It's a very interesting time indeed for the housing market! These next 6-12 months are going to tell us something very big about the economy, crash or no crash. If anything, however, the Fed has built up an ability to drop rates if things go awry, so there's padding in the cushion if a fall does happen.
An interesting stat: We're almost back to our 2022 quantity of _new_ listings in October [1]. That's substantial because we've hovered around 20% below last year's number for just about every other month this year. One of the big stories of real estate is that sellers don't want to sell because they all locked in killer rates on their current homes, and buyers can't afford to buy with home prices AND mortgage rates what they are.
So, seeing even a slight increase in new listings (or the lack of a seasonal dropoff) is maybe an early indication of an easing of that stalemate. At the same time, time on market is still really low, which means that sellers are tapping into the high levels of demand that still exist. As a result, overall inventory isn't increasing.
All told though, even with those slight indicators, it's still a really tough time to be a buyer, and for the real estate market overall. The best hope that most have is that the dam leaks more, or even breaks on listings, and of course, if prices start to fall meaningfully, folks will want to cash out high, and you might get a proper "crash".
I personally don't really see it, but anything can happen, and we'll know soon enough!
I doubt low interest rates help buyers all that much. If there are 3 properties on the market and 4 buyers, it doesn't matter what interest rates are, the 3 highest-earning buyers are going to get the houses and one will miss out. The amount of money borrowed might go up and down, but there is a physical balance equation that must be satisfied which doesn't care about the financial situation.
In theory, low interest rates will reallocate resources from other sectors of the economy to housing, causing more to be built. In practice I don't know how big a factor this is though - I'm used to there being regulatory restrictions that prevent new housing being built in high-demand areas. But that might be an Australia thing. Regardless it'd lag interest rate changes by a few years because it takes time to organise new construction.
> sellers don't want to sell because they all locked in killer rates on their current homes
What happens is that house prices drop way below what they paid, and ends up equalizing their monthly payments with what someone who buys at the higher-rate-but-lower-price is paying. Except these people are locked into their current arrangement, since they cannot sell at a price that would cover the debt.
Some can ride this out over a number of years, some will end up taking a big hit because, for one reason or another (divorce, child birth, etc.) they have to sell and move. If you're old enough you will have seen this play out before.
I believe that many people are starting to fear that their lower rate mortgage exceeds the value of their house. While, in the long run, they’ll likely be fine but the near term may be 10-15 years of stagnant or declining home values. It’s also looking like the Fed is very intent on keeping rates higher for longer, and/or possibly hiking them again, further increasing the burden on buyers. It’s not looking good for sellers or buyers for at least the next 18 months. I suspect a crash in the housing market will occur but we haven’t had enough time to see foreclosures pick up to start the cascade downward.
Looking at how homes are insanely overpriced (worse here than in the US) that is not a bad thing. The only sane market at this point is +1M houses which is simply rediculous.
You're being overly optimistic because you work in real estate and people are blowing rainbows up your ass. If there's a crash, JPow lowering the rate would prevent the housing value correction from taking effect and nothing good would come of it.
There MUST be a crash. Look at all the people who are sitting in homes worth many times more than they bought it. Significantly higher value than a few years ago. Do you think these people are doing well as a result? No! They can barely afford their insurance!
People want the house values high and their insurance dirt cheap, but it's not possible. The housing values have to drop a good 80% for people to be able to afford their homes long term again and for the insurance companies to stop pulling out.
I want the market to crash and correct as much as the next guy but thinking house prices are going to drop 80% is pure fantasy land. What's more likely to happen:
- Big corporations and billionaires hoover up the properties forcing more and more people to rent in the long term (you will own nothing and be happy)
- Companies are finally forced to raise worker wages which, through a variety of means, they have managed to suppress for decades.
The latter is what should happen but the former is what is more likely to happen, with all the evil that entails.
I can tell you honestly that I am personally hoping for a crash, and that's in part because I work on real estate. Home prices are unsustainably high by such a margin that it's absolutely killed transaction volume. Sure, earnings per transaction will go down, but we desperately need an increase in volume.
Plus, I want housing to be affordable despite my economic incentives.
When I say that I don't see it happening, I just don't quite see all of the indicators just yet. If we start seeing a sharper increase in new listings coming on market, or new construction prices significantly dropping, then I'd certainly change my outlook.
The problem is the Fed is using the only tool they have, the federal funds rate, to control the housing market. Yes, it has the effect of cooling the market but it doesn't solve the actual problem, actually it exacerbates it: there aren't enough housing units where they're needed. That's a supply problem. It's the insufficient supply that's the root cause of housing prices rising. The irony is raising the federal funds rate makes it more expensive to build housing so it tends to cool down construction and thus further constraining supply.
What have we actually accomplished? Locking people out of home ownership. But the Fed only has one tool and they're using it to the best of their ability.
> The problem is the Fed is using the only tool they have, the federal funds rate, to control the housing market.
No, they aren't, they are using it to control aggregate consumer prices and employment, their actual mission.
There are institutions with finer grained powers whose job is to manage the economy on a more fine-grained level (Congress at the federal level, plus states generally more locally), and the problem, insofar as there is one, with the management of the housing market is their (in)action, not the Fed.
I'm guessing we'll see a weird mix of the following with the fed adjusting policy to keep everything together.
-80s inflation (higher interest rates hurting real property value, especially in higher value coastal metros)
-90s stagflation (a significant decline in national real property values masked by some inflation)
-50s postwar economic expansion (economics/warfare in EMEA keeping demand for US energy, agriculture, and products high even with higher inflation hurting asset valuations)
I don't it will crash. Democratic party tends to go socialism...in this case they are bailout-ish them Rep. In this case they will quietly bail large properties and banks to ensure it wont crash...just drag and stagnant like Evergrande and others in China. It seems to work over there. As long as people willing to go thru a wasted decade like Japanese did, it won't crash.
If you Americans buy a house with an 8% mortgage today, can you remortgage in the future if/when the rate drops. Is the buy-out penalty of remortgaging somehow higher than just selling / repurchasing?
Do people get locked into higher mortgage rates for long periods of time that are uncompetitive is my question. Is there a significant downside? Is 30-year fixed normal in the states?
30-year fixed rates don't exist in Australia. You'll get a 5 year fixed rate from ~6% or so, that's about it.
The American mortgage market is very unique from the perspective that it has 10, 15 and 30 year fixed rate debt. There are generally no prepayment penalties and no balloon payment (each payment is the same amount even the last one). You can pay down extra any time you want and it reduces your principal appropriately.
The maturities and payment structures are quite generous compared to many other countries mortgage products. Of course there are shorter maturities and different types of adjustable rate mortgages but these are not popular (fallout from 2008 crisis and the general low interest rate environment).
Edit: there is also 40 year fixed products starting to be offered.
*so long as your house appraised for high enough value to meet the debt to equity ratio. So if mortgage rates go down, but your home price crashes 10%, you’ll likely only be able to refinance by significantly paying down the mortgage balance.
Yes, you can refinance any time with nearly no cost. During covid years, a lot of homeowners refinanced multiple times, each time with a small bonus (under 3K) for refinancing.
What people don't understand though is interest payments are front-loaded. Most of the early payments will be almost all interest, and with frequent refinances most of them are paying interest all time time, extending mortgage by a few years. Most only think of cash flow and the payments appear lower, if you don't think about those extra years.
- Yes, typically we can refinance whenever we like, _but_ it extends the mortgage for a 30 year term, along with additional direct immediate costs (plus human inertia). Unless interest rates were alarmingly high for your last go-round (ehem), you're directly incentivized and indirectly likely to not do so.
- I own properties in Canada (yay Commonwealth!). The notion of a 30-year fixed does not exist. One can get a 25-year amortization, but typically only with a 5-10 year guarantee for a fixed rate.
- As an American, Canadians are insane for buying into this system. Our system is so much more favorable to anyone with good enough credit to be approved for a loan it's literal comedy. Also our standards for approving someone for a loan seem to be lower (that said, I had no credit history in Canada when I started this adventure, so perhaps residents get a better deal).
- As a property investor, I'm happy to control for the cash I sink into my investments in interest versus the returns I get from rental revenue. Combining that with exchange rates and US interest rates versus Canadian, I <3 Canada.
- Fully variable interest mortgages are for suckers (and in that regard, I do have some regrets).
(bias: I <3 Canada regardless -- I'd live in Whistler, BC if circumstances allowed)
How come? Here in UK you just remortgage for the remaining term of your mortgage, if you have 14 years left you just remortgage for 14 years. Is that something that you have to to do in America, or just what most people choose to do?
As an American, Canadians are insane for buying into this system.
As a European, the US mortgage system combined with very generous tax-deductible interest rules, is probably one of the most generous and property owner friendly system around. As a property (and mortgage) owner myself, I'm very envious of it.
That being said, had I been a renter in the US I would probably be very upset about how much tax payer money is going to support home owners.
> As an American, Canadians are insane for buying into this system.
In theory, there’s nothing wrong with some/tons of uncertainty, as long as people don’t play along and don’t overpay while hoping for the best. Buuuuut people are stupid and do just that.
30 year fixed and 15 year fixed are very common. There is also 5 year fixed then variable, but those burnt a lot of people in 2008 so they have a bit of a bad reputation with some. There are generally no early payment penalties. Refinancing is easy and considered worthwhile whenever the rates improve by 0.5 percent or more.
It's easy to refinance at a lower rate. You essentially just pay for and qualify for a new mortgage, the fact that it's a refinance and not a new house you're buying is mostly immaterial.
So you're out a few grand in fees, and if you somehow become less creditworthy it may not work.
When interest rates first spiked it seems like the prevailing wisdom was that they wouldn't stay high for long, so buyers should just swallow the higher monthly payment "for a year or two" then plan to refi.
Yes, you can refinance to a lower rate. It’s easy and people do it all the time. There is some cost overhead so you don’t do it everytime rates drop a tiny bit. But if they drop more than 1% it’s easily worth it.
> Yes, you can refinance to a lower rate. It’s easy and people do it all the time.
It's almost unbelievable how easy it can be.
I got a call from the company that held my mortgage asking why I hadn't responded to the refinance offer they had sent me. I told them I wasn't aware of any such offer. They said they had FedExed an offer to me a couple weeks earlier.
I went and looked on the front porch, and sure enough there was a thick FedEx package there. I hadn't noticed that because I used the back door as my main entry/exit door.
Inside was all the paperwork, prefilled, for a refinance with instructions that said all I had to do to accept was call them and tell them, and then they would send a notary to meet me at home or at my office with a copy of the documents for me to sign.
I naively thought that if mortgage rates are 8% then I ought to be able to invest in a mortgage backed security for an 8% annual return. It turns out that, in the process of creating the mortgage backed securities, various entities take fees and the portion of the mortgage that goes to the investor can be several percent less than the interest rate that the homeowner pays.
Rates just reached 8%. Where do you think all the securitized 8% mortgages come from? People actually have to lock that rate and close. Then securitization can happen, and of course during that process there will be fees taken out. If you want 8%, become a direct lender.
Why buy an MBS when you can buy a mortgage pool from Fannie or Freddie directly? The fees are lower, but you own the full mortgage -- and the full risk of default from borrowers. MBS is better for Alt-A and below credit scores, where you want to protect yourself against losses.
You figured because a homeowner is paying 8% that 100% of that revenue would come to you? No servicing fees. No accounting. No overhead. Zero defaults.
Stop making it out to be nefarious. It's not in the process of "making a mortgage backed security". It's in the process of servicing a mortgage.
So people near me just put their house on the market... in October... with 8% mortgage rates.... I have no idea what they are thinking. I know they aren't putting it on the market because of financial or health or family reasons. I just boggles my mind.
Also about 40-percent of homes in America have no mortgage on them. If you own one of these homes (and never took out a second mortgage) selling it and moving to a house of similar value is not really effected by interest rates.
This is way more the case for older people, but still possible.
Or more likely, rates eventually find their way back down and home prices sky rocket with all the freshly available buying power creating endless bidding wars.
House prices are unlikely to crash ever because there's hundreds of billions in private capital waiting to buy up any cheap housing stock as long term rental properties. As soon as there's any dip the demand goes up which pushes prices back up.
My parental units literally just sold their house to a cash buyer... so yep, exactly this.
Final sale was over a million dollars by the way. Where people come up with that kind of cash is beyond me, but they're coming up with it one way or another.
"For the 2023 tax year, you are not subject to capital gains taxes if your taxable income is $44,625 or less ($89,250 if married and filing jointly). If it’s $44,626–$492,300 as a single filer, or $89,251–$553,850 if married and filing jointly, you would pay 15 percent on the $250,000 profit. Above those top amounts, the capital gains rate would be 20 percent."
If you look at a graph of interest rates that goes back more than 50 years you'll see that the recent period of very low rates is an abhoration. It was weird. It hasn't happened before. 8% is a return to normal (still a little low if anything). Refusing to sell because you believe rates will drop is just making your life more difficult because it almost certainly won't happen.
There's a much bigger aberration in a graph out there though. The M2 money supply. During covid it expanded at an unprecedented rate. It's currently declining. The latter hasn't happened since the Fed started publishing records of it.
Worse still, the last historical precedent for such a decline I could find is the 1929 depression.
If you look at a graph of interest rates there is a centuries long trend of declining interest rates. The current interest rate hike is the "abhoration".
it’s strange to me how little attention this is really getting. you’d think politicians would run on solving the housing affordability crisis when half the country is having their life ruined by it.
It will take years to bring supply online. There is no short term fix to build millions of housing units. Also, solving housing affordability drives down real estate prices. Not great as a politician depending on your constituency.
> Also, solving housing affordability drives down real estate prices
Solving housing affordability drives down average per unit real estate prices, obviously, but its likely to increase both land prices and as-improved prices on existing detached single-family residential units.
Young people don't vote. Young people are the ones effected by this since owners locked in low rates during the pandemic. Politicians don't pander to non voters.
Almost all of the proposals to fix the hosuing affordability crisis would piss off NIMBY homeowners who vote so they're not talked about.
That's really bad.
I refinanced last month to a 3.7% fixed 20-year because the fixed rate here is currently lower than base variable rate (6-month Euribor at 4.1%, which would mean about 5.5% effective rate after the bank markup).
Yesterday my friend bid on a house for $3.7M. There were double digit number of bidders. Lost to another buyer who got it for $3.8M all cash. Not saying it is the same everywhere, but where I live it is the norm. Nothing seems to bring down (or even slow) house prices.
At that price level, it’s a whole different market and set of buyers. If that's in California, the property taxes alone would be like $3400 a month. I doubt people with that kind of money are troubled by variations on interest rates.
Readit News
An interesting stat: We're almost back to our 2022 quantity of _new_ listings in October [1]. That's substantial because we've hovered around 20% below last year's number for just about every other month this year. One of the big stories of real estate is that sellers don't want to sell because they all locked in killer rates on their current homes, and buyers can't afford to buy with home prices AND mortgage rates what they are.
So, seeing even a slight increase in new listings (or the lack of a seasonal dropoff) is maybe an early indication of an easing of that stalemate. At the same time, time on market is still really low, which means that sellers are tapping into the high levels of demand that still exist. As a result, overall inventory isn't increasing.
All told though, even with those slight indicators, it's still a really tough time to be a buyer, and for the real estate market overall. The best hope that most have is that the dam leaks more, or even breaks on listings, and of course, if prices start to fall meaningfully, folks will want to cash out high, and you might get a proper "crash".
I personally don't really see it, but anything can happen, and we'll know soon enough!
[1]: https://www.redfin.com/news/data-center/
(Disclaimer, I work at Redfin)
The fact that I heard this exact same statement when interest rates were at 30-year lows really goes to show how constrained the supply is.
In theory, low interest rates will reallocate resources from other sectors of the economy to housing, causing more to be built. In practice I don't know how big a factor this is though - I'm used to there being regulatory restrictions that prevent new housing being built in high-demand areas. But that might be an Australia thing. Regardless it'd lag interest rate changes by a few years because it takes time to organise new construction.
What happens is that house prices drop way below what they paid, and ends up equalizing their monthly payments with what someone who buys at the higher-rate-but-lower-price is paying. Except these people are locked into their current arrangement, since they cannot sell at a price that would cover the debt.
Some can ride this out over a number of years, some will end up taking a big hit because, for one reason or another (divorce, child birth, etc.) they have to sell and move. If you're old enough you will have seen this play out before.
There MUST be a crash. Look at all the people who are sitting in homes worth many times more than they bought it. Significantly higher value than a few years ago. Do you think these people are doing well as a result? No! They can barely afford their insurance!
People want the house values high and their insurance dirt cheap, but it's not possible. The housing values have to drop a good 80% for people to be able to afford their homes long term again and for the insurance companies to stop pulling out.
- Big corporations and billionaires hoover up the properties forcing more and more people to rent in the long term (you will own nothing and be happy)
- Companies are finally forced to raise worker wages which, through a variety of means, they have managed to suppress for decades.
The latter is what should happen but the former is what is more likely to happen, with all the evil that entails.
Plus, I want housing to be affordable despite my economic incentives.
When I say that I don't see it happening, I just don't quite see all of the indicators just yet. If we start seeing a sharper increase in new listings coming on market, or new construction prices significantly dropping, then I'd certainly change my outlook.
What have we actually accomplished? Locking people out of home ownership. But the Fed only has one tool and they're using it to the best of their ability.
No, they aren't, they are using it to control aggregate consumer prices and employment, their actual mission.
There are institutions with finer grained powers whose job is to manage the economy on a more fine-grained level (Congress at the federal level, plus states generally more locally), and the problem, insofar as there is one, with the management of the housing market is their (in)action, not the Fed.
-80s inflation (higher interest rates hurting real property value, especially in higher value coastal metros)
-90s stagflation (a significant decline in national real property values masked by some inflation)
-50s postwar economic expansion (economics/warfare in EMEA keeping demand for US energy, agriculture, and products high even with higher inflation hurting asset valuations)
If you Americans buy a house with an 8% mortgage today, can you remortgage in the future if/when the rate drops. Is the buy-out penalty of remortgaging somehow higher than just selling / repurchasing?
Do people get locked into higher mortgage rates for long periods of time that are uncompetitive is my question. Is there a significant downside? Is 30-year fixed normal in the states?
30-year fixed rates don't exist in Australia. You'll get a 5 year fixed rate from ~6% or so, that's about it.
The maturities and payment structures are quite generous compared to many other countries mortgage products. Of course there are shorter maturities and different types of adjustable rate mortgages but these are not popular (fallout from 2008 crisis and the general low interest rate environment).
Edit: there is also 40 year fixed products starting to be offered.
You have to pay some money to do so, but it's insignificant compared to the cost of interest if it's over a percent lower or so.
There are usually no pre-payment penalties.
I imagine a lot of people buying houses right now are counting on mortgage rates dropping in the future.
What people don't understand though is interest payments are front-loaded. Most of the early payments will be almost all interest, and with frequent refinances most of them are paying interest all time time, extending mortgage by a few years. Most only think of cash flow and the payments appear lower, if you don't think about those extra years.
https://thepillmethod.com/help-us-celebrate-the-80th-anniver...
This is completely wrong. In the U.S. at least, interest is calculated based on the remaining balance.
It is not "front loaded" at all. It's just that your balance is highest at the start of the term.
A borrower can pay down extra principal at any time if they so choose and interest (absolute, not rate) will go down the next month.
- Yes, typically we can refinance whenever we like, _but_ it extends the mortgage for a 30 year term, along with additional direct immediate costs (plus human inertia). Unless interest rates were alarmingly high for your last go-round (ehem), you're directly incentivized and indirectly likely to not do so.
- I own properties in Canada (yay Commonwealth!). The notion of a 30-year fixed does not exist. One can get a 25-year amortization, but typically only with a 5-10 year guarantee for a fixed rate.
- As an American, Canadians are insane for buying into this system. Our system is so much more favorable to anyone with good enough credit to be approved for a loan it's literal comedy. Also our standards for approving someone for a loan seem to be lower (that said, I had no credit history in Canada when I started this adventure, so perhaps residents get a better deal).
- As a property investor, I'm happy to control for the cash I sink into my investments in interest versus the returns I get from rental revenue. Combining that with exchange rates and US interest rates versus Canadian, I <3 Canada.
- Fully variable interest mortgages are for suckers (and in that regard, I do have some regrets).
(bias: I <3 Canada regardless -- I'd live in Whistler, BC if circumstances allowed)
How come? Here in UK you just remortgage for the remaining term of your mortgage, if you have 14 years left you just remortgage for 14 years. Is that something that you have to to do in America, or just what most people choose to do?
As a European, the US mortgage system combined with very generous tax-deductible interest rules, is probably one of the most generous and property owner friendly system around. As a property (and mortgage) owner myself, I'm very envious of it.
That being said, had I been a renter in the US I would probably be very upset about how much tax payer money is going to support home owners.
In theory, there’s nothing wrong with some/tons of uncertainty, as long as people don’t play along and don’t overpay while hoping for the best. Buuuuut people are stupid and do just that.
So you're out a few grand in fees, and if you somehow become less creditworthy it may not work.
When interest rates first spiked it seems like the prevailing wisdom was that they wouldn't stay high for long, so buyers should just swallow the higher monthly payment "for a year or two" then plan to refi.
I don't hear that advice much anymore!
It's almost unbelievable how easy it can be.
I got a call from the company that held my mortgage asking why I hadn't responded to the refinance offer they had sent me. I told them I wasn't aware of any such offer. They said they had FedExed an offer to me a couple weeks earlier.
I went and looked on the front porch, and sure enough there was a thick FedEx package there. I hadn't noticed that because I used the back door as my main entry/exit door.
Inside was all the paperwork, prefilled, for a refinance with instructions that said all I had to do to accept was call them and tell them, and then they would send a notary to meet me at home or at my office with a copy of the documents for me to sign.
You figured because a homeowner is paying 8% that 100% of that revenue would come to you? No servicing fees. No accounting. No overhead. Zero defaults.
Stop making it out to be nefarious. It's not in the process of "making a mortgage backed security". It's in the process of servicing a mortgage.
Sell now, rent for a while, watch the market crash, jump back in when prices and/or rates fall?
This is way more the case for older people, but still possible.
A 1031 exchange is a good reason to not do that.
https://www.investopedia.com/financial-edge/0110/10-things-t...
Much stagnation
Final sale was over a million dollars by the way. Where people come up with that kind of cash is beyond me, but they're coming up with it one way or another.
"For the 2023 tax year, you are not subject to capital gains taxes if your taxable income is $44,625 or less ($89,250 if married and filing jointly). If it’s $44,626–$492,300 as a single filer, or $89,251–$553,850 if married and filing jointly, you would pay 15 percent on the $250,000 profit. Above those top amounts, the capital gains rate would be 20 percent."
Worse still, the last historical precedent for such a decline I could find is the 1929 depression.
A return to zirp in the short-term most likely won't happen.
But the world simply cannot afford higher rates. The Fed is pausing, in will likely cut next year.
It's the past several years that were the anomaly. There's a legitimate chance we don't see rates like we did in 2021 again for decades.
Solving housing affordability drives down average per unit real estate prices, obviously, but its likely to increase both land prices and as-improved prices on existing detached single-family residential units.
Dead Comment
Almost all of the proposals to fix the hosuing affordability crisis would piss off NIMBY homeowners who vote so they're not talked about.
Soon Ill be working only to pay off interest.
The system we have is amazing and totally does not exploit honestly working ppl.