices based on which supermarkets are more popular? Do I only take the lowest price of a gallon of milk at the supermarket or do I average in the prices of brand-name and specialty milk? Should I also include milk prices from bodegas in my average? Should I include the milk price from Instacart where they're adding their own markup?
With the average mortgage rates, is this the average rate for mortgages with zero points or the average rate that buyers are getting with some deciding to pay points? For those who don't know what points are: you sometimes have the option to pay an upfront fee for a lower rate. Each point is 1% of the loan value. If your loan is for $1M and you pay 2 points, you're paying $20,000 upfront to get a lower rate.
For example, when I look at mortgage rates on BofA's website (https://www.bankofamerica.com/mortgage/mortgage-rates/) for a $500k home with 20% down ($400k loan), they pop up 6.625% (6.787% APR) with 0.865 points which would be an upfront cost of $3,460. Their calculator doesn't say how much the rate would be worse without points, but maybe they do if you're actually applying for a loan (or maybe they don't give you a choice).
Beyond points, there's so much difficulty in knowing what average rates are. Do you look at each lender and just average the rates or do you weigh rates from BofA higher because they're writing a lot more loans than smaller lenders? Do you even really know?
Also, since you posted (and since I started writing this comment), Mortgage News Daily has adjusted their estimate down to 6.82%.
I think one thing we can certainly say is that mortgage rates have been pushed quite high and the average is likely in the 6.5%-7% range at the moment. Yes, that is a reasonably broad range, but it's certainly a contrast from the sub-4% and even sub-3% rates we had seen.
Jerome Powell has indicated he wants to see the housing market correct.
Unfortunately, real estate agents and sellers are slow to react. You don't just immediately drop your price to match the payment.
In Bay Area, houses effectively dropped from 2 => 1.85. They should drop 150K; but with the latest interest rate hike of 5.2->6.2 you'll see 50K price drops as buyers/sellers adjust. In reality, prices are still dropping as we bounce off the unreasonably low interest rate of 2-3%.
The interest rate will act as a gravity on prices, but housing prices won't immediately "snap" to the new normal. You'll see house prices begin to crash in a few months as a lagging effect.
On top of this, you'll see new home builds get put on hold, because the builders specifically won't be able to find people to buy a new house for a high price; their margins will be squeezed. With existing homeowners, they can at least hunker down in their well financed 30 year fixed rates.
Pretty crazy correction if you run the math on mortgage payments. I bought a place 1 year ago with a 2.75% rate. Say you're somewhere outside a major metro buying a $500k house. With a $100k down payment, a 2.75% rate equates to $1,633/month. A 6.5% rate equates to $2,500/month.
With $600/month in taxes/insurance, the "don't spend more than 40% of your income on housing" rule means the necessary income to comfortably afford that property increases from $65k to $93k. That'll create some waves in the market.
I bought a house in 2009 @ 3.75% for 480k fixer-upper 1922 craftsman home in East Los Angeles area. My monthly payment was about $3200 because I could only afford ~4% down so we had to get PMI. At the time I made $110,000 and wife made $60,000. We put in about 50k into the house using my dad who is a general contractor (basically only paid for materials).
In Dec of 2021, we refinanced for 2.75% and our fixer-upper was valued at 750k which meant we could get rid of PMI and now our monthly payment is $2500 (including taxes). It's a massive drop for us now that we have a baby.
Literally none of this is possible right now. It feels like we've won the lottery. On top of that, we had a ton of help making this place a home because of my dad. For most families in the major metro areas, this is just totally out of reach now.
The market does not work that way. You're implying that the cause and effect are backwards. It is local wages that set the price! The prices, while they do adjust slowly due to high friction in the housing market, are not exogenous.
The <100% pay differential between California and somewhere in the Midwest does not explain the >500% difference in housing prices. You are leaving out numerous factors including demand, supply, and local regulations.
That was true before the pandemic. Part of the reason demand surged in "second cities" around the country was because remote work allowed higher paid workers to migrate somewhere cheaper and not only take advantage of low rates but lower housing prices.
It remains to be seen if now that the wave of remote workers is (probably) largely over now that employers are more likely to offer hybrid than fully remote work if these housing markets more severely correct compared to coastal cities (SF, LA, NYC) that have always been expensive.
Like most rules-of-thumb, they're 'fuzzy' and it's not about the total home value but the actual monthly cost of ownership.
Pick a state though, say Missouri. A married couple earning $65k will bring home $50k after tax. In the first example, with a mortgage + tax + insurance house cost of $2,200/month, their home costs will be about $25k/year leaving them about $25k for other spending. Not lavish, but likely doable.
The real comparison though, is what they could rent an apartment for as the alternative to buying that house. In most places, they'd be paying nearly that same total in rent so it's basically a wash (assuming they can come up with the down payment).
people who can buy a house all cash will be the real winners here. if and when rates go down, they can cash out refinance, and if they don't they will benefit from the downward pressure high rates create on prices.
My wife and I have been waiting for this for a few years now. We live in a college town in the South and the prices here are fairly delusional. I imagine this will allow for some market correction and we’ll be able to get into a bigger home.
I sort of doubt it will correct very much. I assume a fair percentage of the homes are rentals. Landlords won't care to lower prices. They have a client based that's geographically constrained to the college and able to get easy money from the government.
I'm also from a small southern college town and the housing market has been absolutely absurd for the past decade or so. It's always seemed like football fans looking for vacation homes and retirees were buoying it.
In California property tax is also fixed based off purchase price (thanks Prop 13, love it or hate it) so one could pay ~1% on 1M at 7% vs 1.5M at 3% and then simply refinance the 7% later.
This assumes you'd anticipate rate cuts in the near-ish future. This property tax arbitration could easily go wrong.
You cannot do a cash out refinance if you don't already have a mortgage on the property. You can do a home equity loan or line of credit but those come at higher interest rates than a refinance.
But yes the real winners are almost always those who have ample resources.
Why should we look at a period 20 years in the past for predictions about the future? 20 years ago Facebook didn't exist nor did the iPhone. For the last 10 years rates have been below 6%. It seems a strech to call a decade "recent."
Readit News
Yes rates were 16% in 1980 but the median home was $64,000. That's $230,000 in today's dollars.
If you'd prefer to pick a time when rates were more comparable, how about 2001 at 7%. The median home price was $180,000. $301,000 in today's dollars.
Today's median home is selling for $440,000. It's small wonder that people are upset.
[1]: https://fred.stlouisfed.org/series/MORTGAGE30US [2]: https://fred.stlouisfed.org/series/MSPUS
a $1M house or condo bought at 3% rates would have been under $5k all in a month. I’m fairly certain a single person with mid six figure income could easily afford that. It’s now around $6k which should also be doable.
(of course, in practice, once they've bought, people tend to be averse to their "investment" losing 20% or 30%, even if they did lock in a good interest rate they'll be paying for years to make up the fall. this has always been one of the giant gotchas with keeping interest rates so eternally low... also the cost of financing the national debt just zoomed up too.)
This is not entirely irrational. The median length of hone ownership is about 13 years. With stable value and interest rates, this is not a big issue. People can role their equity into their next home and just pay the transaction cost of selling. With rising rates and falling prices, you would also need to realize the loss, and give up on the counteracting benefit of a low rate.
The net effect of this is to make people more reluctant to move than they otherwise would be.
Not for long.
Running the examples from before:
1980: 63 (actually for 1987, earliest in the chart)
2001: 110
2022: 305
I'm no economist so I won't try to interpret these numbers, but if higher is worse then it supports my original point.
[1]: https://fred.stlouisfed.org/series/CSUSHPISA
For a US$1M house, which is the going rate near my area, the jump from 6% to 7% is $5000/month apr interest to $5834/month apr (not including fees, taxes, and insurance).
So to go back to the monthly of $5000 (which is out of my budget), a US$1M house would need to fall to $857,153. That is NOT happening around here.
I have no idea who is buying houses at these prices, if it's not BlackRock-type firms (corrected company name, thank you). I can't fathom how new homeowners are fairing in this market.
US housing at 2% 15-year fixed is the biggest handout the world has ever seen. That's why Blackrock-type firms GOBBLED up real estate.
They were the first ones to back out when interest rates started going up.
They're not the ones buying.
I'm guessing the people who are buying are either 1) completely desperate, 2) oblivious, or 3) are willing to bet they'll have a chance to refinance at a much lower rate within a year or two and don't mind the extra carry-cost until then.
Important technicality - Blackrock and other large institutions don't buy SFH directly. They do it indirectly through other funds, like REITs.
https://i.redd.it/x0jeiofl7j471.jpg
https://www.blackrock.com/us/individual/insights/buying-hous...
Edited to change “ownership” to “purchasing”
1) You lock your mortgage rate for 90 days, so 90 days ago rates were significantly lower. These will be rolling off soon and by early next year the prevailing rates will obviously be much higher.
2) People are paying points up front to buy down the interest rate.
3) Jumbo mortgages are still much cheaper than conforming (I think a full point).
4) Lots of people buying with all-cash or mostly-cash. You're not at all rate-sensitive if you're a cash buyer.
5) A lot of these cash-heavy buyers are powered by generational wealth.
6) The housing shortage in the US is incredibly acute, so much so that the market will continue chugging along even as borrowing conditions worsen considerably. I bought a couple of years ago when the market was red-hot largely because a family-sized property was unrentable - to get anything big enough for my needs there was no choice but to buy. I imagine others are in the same position now.
People with adjustable rates haven't been adjusted yet. People that locked in rates at the lows are just fine. Only some small percent of people with mortgages would be affected right now, and optimistic people that think they can pay the rates have a few months before they realize their budget didn't fit. The cash buyers have slowed down. Just not a flood of foreclosures yet.
The number of people in economic distress being forced to sell their houses will be rising over the next 12 months.
Only the most richest parts of the US have homes that start at $1m. And only a fraction of the people rich enough to live there can afford to purchase.
My dad gave me these rules for home buying:
* can I make the monthly payment for as long as I own the home?
* don't buy unless you expect not to sell for 5 years
* put down at least 10%
* don't get an ARM
Deleted Comment
Once done, it gets easier.
Of course, that is easier said than done, but it took me 10 years to save up for that first-time 20% down payment.
I too was a 90% percentile. And it also … afterward … took several homes upward before I can tap out for a bigger down payment for a 3,200 sq. ft. in “cushy” California while attaining just 25% of take-home pay toward mortgage+insurance.
First home was a killer 48% of take-home pay toward house payment.
Deleted Comment
-- https://www.mortgagenewsdaily.com/mortgage-rates
https://www.freddiemac.com/pmms
https://www.bankrate.com/mortgages/mortgage-rates/
Zillow is saying 6.54% (actually down 6 basis points, though still up 39bps from last week). Zillow does break things down into categories more with Jumbo loans having a lower than average rate at 6.36% while FHA loans are at 7.05%.
https://www.zillow.com/mortgage-rates/
It's hard to estimate what the average loan rate is (or really anything in the real world where you don't have complete data). What's the average price of a gallon of milk in your city? I mean, it sounds like a simple question, but quickly becomes complicated. There are 5 supermarkets in my city. Do I just look at the price at each of them and take the mean? Do I weight the prices based on which supermarkets are more popular? Do I only take the lowest price of a gallon of milk at the supermarket or do I average in the prices of brand-name and specialty milk? Should I also include milk prices from bodegas in my average? Should I include the milk price from Instacart where they're adding their own markup?
With the average mortgage rates, is this the average rate for mortgages with zero points or the average rate that buyers are getting with some deciding to pay points? For those who don't know what points are: you sometimes have the option to pay an upfront fee for a lower rate. Each point is 1% of the loan value. If your loan is for $1M and you pay 2 points, you're paying $20,000 upfront to get a lower rate.
For example, when I look at mortgage rates on BofA's website (https://www.bankofamerica.com/mortgage/mortgage-rates/) for a $500k home with 20% down ($400k loan), they pop up 6.625% (6.787% APR) with 0.865 points which would be an upfront cost of $3,460. Their calculator doesn't say how much the rate would be worse without points, but maybe they do if you're actually applying for a loan (or maybe they don't give you a choice).
Beyond points, there's so much difficulty in knowing what average rates are. Do you look at each lender and just average the rates or do you weigh rates from BofA higher because they're writing a lot more loans than smaller lenders? Do you even really know?
Also, since you posted (and since I started writing this comment), Mortgage News Daily has adjusted their estimate down to 6.82%.
I think one thing we can certainly say is that mortgage rates have been pushed quite high and the average is likely in the 6.5%-7% range at the moment. Yes, that is a reasonably broad range, but it's certainly a contrast from the sub-4% and even sub-3% rates we had seen.
https://github.com/whyboris/mortgage-and-investments
Hope it's useful to at least someone :)
I'm not sure I could have done the same using Excel, and software doesn't seem to exist to make these calculations easy to understand.
That's to say: Thanks! We need this.
Jerome Powell has indicated he wants to see the housing market correct. Unfortunately, real estate agents and sellers are slow to react. You don't just immediately drop your price to match the payment.
In Bay Area, houses effectively dropped from 2 => 1.85. They should drop 150K; but with the latest interest rate hike of 5.2->6.2 you'll see 50K price drops as buyers/sellers adjust. In reality, prices are still dropping as we bounce off the unreasonably low interest rate of 2-3%.
The interest rate will act as a gravity on prices, but housing prices won't immediately "snap" to the new normal. You'll see house prices begin to crash in a few months as a lagging effect.
On top of this, you'll see new home builds get put on hold, because the builders specifically won't be able to find people to buy a new house for a high price; their margins will be squeezed. With existing homeowners, they can at least hunker down in their well financed 30 year fixed rates.
With $600/month in taxes/insurance, the "don't spend more than 40% of your income on housing" rule means the necessary income to comfortably afford that property increases from $65k to $93k. That'll create some waves in the market.
I bought a house in 2009 @ 3.75% for 480k fixer-upper 1922 craftsman home in East Los Angeles area. My monthly payment was about $3200 because I could only afford ~4% down so we had to get PMI. At the time I made $110,000 and wife made $60,000. We put in about 50k into the house using my dad who is a general contractor (basically only paid for materials).
In Dec of 2021, we refinanced for 2.75% and our fixer-upper was valued at 750k which meant we could get rid of PMI and now our monthly payment is $2500 (including taxes). It's a massive drop for us now that we have a baby.
Literally none of this is possible right now. It feels like we've won the lottery. On top of that, we had a ton of help making this place a home because of my dad. For most families in the major metro areas, this is just totally out of reach now.
It remains to be seen if now that the wave of remote workers is (probably) largely over now that employers are more likely to offer hybrid than fully remote work if these housing markets more severely correct compared to coastal cities (SF, LA, NYC) that have always been expensive.
Pick a state though, say Missouri. A married couple earning $65k will bring home $50k after tax. In the first example, with a mortgage + tax + insurance house cost of $2,200/month, their home costs will be about $25k/year leaving them about $25k for other spending. Not lavish, but likely doable.
The real comparison though, is what they could rent an apartment for as the alternative to buying that house. In most places, they'd be paying nearly that same total in rent so it's basically a wash (assuming they can come up with the down payment).
it's rich to be rich.
This assumes you'd anticipate rate cuts in the near-ish future. This property tax arbitration could easily go wrong.
In that scenario, the real winners will be people who waited to buy.
I guess cash-buyers will do better than financed buyers - but both of them are going to do terribly if prices decline substantially.
But yes the real winners are almost always those who have ample resources.