Would higher mortgage interest rates allow more people to qualify for loans and help absorb the foreclosures?
Irvine Home Address … 4471 WYNGATE Cir Irvine, CA 92604
Resale Home Price …… $788,000
I was listening to the radio
I heard a song reminded me of long ago
Back then I thought that things were never gonna change
It used to be that I never had to feel the pain
I know that things will never be the same now
I wanna go back
And do it all over again
But I can't go back I know
Eddie Money — I Wanna Go Back
Right now, I don't want to see mortgage interest rates go higher. I plan to borrow heavily to buy as many cashflow-positive properties as I can get, and as long as interest rates are low, I hope to take advantage of them. However, the best thing for the housing market is not sustained low mortgage rates because those rates only benefit the few who qualify. We need lower prices, higher interest rates, and more people to qualify for mortgages.
Non-Prime Mortgages: Time to Lend Again?
By Jeff Corbett Oct 26th 2010
often hear people wonder aloud why banks won't loosen underwriting standards on home mortgages. I'm beginning to wonder the same thing. That's because I think it is time for lenders to start issuing mortgages to non-prime borrowers again, though not on the same shaky terms that triggered the housing crisis of 2008, of course.
I wondered why we don't relax lending standards for investors in Should Government Mortgage Subsidies Be Offered to Cashflow Investors? There are many good borrowers being denied credit right now because lenders are so afraid of certain loan products that even the small number of borrowers who can properly utilize certain loan products are being denied. However, the main reason banks won't loosen underwriting standards is because they really don't know which ones they can loosen and still get their loans repaid.
First, the reason why lenders are hesitant to relax loan requirements: The heart of the matter is: Mortgage rates and their profitability margins are so low, it just isn't worth the risk to lend to anyone who is anything but a AAA+ credit-worthy consumer.
Furthermore, it takes an implicit guarantee from Fannie Mae or Freddie Mac, on top of that sterling rating, to make mortgage lending even semi-palatable for a bank or investor.
The real problem with mortgage lending is super low interest rates made possible by government loan guarantees. It started when the Federal Reserve began buying down interest rates through purchase of GSE insured loans. When the program terminated in early 2009, there was great concern that interest rates would rise. After the Fed quit purchasing GSE MBS, purchase applications and home sales plummeted. As purchase applications fell, so did interest rates as the supply of money available for home mortgages exceeded demand.
Mortgage interest rates are at historic lows for those with good credit who are borrowing less than the conforming limit; however, for those outside of these parameters, either the interest rate is significantly higher, or credit is simply not available. The market would ordinarily react by pushing interest rates higher. If the yield does not match the risk — and the risk is much higher for non-insured loans — the yield must go up to attract capital. Higher yields mean higher interest rates.
For better or worse, the housing market is fueled by Wall Street's appetite for mortgage-backed securities. As mortgage rates continue to set historical lows, so do their profitability margins — as well as the profitability margins of the securities they reside in (that investors typically buy, sell and otherwise trade on).
Being that investors have no appetite for high-risk, low-yield investments, there's simply no money in mortgages right now. As a result there is very limited credit available in the marketplace, especially to non-prime borrowers.
This is not a problem limited to subprime borrowers. Anyone looking for a jumbo loan can expect to pay a much higher interest rate and be subject to very high qualification standards. Even then, these loans don't make much sense given the likelihood of declines at the high end.
This is in stark contrast to what was a high-risk, high-yield, credit free-for-all environment that was in place from 2002 until the housing market crash in late 2008.
So, it's been two years since the crash and the prevailing thought has become that: Interest rates must be kept low to keep consumers "incentivized" and "transacting." Unsustainable consumer incentives have run their course. A tax credit has been tried and proved expensively ineffective while interest rates have been kept artificially low for too long. These are strategies that treat the illness but do little toward finding a cure.
Our current policy of market manipulation to sustain inflated prices is the problem. Fix the Housing Market: Let Home Prices Fall. 
Current mortgage rates for the most qualified consumers and properties are hovering around 3.99 percent for a 30-year-fixed and as low as 2.875 percent for the 5-year-fixed variety. Yet while mortgage rates are jaw-droppingly low, the housing market is no closer to snapping out of the protracted downward spiral it's been in for a couple years now. You can drop rates to .399 percent, but if only a tiny consumer pool qualifies for such, there isn't enough benefit to impact the market in a meaningful way.
Money needs to be thoughtfully brought back to non-agency mortgage-backed securities, which would require higher interest rates and the yields they offer investors. Huh? Yes, increasing interest rates and the yields that accompany them are required if we want to see credit flow back into the non-agency — that includes portfolio, jumbo, Alt-A and subprime loans — mortgage-bond markets. We need more liquidity and credit in the non-prime, non-agency mortgage pools if we want to pull out of the housing quagmire, because there's a huge pool of non-prime borrowers who can afford mortgages.
If prices were allowed to fall, and if mortgage interest rates were allowed to find a natural equilibrium, credit would be made available to more people. The problem right now is not interest rates, it is the number of qualified borrowers who can take advantage of them. The market manipulation has made mortgage debt inexpensive and affordable, but only for a small number of people.
It isn't a matter of simply lowering qualification standards and allowing more people to borrow at low interest rates. We must find a natural market where risk is tied to yield, then we will have credit being made available to a larger number of people albeit at much higher rates.
Something that gets lost when discussing borrower defaults and foreclosures is that people who were prime borrowers are defaulting just as readily as non-prime borrowers. At the same time, there is an abundance of non-prime borrowers making their mortgage payments in a timely fashion.
I've had the opportunity to personally review residential mortgage-backed securities and can attest that FICO scores and loan-to-value ratios are not the leading factors behind mortgage defaults. That's why I think it's time to bring back the non-prime borrower into the mortgage market.
So, how high do rates need to be? Likely 300 to 400 basis points (3 percent to 4 percent) higher than they are today.
Therein lies the reason why this doesn't happen. If interest rates were 300 to 400 basis points higher, affordability would decline about 50%, and prices would crumble. A natural rate of interest after a catastrophe like the housing bubble would be much higher than it is today. The housing bubble was caused by a mispricing of risk, and we are still doing it. Before it was questionable credit default swaps that allowed the market to misprice risk, now it is the backing of the US government that is doing the same. AIG went under because of the credit default swaps they issued. The US taxpayer will likely absorb huge losses because we are currently underwriting the entire housing market.
Interest rates of 6 percent to 7 percent on a fixed-rate mortgage are still cheap money, and there is a very large pool of consumers who could afford mortgages with rates in this range but who qualify for nothing under today's agency-backed underwriting guidelines. Get back to mitigating risk with price, but in a more responsible way.
Non-prime borrowers will call for different underwriting standards. I'm not talking about going back to the days of no income, no asset, no job requirements; I suggest going back to more logical and flexible underwriting criteria. A heavy emphasis must still be kept on the substantive components of mortgage qualification: Credit, income and assets.
These suggestions will ultimately come to pass, but it will be years before we have anything resembling a natural market for interest rates or home prices. For now, propping up prices with artificial interest rates created by government backing is the official policy, and as long as our banks teeter on the edge of insolvency, this policy will continue.
Despite the robo-signing paperwork mess, there will continue to be abundance of foreclosed inventory flowing into the market — that desperately needs buyers who desperately need credit — or the property will continue to rot a hole into the housing market and U.S. economy for many years to come.
We learned a lot from the housing boom and subsequent bust. No one is suggesting that we go back to the period of 2003 to 2007. Increased awareness and transparency on many levels likely will prevent that.
Actually, many have suggested that we return to the bubble ways. Many of our efforts to prop up the market are similar to what we did in the bubble. For example, loan modification programs are essentially Option ARMs. No amount of awareness and transparency is going to prevent a housing bubble.
I recommend that lenders increase rates and yields to match the risk of the underlying borrower and security. A bold move like that will get investor liquidity and credit flowing back into a market that is choking itself out.
I agree that we need to match yield to risk to better serve the housing market, but it isn't going to happen any time soon because in order to do what he suggests, house prices would need to fall another 30% while interest rates doubled. The bank losses and chaos that would create make it unpalatable to policy makers and, of course, the banks — if you can actually tell the difference between the two.
What passes for responsible mortgage management in Irvine
Most loan owners I profile in Irvine have more than doubled their mortgage. Almost all borrowers I see looking through the property records have added to their mortgage. It is a very rare case to find a homeowner who paid it down. What should be the norm — paying down a mortgage on a 30-year amortization schedule — is a rarity.
In the HELOC Abuse Grading System, I wrote this about Grade C HELOC abusers:.jpg)
I hate to give borrowers in this category a "passing" grade, but this is the reality for most Americans. Growing credit card or mortgage debt slowly generally can be compensated for through home price appreciation, and although I consider this a bad idea, I can't really call it HELOC abuse, just foolish HELOC use. Is there a distinction there? I will let you decide.
Financial planners will tell you that most people fail to budget properly for unexpected expenses (they don't save), so when they fall behind a little each month, they put the balance on a credit card and hope they can pay it back with a tax return — or during the bubble with a visit to the housing ATM.
People are still going to manage their bills this way going forward, and there will be pressures to "liberate" this equity to pay for these expenses. The money changers will continue to peddle this nonsense as sophisticated financial management. It is a stupid way to manage debt, and I give it a C.
- The owners of today's featured property paid $192,000 on 6/17/1988. I don't have their original mortgage data, but they likely put 20% down.
- On 4/6/1998 they refinanced with a $191,000 first mortgage. Ten years after buying this property, the mortgage nearly equaled their purchase price.
- On 7/17/2000 they obtained a $37,000 HELOC.
- On 12/10/2003 they got a $50,000 HELOC.
- On 10/21/2004 they refinanced with a $215,000 first mortgage.
- On 5/31/2007 they opened a $150,000 HELOC.
- On 8/31/2009 they refinanced again with a $264,500 first mortgage.
After owning the house for 22 years, they should have it nearly paid off, but instead, they extracted $100,000 in equity and they have enlarged their mortgage considerably. They will still sell this home and make a significant profit — thanks to the housing bubble.
So what do you think? Is this a reasonable way for people to manage their mortgage debt? Are these people acting wisely and responsibly?
Irvine Home Address … 4471 WYNGATE Cir Irvine, CA 92604 
Resale Home Price … $788,000
Home Purchase Price … $192,000
Home Purchase Date …. 6/17/1988
Net Gain (Loss) ………. $548,720
Percent Change ………. 285.8%
Annual Appreciation … 6.3%
Cost of Ownership
————————————————-
$788,000 ………. Asking Price
$157,600 ………. 20% Down Conventional
4.23% …………… Mortgage Interest Rate
$630,400 ………. 30-Year Mortgage
$149,166 ………. Income Requirement
$3,094 ………. Monthly Mortgage Payment
$683 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$66 ………. Homeowners Insurance
$0 ………. Homeowners Association Fees
============================================
$3,842 ………. Monthly Cash Outlays
-$726 ………. Tax Savings (% of Interest and Property Tax)
-$872 ………. Equity Hidden in Payment
$239 ………. Lost Income to Down Payment (net of taxes)
$99 ………. Maintenance and Replacement Reserves
============================================
$2,582 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,880 ………. Furnishing and Move In @1%
$7,880 ………. Closing Costs @1%
$6,304 ………… Interest Points @1% of Loan
$157,600 ………. Down Payment
============================================
$179,664 ………. Total Cash Costs
$39,500 ………… Emergency Cash Reserves
============================================
$219,164 ………. Total Savings Needed
Property Details for 4471 WYNGATE Cir Irvine, CA 92604
——————————————————————————
Beds: 5
Baths: 3 baths
Home size: 2,694 sq ft
($293 / sq ft)
Lot Size: 5,000 sq ft
Year Built: 1970
Days on Market: 5
Listing Updated: 40473
MLS Number: S636555
Property Type: Single Family, Residential
Community: El Camino Real
Tract: Wl
——————————————————————————
This is a custom home with light large open spaces. Custom wood work and hardwood flooring give the home a warm, friendly feeling. The windows are large and include operable skylights. This creates excellent cross ventilation. The home is located within walking distance to all schools. Irvine High School, Heritage Park, and Irvine public library are very close by. The home has three bedrooms downstairs and two upstairs, along with a large bonus room. The bonus room has a built-in Murphy bed. The three full bathrooms have been remodelled, and the master bathroom features a Jacuzzi tub. The upstairs bathroom is a Jack and Jill, opening to both bedrooms. There are two fireplaces. One is used brick in the living room. The other is in the master bedroom. Mature trees and landscaping make the exterior of the home lovely and relaxing. The home includes a gazebo in the backyard, which is included in the sale.
remodelled?
I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.
Have a great weekend,
Irvine Renter
So what do you think? Is this a reasonable way for people to manage their mortgage debt? Are these people acting wisely and responsibly?
I would say “it depends”. We bought our 19th century home in 1984 – 20% down, 30 year 14.5%. In 2003 we did our 4th refinance into a 15 year 5.5% note at twice the face value of the original and added a HELOC equal to the original.
We now have a heavily utilized gourmet kitchen, 2 new bathrooms, a new bedroom and den and have totally modernized the structure and utilities of the property.
Meanwhile we have gone from paying more than 30% of net income on the mortgage to less than 20% of net despite a 10 fold increase in taxes because of increased household income. The HELOC will be paid in Dec 2011 unless we tap it again. The first will be paid off in Dec 2013.
So I would say again “it depends”. Plus, if IR is right about what is coming to housing prices in Irvine they are smart to get out now.
This is one more excellent post about how the rich get richer, and the poor or less fortunate get the shaft.
Example: Baby Boomer buys house in 1996 for $185,000. Home values skyrocket, and boomer gets a second to “invest”, or simply to add luxury to their lives…no problem. Boomer also gets to re-finance at a much much lower rate to save cash.
New homeowner steps in to buy a home for his newly beginning family in the same neighborhood as boomer. He has to pay $600,000, for the exact same house. He also pays 3-4x the amount of property taxes. Bubble bursts, new owner left holding the bag, down payment is gone. New owner CANNOT re-finance to a lower rate, while Boomer that is already wealthy and within debt to income ratio, gets a 3.75 fixed loan.
Yup, it’s all good and fair. Gee, I wonder why people are leaving their homes in droves?
I don’t quite think that is fair… nobody put a gun to the head of the new buyer and forced them into it. Had they stayed on the sideline, they could watch as the boomer lost their equity and leveled the playing field.
All this does is explain why one ends up poor in the first place.
This is not a rich get richer poor get poorer instance. This is a “understanding what makes home prices rise and fall can benefit you financially” situation. New homeowner, rich or poor, is stupid for paying too much and suffers the consequences. Boomer, rich or poor, is smart or lucky and reaps the benefit of selling at the top.
The rich get richer situation will play out in inflation. The big guys get to gamble and profit with the monopoly money first, keeping pace with or beating inflation. The money eventually filters to the street where the poor get to realize a lower standard of living when price increases show up months or years later.
It depends, is right. You bought your home in 1984 and were quite wise in refinancing, and in managing your HELOC. And you plan to pay off both loans in the next couple of years, within the 30-year term of your original loan – Kudos from a fellow-traveler! But the people IR is complaining about are the ones who kept adding to their principal regardless of their earned income – or worse, to substitute for earned income.
IrvineRenter: “Mortgage interest rates are at historic lows …”
Theoretically speaking, mortgage rates may fall again if Fed will continue quantitative easing.
We live in times of madness.
No doubt in my mind that higher mortgage
interest rates are the key to recovery.
The government has just got to get their
fingers out of the pie.
Artificially holding down the cost of money
along with ridiculous incentives just
prolongs the misery.
As IrvineRenter points out, low interest rates
and thus low margins for the banks creates, in effect, an elite class who can now finance a home.
A classic example of the law of unintended consequences.
What’s the solution? I just don’t think
there is a quick fix.
Here are some ideas for a ‘slow fix’.
Perhaps a *gradual* reduction in the mortgage
tax deduction along with *gradual* reduced
lending limits by the GSE’s would be a start.
We have *got* to remove all these artificial constraints and let free market forces start working again.
We have no choice but to phase out govt subsidy and tax incentive.
Is there any data to support the idea that there is a huge quantity of “good borrowers being denied credit right now because lenders are so afraid of certain loan products that even the small number of borrowers who can properly utilize certain loan products are being denied.”
If you’re talking about investors, markets are right to be cautious of them because they were the first to default once prices fell. If you put 30-40% down on an investment property, have 6 months of reserves, can you not get a loan on an investment property?
I agree that lenders should have a spectrum of rates based on risk. That we don’t is a function of our underwriting system. A given product is available, if one qualifies. So if you’re right at the edge or well below the limits, everyone gets treated the same. This is also due to the fact that the price of default risk in mortgage rates is 0. It might be mispriced, but the USG is just saying we’ll take it on. USG implicitly held a lot more risk on its books than just Fannie/Freddie. What if things had gotten worse and we needed an AIG style bailout of Citi or BoA? We wouldn’t have let them go Lehman.
I thought banks and bankers were supposed to be capitalists. If there was really money to be made here, shouldn’t the invisible hand be lending it out? Banks wouldn’t need to securitize, they could just hold the loans.
I seriously doubt that any people with a steady source of verifiable income can’t get a loan at this point. Maybe the self-employed might have problems, but that’s about it-if you get a steady paycheck, you can get a loan (of some size).
I am seeing people who have high incomes (over $100K), FICO scores in the 750-800 range, and 50% down who cannot get loans. It is really no reflection on this borrowers- what it really reflects is the opinion lenders have of the local housing market.
The people of whom I speak were turned down for a loan on a new condo in one of the many half-empty 50-story condos in Chicago’s South Loop. This tells me that no matter how far prices have dropped there, the lenders see them going at least 50% lower, which wouldn’t surprise anybody given the massive glut there of new condos in huge high rise buildings. You could easily be buried in one of these places not only from another leg down in prices, but because you are so saddled with extra HOA fees to make up for those not being paid by about half the units, thanks to developer defaults. It is like Miami.
If you have a good FICO (720 or above), no heavy CC or car debt, and 20% down, you’ll have no trouble getting a loan for a reasonably priced place in a stable building or neighborhood. So, if you’re turned down when you have plenty of down payment money, a good income, and an excellent credit profile, you might as well figure that there are many problems with the place that you’re not hip to, and that you dodged a bullet by being turned down.
OK, so a developer defaults, and the condo tower goes to…a bank. That bank is really not going to loan to these people you mention?
There is a downtown condo building here, maybe half sold. I don’t think the deed changed hands, but the rest of the building is being auctioned, with the primary mortgage holding bank providing up to 90% financing. They are financing primary residence, secondary residence and investor purchases. Another smaller condo went through the same process about a year ago, with all the units selling.
Why would a bank choose to sit on the condos instead of providing financing for someone willing to buy it?
What happens is the developer defaults, and the bank drags its feet foreclosing because it does not want to assume the maintenance costs, and because the system is so clogged already.
But everyone knows those defaults are there and that the place is barely paying its bills. They also know that once this crap appears on the market that the prices will go through the floor. We have massive shadow inventory in Cook County- only 1200 foreclosed housing units- about 3.5%- are visible on the market, but there are over 28,000 houses and condos already foreclosed, and that of course does not include those that are in some way distressed- delinquent, “dirty current” (modified after being delinquent), or deeply underwater.
The banks also, as has been noted, are not particularly eager to make 30 year loans at 4% or 4.3%. That does not reflect the risk in lending for 30 years in a market with so much inventory overhang.
The only way this crap will all move is if we stop paying the lenders to hold all this inventory. They are holding onto it because our assistance has enabled them to, in the hopes of forcing prices up.
Thanks, LL, for your explanation. It’s always good to see some actual facts and figures in commentary, and yours was very enlightening!
Aren’t a lot of those condos financed by Corus, already gone under and bought out by private equity? They have no reason to drag their feet as the losses were realized before the deal.
There are other reasons why things might be slow:
http://www.chicagobusiness.com/apps/pbcs.dll/article?AID=9999200038366
That one just seemed to change hands in May. The article does say that the website is down & management unresponsive, but I’m sure that will change when the PE group gets more in charge.
The other thing is that the GSE’s have strict limits on condos – need a certain number sold to back/buy the loan. I know in FL this has been an impediment for some, but should not be in the low DTI, low LTV case you describe.
This is pure conjecture, but the owners of these units might have reason to drag their feet if they believe they will be supported by the assistance given banks, in holding on to massive inventory until the market is more favorable.
Problems like those of the building discussed in the article you referenced, about Lexington Park, are very common in new South Loop towers. Many of these buildings have massive construction problems that will probably never be cured, such as water seepage in a 50-story tower at 1717 S. Prairie, that is costing $50,000 a unit to mitigate. People who were already way underwater are now having to ante up massive amounts of money to correct construction problems.
All in all, between the massive glut of empty units in this area, and the buildings that have major problems that will require a lot of expensive mitigation, this area is a very bad bed for lenders who don’t want to write loans that will end up in default in two years. It could be that high-rise condominiums are not really suitable for most buyers of any income bracket. At any rate, your lender may be more interested in writing a loan that will perform than in helping another lender recover losses on foreclosed properties, and it looks to me as though lenders in this area see another massive drop in prices coming, and still more defaults, in these troubled buildings.
I don’t live in an area with that sort of condo problem, but where I grew up in South Florida has about the worst condo situation anywhere (only helped by the fact that Canadiens love the area). One condo that made the news for its poor sales is the Tao at Sawgrass. There is a blockshopper site for SoFla that shows a fair amount of recent activity, with some of the sales going to people getting mortgages – the one I found was 33% down.
So there are loans out there. I think the point you’re making is that there are condos that banks won’t loan on. I agree with that idea especially where there are construction issues. However, that is a different problem than the one IR mentions about potential borrowers who could pay, but don’t meet certain standards.
Condo water damage … now that’s really being underwater. 🙂
Even worse is an internal swimming pool. They’re good for decades of special assessments.
(And my captcha is pool56.)
The invisible hand would be delighted to loan out the money and hold it on their books at 7%. At 4.5% it only makes sense if they sell it to an investor.
So why aren’t they loaning at that rate, and people who want to buy borrowing at that rate?
At a 7% interest rate, none of the prices are affordable. The whole point of pushing interest rates down was to make the inflated prices of the bubble affordable with conventional financing. For those that don’t qualify for 4.5% interest rates, nothing is affordable.
IR – there are very few markets that have not seen prices fall to the point that they’re nearly as affordable at 7% just the same as at 4.5%. You want banks to engage in a practice (offering lower than 7%?) to help Irvine when that would not be a good idea for the RoC (not Taiwan, but the Rest of Country).
If anything, banks should be asking higher rates to Irvine, if prices still have room to drop, because we’ve seen that collateral quality, relative to the size of the loan, is the best determiner of default.
Irvine Renter, always crying a river for the trials and tribulations of the banking community. Oh the hardships of making money when you have access to 0% money. How will they ever survive? To lend a hand let’s start with the movie sequel: quantitative easing 2 – the return of profits, and if that doesn’t work: QE3 – “I laughed, I cried, I bailed them out”.
Capitalism functions poorly when the govt distorts the market with subsidy, guarantees, and incentive.
Bankers and investors are capitalists. Bankers make fees and recapitalize by selling a loan to the secondary market where an investor will purchase it at a discount. Govt involvement creates a perverse market dynamic where the fear v greed and risk v reward ratio falls apart.
That the govt decided to bailout further distorts the market.
Homes located just 10 miles away sold for 10-20% more than this home back in 1988. Now those same homes sell for 20-30% less than this home. This speaks volumes about Irvine’s development as a prime location.
Excellent point
Factor in that today’s home is not even located in a premium area of Irvine nor was it 10 years ago.
Maybe. Did relative rents undergo the same changes? If not, then there’s some explanation other than Irvine becoming more relatively desirable.
The most basic evidence that the housing bubble existed (and now, that the housing bubble hasn’t finished deflating) is the comparison of prices to rents. Bringing up relative price differences between areas is a non sequitur.
I looked for some historical data to see if I could support the idea that rising interest rates cause home prices to drop and I didn’t see it, personally. I even printed out the data and constructed a little graph for myself, covering the period from 1972 to 1996. Yes, the circa 1980 interest rate spike caused a small decline and overall flattening of home prices, but I did not see anywhere a strong inverse correlation like people are claiming there will be.
Granted those aren’t the only two factors, and these are abnormal economic times. But in 1980 the interest rate had spiked enormously from the historical trend, and it caused a teeny, barely perceptible dip in prices that was gone by 1984.
Is there any historical support for an inverse relationship between prices and interest rates?
Anyone with an open mind and willing to spend the 15 minutes to research this would reach the same conclusion.
For some people over simplifying the economy is convenient.
If prices and interest rates aren’t related.. why is the government doing anything it can to push rates lower?
I would argue that we are moving towards a period of time that may last the rest of our lives (50+ years)where rates consistently rise. 13T in debt, 1T+ in annual budget deficits and 30+ Trillion in SS and Medicare mandates that are unfunded.
…just some thoughts.
BD
Interest rates on 30yr fixed mortgages have consistently declined for 30 years!
This has made it easier for anyone using other people’s money to buy a property. As rates have declined prices have risen. Property prices haven’t risen just at the rate of inflation or wage growth they have risen far faster b/c interest rates have declined!
IF you believe that we are going to have even lower rates 10 years from now it’s a great time to buy. But, if you believe that we are going to be higher 10 years from now and even higher 20 years from now, you better not buy unless you plan to pay that thing off as fast as possible because prices are going to get killed!
My .02
BD
And added to that… there is no proof that a rise in rates will cause a proportional drop in prices.
Do you really think that your monthly costs will be the same (just P&I) on a house where interest rates jumped 55% (4.5% to 7%) but the price only dropped 10-20%?
And the math is easy… convincing sellers to drop their prices even 20% is not.
I think a seller in many of your minds is someone who doesn’t have to sell or need to sell but, is made a ‘generous offer far above his initial price’ and decides to sell. You are wrong if you belive this… you don’t need to convince a seller of anything. You just need to have REALITY like financing dictate how much you can spend and afford on a monthly basis.
If rates rise consistently in the future which I believe they will you will see long term grinding pressure lower on prices the same way you see compression in P/E multiples on stocks.
If you buy now you better be prepared to STAY and PAY long term. Prices are going to get pushed lower as rates rise….
Planet Reality is right. It is simple…
My .02
BD
@BD:
“If rates rise consistently in the future which I believe they will you will see long term grinding pressure lower on prices the same way you see compression in P/E multiples on stocks.
If you buy now you better be prepared to STAY and PAY long term. Prices are going to get pushed lower as rates rise….”
But that still doesn’t mean the relative cost (which really is what most people are concerned about) will stay the same.
A $900k house with 20% down and the monthly payment at 4.5% is about $4500 a month (P&I+taxes)… same house, with a price of $750k with 20% down at 7% is about $4750 a month.
Should I wait (and hope that a $900k house in Irvine will sell for $750k)?
…Should I wait (and hope that a $900k house in Irvine will sell for $750k)?…
Yes, absolutely.
1) You can always refi interest rate downward,
but the reverse (as we have seen) you can’t
get lenders to reduce principle.
2) Holding costs, (i.e. Fire Insurance, Property
taxes are based on valuation).. Why would
you want to pay more?
So why isn’t IrvineRenter waiting until rates go higher before his all-in venture into Las Vegas real estate?
Kind of contradictory right?
Nobody knows your circumstances and only you know if you should wait. I just saying that this housing bubble coupled with our state and national fiscal and monetary irresponsibility has wrecked housing price appreciation in SoCal and other high priced markets for the next 10 or 20 or 30 years. It has nullified it..
If you buy now the $900K house now be prepared to sell it in 10 yrs for $750K. I guess this could be a good deal if you do plan to STAY and PAY. But, only you can decide.
My .02
BD
Not at all… IR is buying income producing property. It will cash flow NOW. If rates go up and prices fall he won’t sell but, he doesn’t have to… his property is paying for itself plus some income. There is a huge difference in income producing and personal properties.
E.g., I can lease a house on the water with a boat dock and 4000sqft for about 6000/month. To own that same property with our rediculously low rates it will cost me $12000/month. Something is wrong here…no? This is why rental parity is the best measure of TRUE value.
BD
…Kind of contradictory right?…
No.. Not at all.
With one big exception [1], Irvine R/E is
lagging many other markets such as LV.
Why? IMO it’s because fewer houses were
bought on spec and even fewer households
HELOC’d themselves into oblivion. Thus,
prices will decline more slowly as
other markets adjust downward.
***But they *will* adjust.***
[1] The big exception? Shady Canyon.
Prices are in free fall. Why? Because
so many of the homes is Shady were built
on spec. To this day, homes have been
sitting on the market with no takers.
Isn’t the purpose of IR’s fund to buy LV properties at auction and flip them?
IMHO…this is an ugly POS. I wouldn’t live in it…
BD
It’s very simple, raise interest rates so home prices will come down then fence sitters will start buying. If home prices were realistic and not at bubble pricing, people would start buying. If people buy affordable homes, contractors and subcontractors would be back in business. The economy would be headed in the right direction. Unfortunately, you would still have a lot of underwater home owners. We had this problem in the 90’s and no one bailed out homeowners then.
If rates go up and if that pushes prices down then construction will go from its already record lows to zero. Minus land, construction costs aren’t much lower now than they were during the bubble. Labor’s not much cheaper, and commodities make up a big fraction of the price. If you want a builder to sell a home for $375k @ 7% when that home is selling for $450k now at current rates, he’ll just go into another line of work.
That will likely happen. I know of a number of ‘builders’ that became stock brokers or other when rates began a consistent rise in the 70s…
BD
winstongator,
The decrease in builder when cost excedes price is the law of supply and demand. The exodus of builders will cause a decrease in the supply. A new steady state will be reached.
When prices are rising, new houses are better value than used house (replacemtnt cost less depreciation). When prices are declining, the new house is usually better priced, then the used houses will decline fast over long periods. The builder is needs to clear out the vacant house fast. The used house has an occupant will move down the slowest.
“Is this a reasonable way for people to manage their mortgage debt? Are these people acting wisely and responsibly?”
yes. Irvine tract homes deteriorate quickly and from the listing, it says it’s “custom” which means more than likely a lot of the equity withdrawal went into necessary updating.
Since they are going to be making a profit after selling, how can anyone reasonably conclude that the homeowners were not acting wisely?
Gentlemen and Gentleladies All –
We are currently in uncharted waters for the US. Our governement is literally printing money and buying bonds to keep and push rates lower. Their hope is to reinflate the economy by allowing companies and people to re-finance their long term debts at a lower price to ‘free up’ monies for consumption and to grow the economy.
Up to this point it hasn’t had an adverse impact and is working – in the sense – that it is lowering rates and inflateing assets. Housing has had such a precipitous fall from unrealistic and elevated levels that this is barely working or only slowing the decline in housing prices.
At some point, in the next few months or years either the Fed will stop this process and rates will rise dramatically or our DEBT BUYERS / BOND VIGILANTES will stop buying our debt at rediculously low rates and rates will rise! Either way, rates will rise… the best that can be hoped for is a gradual rise and flat or slowly / gringing lower of housing and other asset prices. But, the worst that can happen is a spike in rates and inflation and housing and asset prices spike downward.
Bottom line… anything you buy with borrowed money / leverage ( a house) will decline in value for the next decade or more. It will either grind lower or fall dramatically based on rates.
Somebody … anybody…please… make a case for SoCal housing appreciation of any sort in the next DECADE or more.
If you are willing to STAY and PAY… you can still buy. Just be willing to break-even or lose money selling 10 years from now…
The markets are signaling inflation and higher rates.. gold, oil, cotton prices going to the moon. People just bought TIPS at a negative rate! Investors are actually buying TIPS at a negative rate. That means the believe so strongly that we will get inflation in the future that the are willing to PAY the government to loan them money!
My .02
BD
I see it this way.
The US government prints excessive amounts of dollars in order to fire the inflation process.
In 15 years, the average house will cost a billion dollars. A seller at a grocery store will tell you, “I don’t accept the green paper. Only gold.” The average American salary will be on a par with the Chinese.
For example, those who bought houses 20 years ago for $100,000 now sell them for $500,000 because of the inflation. And the future inflation seems to be much greater.