Homebuyers must ‘learn to live’ with near-7% mortgage rates says RE/MAX chairman(cnn.com)
cnn.com
Homebuyers must ‘learn to live’ with near-7% mortgage rates says RE/MAX chairman
https://www.cnn.com/2023/07/14/business/mortgage-rates-buy-home/index.html
104 comments
The truth is interest rates have quadrupled in last 2 years but home prices have only dropped 10-20%. That’s not much.
There is very little supply at the moment, the population is still growing and the people with money are still buying houses they can afford.
FWIW under Biden, the wealth gap increased the most, he added the most debt, the house prices have the biggest hike.
For all things Democrats preach, it’s the exact opposite. Most people are worse off.
There is very little supply at the moment, the population is still growing and the people with money are still buying houses they can afford.
FWIW under Biden, the wealth gap increased the most, he added the most debt, the house prices have the biggest hike.
For all things Democrats preach, it’s the exact opposite. Most people are worse off.
Political spin isn’t needed here. The debt and wealth gap are both increasing exponentially regardless of who is in office. When Trump was in office you could have flipped the parties and made the same statement.
I guess my deeper point is, someone could make a law - you can only max own 2 homes, after 3rd home and thereafter, taxes go through the roof for capital gain.
Having homes as a speculative investment is a great way to have an entire generation having low home ownership.
And I agree, both sides are equally worse.
With colleges, homes, healthcare, daycares, food becoming so expensive, the effects will be huge but we’ll feel it decades later
Having homes as a speculative investment is a great way to have an entire generation having low home ownership.
And I agree, both sides are equally worse.
With colleges, homes, healthcare, daycares, food becoming so expensive, the effects will be huge but we’ll feel it decades later
... and then the rental market collapsed.
I mean what do you want to do with companies that work by owning (or ...) 200 homes and renting them out? There's a LOT of these, responsible for a big part of the rental market.
Economic systems are systems of dividing up stuff. Capitalism and communism, and everything in between change who gets which housing. They cannot solve housing shortages.
They (obviously) do not change the quantity of housing without the government at least allowing large housing developments.
I mean what do you want to do with companies that work by owning (or ...) 200 homes and renting them out? There's a LOT of these, responsible for a big part of the rental market.
Economic systems are systems of dividing up stuff. Capitalism and communism, and everything in between change who gets which housing. They cannot solve housing shortages.
They (obviously) do not change the quantity of housing without the government at least allowing large housing developments.
There are rental multi family units and single family homes.
Dense multi family units - companies can go crazy building and renting them out.
Single family homes is a special American dream. Having them subject to rent seeking greed is not great.
It’s along the same lines of cities saying - in this zones you can’t have Airbnb short term rentals, in this zone primary home owners or second home rentals only, in this zone go crazy capitalistic do whatever you want.
I honestly don’t care about billionaires. But if they are taking a huge pie away from finite resources like livable land/housing, then that is a problem.
Focusing on income inequality or giving free money as universal income is wrong way to look at it.
We just need a healthy distribution of finite resources that yield supply of basic needs.
Needs being Food, water, electricity, internet, housing, clothing, transport, electricity, healthcare etc.
Price gouging of utilities is restricted, no reason why we can’t encourage building more homes and ensuring a healthy gradient of distribution.
Dense multi family units - companies can go crazy building and renting them out.
Single family homes is a special American dream. Having them subject to rent seeking greed is not great.
It’s along the same lines of cities saying - in this zones you can’t have Airbnb short term rentals, in this zone primary home owners or second home rentals only, in this zone go crazy capitalistic do whatever you want.
I honestly don’t care about billionaires. But if they are taking a huge pie away from finite resources like livable land/housing, then that is a problem.
Focusing on income inequality or giving free money as universal income is wrong way to look at it.
We just need a healthy distribution of finite resources that yield supply of basic needs.
Needs being Food, water, electricity, internet, housing, clothing, transport, electricity, healthcare etc.
Price gouging of utilities is restricted, no reason why we can’t encourage building more homes and ensuring a healthy gradient of distribution.
Sellers will have to learn to live with price discovery based on mortgages governed by wage income. You’ll still have some volume driven by older folks with various equity (home or stocks) but less investor driven acquisitions with the risk free rate beating out cap rates. Wage earners buying will eventually drag prices down, it’s just going to take time and be painful. Lots of people don’t want to sell and lose their Goldilocks rate, but those who must sell (death, divorce, relo, etc) will contribute to (hopefully downward trajectory) comps.
1.8 million people over the age of 55 die every year in the US, and there are about 650k divorces every year. These are potential price discovery opportunities in the real estate market. (Excuse the morbidity)
1.8 million people over the age of 55 die every year in the US, and there are about 650k divorces every year. These are potential price discovery opportunities in the real estate market. (Excuse the morbidity)
Well good luck with that but customers don't determine CEO pay.
Sure they do. If his real estate company closes a lower dollar volume of deals, because money that would’ve been going to sellers is now going to banks as interest, then its stock is likely to go down.
In that scenario, the bank's profits wouldn't change so why would that affect the stock and his pay?
He’s not a banker. He’s a real estate agent.
This is largely a zero-sum game: if the bank is taking more money out of the transaction, sellers (and their agents who work for a percentage of the selling price) will be taking less. It’s not like buyers can magically afford to pay the same principal as before plus new higher interest rates.
This is largely a zero-sum game: if the bank is taking more money out of the transaction, sellers (and their agents who work for a percentage of the selling price) will be taking less. It’s not like buyers can magically afford to pay the same principal as before plus new higher interest rates.
This assumes that most people spend the absolute most they can afford for their home purchase. The question is going to be how often is that actually the case?
More often than not? That's why auto dealerships talk about the monthly payment not the sale price. A majority of Americans are consistently maxed out on all types of debt with Covid resetting that a bit but those savings are rapidly depleting.
The headline is awful - the longer sentence is in the article: '“We’re just going to have to learn to live with 6.5% or 7% mortgage rates for six to 18 months,” said Liniger.'
The headline is also awful because before 2008 those would be good rates anyway.
If you bet on the 2020-2021 trend continuing you could be in a bad place now, but... that was a weird trend to bet on continuing given the COVID factors that are now largely back to normal. I'm not one to classify the past as some sort of "stable" period that we've now dangerously shifted away from - 1970 was different than 1960 was different than 1980, etc, in so many economic factors - but it's always good to be skeptical of those guaranteeing that the trend will go one way long-term, whether that's "imminent bust" or "imminent boom."
If you weren't able to get in on low rates then, they also likely wouldn't be helping you that much now since prices are only falling slowly. Any downward correction is likely to be a slow painful process since these buyers were generally more financially buttoned-up than the mid-2000s ones were, and will want to ride things out vs sell for huge discounts.
Would higher rates slowly discourage some of the hedge-fund/PE invasion of residential real estate, though?
The headline is also awful because before 2008 those would be good rates anyway.
If you bet on the 2020-2021 trend continuing you could be in a bad place now, but... that was a weird trend to bet on continuing given the COVID factors that are now largely back to normal. I'm not one to classify the past as some sort of "stable" period that we've now dangerously shifted away from - 1970 was different than 1960 was different than 1980, etc, in so many economic factors - but it's always good to be skeptical of those guaranteeing that the trend will go one way long-term, whether that's "imminent bust" or "imminent boom."
If you weren't able to get in on low rates then, they also likely wouldn't be helping you that much now since prices are only falling slowly. Any downward correction is likely to be a slow painful process since these buyers were generally more financially buttoned-up than the mid-2000s ones were, and will want to ride things out vs sell for huge discounts.
Would higher rates slowly discourage some of the hedge-fund/PE invasion of residential real estate, though?
That means that contracts signed in that period will have that percentage baked into them and that means that for those that ink those contracts that it will take up to 30 years at those rates, unless you can refinance but that will cost you too.
It would have to go down far enough to make the refi worth it, but in expensive markets that doesn't take much. When rates bottomed out during Covid the RE bankers I knew were swamped with refi work, I think even on recent stuff already at 4% to 5%. It was like a perfect storm: low rates -> bidding wars driving up prices -> refi to a lower rate, fees paid themselves back in a hurry, take out some equity to do other home-office-upgrades and similar too.
But yes, you should never assume you're gonna be able to refi. Not that that stops everyone. :(
But yes, you should never assume you're gonna be able to refi. Not that that stops everyone. :(
Homesellers must 'learn to live' with buyer affordability placing serious stress on the market. You can't raise monthly mortgage and interest payment by 40% over a year and expect that to have no impact on the market.
Meanwhile, real estate brokers fees in the US and Canada are ridiculous.
I once made a bid on a property slightly under the asking price and the bid was accepted, then, upon reading the fine print it was said that the buyer was responsible for the real estate brokerage fee of the seller. So, I asked to see the amount they had agreed upon and this was so exorbitant that I ended up backing out of the deal (I had not signed the purchase contract yet). Then the real estate brokerage contacted me and asked to re-negotiate because they figured they had better get something than nothing. I negotiated it down to 1/5th of their original price and the deal went through.
Weirdest arrangement, so somehow you can push the costs of selling a property to the buyer, who has no say in the amount negotiated. It wasn't exactly a hot property so I think that factored into all of this but I'm still not sure if this was just an attempt at taking advantage of someone new to real estate transactions on that side of the Atlantic or whether or not this is a common arrangement.
As for the 7% mortgages: those aren't all that rare historically, but they were usually coupled with stronger markets and lower inflation. In a weak market agreeing to a high interest rate can set you up for future trouble. So unless you see a mortgage as a way to keep more options open rather than a necessity I'd advise caution.
I once made a bid on a property slightly under the asking price and the bid was accepted, then, upon reading the fine print it was said that the buyer was responsible for the real estate brokerage fee of the seller. So, I asked to see the amount they had agreed upon and this was so exorbitant that I ended up backing out of the deal (I had not signed the purchase contract yet). Then the real estate brokerage contacted me and asked to re-negotiate because they figured they had better get something than nothing. I negotiated it down to 1/5th of their original price and the deal went through.
Weirdest arrangement, so somehow you can push the costs of selling a property to the buyer, who has no say in the amount negotiated. It wasn't exactly a hot property so I think that factored into all of this but I'm still not sure if this was just an attempt at taking advantage of someone new to real estate transactions on that side of the Atlantic or whether or not this is a common arrangement.
As for the 7% mortgages: those aren't all that rare historically, but they were usually coupled with stronger markets and lower inflation. In a weak market agreeing to a high interest rate can set you up for future trouble. So unless you see a mortgage as a way to keep more options open rather than a necessity I'd advise caution.
Yeah the mortgage on my first house was close to 7% nearly 30 years ago. PITI was still cheaper than rent.
Sounds exactly like Amazon sellers putting high shipping fees hoping you're already bought in.
Was this in the US or Canada?
I've never heard of that in the US.
The buyer 'pays' because the seller puts in the cost of the agent into their asking price, but it's never asked on top of that.
In fact, unlike in Belgium where you need to add another 10%-12.5% over the asking price because the government wants a slice of your hard-earned money AGAIN.
I've never heard of that in the US.
The buyer 'pays' because the seller puts in the cost of the agent into their asking price, but it's never asked on top of that.
In fact, unlike in Belgium where you need to add another 10%-12.5% over the asking price because the government wants a slice of your hard-earned money AGAIN.
Canada.
> The buyer 'pays' because the seller puts in the cost of the agent into their asking price, but it's never asked on top of that.
No, this was 'buyer pays fees'.
> In fact, unlike in Belgium where you need to add another 10%-12.5% over the asking price because the government wants a slice of your hard-earned money AGAIN.
The same in NL, transfer tax. And that really adds up with present day real estate prices.
> The buyer 'pays' because the seller puts in the cost of the agent into their asking price, but it's never asked on top of that.
No, this was 'buyer pays fees'.
> In fact, unlike in Belgium where you need to add another 10%-12.5% over the asking price because the government wants a slice of your hard-earned money AGAIN.
The same in NL, transfer tax. And that really adds up with present day real estate prices.
Marketplace did a piece on those buyer fees: https://www.youtube.com/watch?v=ShBvRe0Jv68
There is something fundamentally wrong about these: for one the buyer doesn't normally get to negotiate the sellers fees, for another there is a conflict of interest: the sellers realtor should be working for them and should be paid by them. If I'm paying for the realtor, they're working for me.
Haven't met a realtor that I liked yet. Worse than car sales people.
Haven't met a realtor that I liked yet. Worse than car sales people.
I think he’s trying to say that near-zero interest rates are never coming back which is a sentiment that I think everyone agrees with here. His tone comes off as abrasive, though, and I struggle to want to agree with him.
Right. Seeing mortgage rates in the mid-to-low 4% range again within the next five years seems possible.
I reckon it will be more than a decade before we see anything like the 2020/2021 rates again, if ever.
I reckon it will be more than a decade before we see anything like the 2020/2021 rates again, if ever.
Home sellers must also learn to live with near-7% mortgage rates. Since the price that the buyer can afford is often set by the monthly payments, the price that most buyers can pay will go down.
The selling price will always be set by the market. Sellers with great interest rates will also be less likely to sell since they can’t turn the rate over in their next home purchase. It’s like proposition 13 all over again, except no boomer exemption.
I paid 11% fixed on my first house in 1976 and rates went much higher into a peak around 1980 and I thought my rate was a steal. If rates go down you can always refinance but if rates go up a fixed rate is a huge advantage. Most of the time an adjustable rate will be cheaper but in hard times when rates rise or prices decline you will be SOL. However in a housing depression judges may refuse to allow the lender to foreclose on you if you are in good standing - making regular payments maybe of interest only.
"... for six to 18 months"
>> As of June, there were fewer than 800,000 housing units listed for sale across the country, down from nearly 1 million at this point in 2020, according to Realtor.com. At this point in 2018 and 2019 there were north of 1.2 million homes listed for sale.
>> “For buyers, it’s been a tough go,” said Yun. “Not only have prices not fallen, there’s not much inventory.”
As an active homeowner looking to relocate in Seattle, inventory has not been good this summer.
I'll also say that IMO, the economy has not cooled. Even with all the tech layoffs, banking faults, the US$1M+ houses are still selling quickly. I spoke with a family member in finance, who kept saying a recession was coming. It never did, at least not one I can say that affected the economic landscape.
>> “For buyers, it’s been a tough go,” said Yun. “Not only have prices not fallen, there’s not much inventory.”
As an active homeowner looking to relocate in Seattle, inventory has not been good this summer.
I'll also say that IMO, the economy has not cooled. Even with all the tech layoffs, banking faults, the US$1M+ houses are still selling quickly. I spoke with a family member in finance, who kept saying a recession was coming. It never did, at least not one I can say that affected the economic landscape.
We’re looking at a stagflation situation now where prices go up and wages and even underlying assets are supposed to be going down (cars and technically houses given they both depreciate as durable goods go).
One thing I see being discussed is how high rates will reduce competition for homes (therefore lower prices). This isn't necessarily true for 2 reasons: 1) High rates mean higher finance rates for development/redevelopment projects, forcing new inventory to be priced higher to be viable 2) Owners with locked in rates (most homeowners) have little incentive to trade up, and more likely to trade down (increased competition for starter/smaller homes). Variable rate mortgages are a fraction of the mortgage market they used to be - this isn't 2008.
The only real solutions here are to radically rethink zoning at a city level, and potentially incentivize construction of affordable homes at a federal level through new lending programs.
The only real solutions here are to radically rethink zoning at a city level, and potentially incentivize construction of affordable homes at a federal level through new lending programs.
Owners with locked-in rates have little incentive to trade to anything else. You can't take the mortgage with you, so selling and then even buying a smaller house is going to lead to a higher payment in most cases.
What you will see is a lot more rental houses. When a lot of people move, they will just keep the old house and rent it out, because a huge portion of the value in the house is the mortgage itself.
What you will see is a lot more rental houses. When a lot of people move, they will just keep the old house and rent it out, because a huge portion of the value in the house is the mortgage itself.
> You can't take the mortgage with you
One wonders perhaps, why is that exactly? Why can't you trade one bit of collateral for another similar bit of collateral?
You owe $300k backed by a $700k house and you want to swap that for a $500k house, why should the note holder be able to call in the loan when you do that?
One wonders perhaps, why is that exactly? Why can't you trade one bit of collateral for another similar bit of collateral?
You owe $300k backed by a $700k house and you want to swap that for a $500k house, why should the note holder be able to call in the loan when you do that?
Doesn’t the bank have the right to refuse to grant a mortgage in the first place, depending on the asset? It’s not like you tell them you’re buying a house worth x and they give you a mortgage for 0.8x, right?
Banks are heavily regulated and aren't loaning out their own money.
Because you no longer own the asset that is the collateral for the loan.
Easy enough.
Then as a seller, I'm lowering the buyer's fees to 0% , and then negotiating my seller's agent as 4%.
There's no way, as a seller, that I'm going to willingly pay the buyer's real estate agent any money. That's the buyer's job, not mine.
Then as a seller, I'm lowering the buyer's fees to 0% , and then negotiating my seller's agent as 4%.
There's no way, as a seller, that I'm going to willingly pay the buyer's real estate agent any money. That's the buyer's job, not mine.
Sold my last house and bought my current one FSBO, no agents. They really don’t do much. Hire a lawyer to help with the closing if you feel better doing that, it’ll still be cheaper than an agent.
Maybe it's not well talked about enough, but I'm indirectly referring to https://www.realestatenews.com/2023/03/29/commissions-lawsui...
When you sell a home and you hire a realtor (sellers agent), the buyer will also likely have a realtor (buyers agent).
When the house is sold, it is "traditional" for 2.5% of the cost of the house to go to the seller's agent.... BUT ALSO 2.5% goes to the buyer's agent, from the seller's sale.
If the buyer doesn't have an agent, the seller's agent get 5%.
The $14 billion lawsuit is all about "why does the seller have to pay for the buyer's agent when they dont represent me?". And looking at that whole pile-o-shit even from a 10000 foot view shows really broken and terrible things.
When you sell a home and you hire a realtor (sellers agent), the buyer will also likely have a realtor (buyers agent).
When the house is sold, it is "traditional" for 2.5% of the cost of the house to go to the seller's agent.... BUT ALSO 2.5% goes to the buyer's agent, from the seller's sale.
If the buyer doesn't have an agent, the seller's agent get 5%.
The $14 billion lawsuit is all about "why does the seller have to pay for the buyer's agent when they dont represent me?". And looking at that whole pile-o-shit even from a 10000 foot view shows really broken and terrible things.
If the seller didn’t have to pay the agents, the seller would be able to accept a lower offer. The buyer pays, in the end.
I'm constantly reminded to be thankful to be a homeowner in America. Most other countries don't even have fixed-rate mortgages and many of my international friends are facing massive unexpected jumps in their monthly housing costs.
Yes.
Here in America we face our massive unexpected jumps in the form of medical bills.
Here in America we face our massive unexpected jumps in the form of medical bills.
Not if you have insurance which most do.
Can you imagine having such unexpected jumps in housing costs and not even owning your home? That would be way way worse
Can you explain this more? When I rented, I paid a flat rate. When rent increased, it only went up 10% at max.
Now that I am a homeowner with a 30y fixed mortage, I have many unexpected jumps (thousands in home repairs, increasing property taxes and insurance). Unexpected jumps are way bigger as a home owner than they ever were as a renter.
Oh, and my house value has dropped $100k since I bought it.
Now that I am a homeowner with a 30y fixed mortage, I have many unexpected jumps (thousands in home repairs, increasing property taxes and insurance). Unexpected jumps are way bigger as a home owner than they ever were as a renter.
Oh, and my house value has dropped $100k since I bought it.
Many people live in rental markets where rent increases are more than 10%. At least if you own there is some upside at the end of it. And you can estimate how much your upkeep will rise over the years.
You can figure on property taxes and insurance gradually but steadily increasing. Maintenance is more variable but you tend to get a general sense for it over time (although you can have unexpected big bills).
In general, I live in quite an old house (1800s) and figure it probably costs me a good $15K/year in taxes/insurance/maintenance/other upkeep not to go into maintenance debt. Can be a lot more or somewhat less.
In general, I live in quite an old house (1800s) and figure it probably costs me a good $15K/year in taxes/insurance/maintenance/other upkeep not to go into maintenance debt. Can be a lot more or somewhat less.
> When I rented, I paid a flat rate. When rent increased, it only went up 10% at max.
10% is still a pretty serious increase. In France there's an index that is the max that rents can be increased with, and it's usually at max 6-7% (usually lower), and cannot be increased in areas that have significant housing shortage vis à vis demand.
10% is still a pretty serious increase. In France there's an index that is the max that rents can be increased with, and it's usually at max 6-7% (usually lower), and cannot be increased in areas that have significant housing shortage vis à vis demand.
Doesn't rent control compound the problem? In areas with housing shortage, if no one can move, then the supply is further constrained. New people moving into the city (or young people moving out of their parent's homes) have to pay current market prices.
> Doesn't rent control compound the problem
Depends on which problem you're talking about. People getting priced out of the places they live by increasing rents? That one is solved by rent controls. The other big one, of people being unable to find where to live, is compounded to an extent, but coupled with other efforts (highly incentivised building of affordable and social housing, as well as various programs to help people buy the first time, and incentives to buy to rent (at fixed rates) it's not that bad.
All the renter's protections do create obstacles to renting though, with e.g. landlords demanding proof of salaries at least x3 or a guarantor with such salaries.
Depends on which problem you're talking about. People getting priced out of the places they live by increasing rents? That one is solved by rent controls. The other big one, of people being unable to find where to live, is compounded to an extent, but coupled with other efforts (highly incentivised building of affordable and social housing, as well as various programs to help people buy the first time, and incentives to buy to rent (at fixed rates) it's not that bad.
All the renter's protections do create obstacles to renting though, with e.g. landlords demanding proof of salaries at least x3 or a guarantor with such salaries.
This lack of risk is exactly why prices are rationally so high. At least in other countries, they're irrationally high because people forgot about the risk of interest rate increases.
I agree that low fixed rate long term mortgages contribute to higher housing prices.
And the reason 30 year fixed rate loans are common in the U.S. is because the government (taxpayers) backstop most of the loans. Bank wouldn't be stupid enough to underwrite a 30 year loan at historically low interest rates of 3%.
And the reason 30 year fixed rate loans are common in the U.S. is because the government (taxpayers) backstop most of the loans. Bank wouldn't be stupid enough to underwrite a 30 year loan at historically low interest rates of 3%.
The fixed-rate mortgages in the US are the result of government manipulation of the housing market. The other countries you refer to are using market-based solutions instead of government intervention. That said yes I can see why you'd like it. Those who are advantaged by government policies usually are happy to be on the receiving end.
And no prepayment penalties, which means that if interest rates go down, you can refinance.
How does this work in the American economy? Why does anyone buy RMBS at such low yields for 30 years with the capital risk that the money could come back to you if rates move against you?
US has Freddie Mac and Fannie Mae that essentially buy all OK mortgages from the banks so long-term liabilities don't ruin banks and FED can create more reserves when needed.
> Freddie Mac and Fannie Mae that essentially buy all OK mortgages from the banks so long-term liabilities don't ruin banks
FDMC/FNMA mostly buy up conforming loans and repackage them. In theory the bundling and government sponsored entity's (GSE) own equity would protect buyers of these repackaged bonds. In practice they did not and the government had to step in.
However, none of this protects against interest rates. If you take a bunch of 2 percent APY loans and bundle them, the resulting bonds are still 2 percent APY and everything seems good from GSE perspective. If rates rise to 7 percent, its just as easy to buy 7 percent rate conforming loans and bundle them into bonds paying 7 percent.
The problem OP brings up is one which the GSEs do not solve: if I own a 3 percent bond but the GSEs are selling 7 percent bonds, I have to sell mine for less than what the GSEs do to compete. The rule of thumb is the asset value drops one percent per APY point below market _per year of duration_. Knowing this, you would naturally shy very far away from mortgages because every percentage point is 30 percent of your delta. (It's a heuristic though, so its not like the example I gave actually trades at a negative price; performs better during "normal" sub 1pct changes.)
In practice people try to find arbitrage opportunities with ever more sophisticated instruments like interest rate swaps to "hedge the risk," but if markets are efficient this is a very small delta that could end up being a negative number. What we saw in 2008 was that the buyers were things like money market funds that prioritized retention of principal, but were dabbling in yield[1] enhancement strategies, given the whole "zero interest rate environment" thing.
[1]: https://www.bogleheads.org/wiki/The_2008_money_market_crisis
FDMC/FNMA mostly buy up conforming loans and repackage them. In theory the bundling and government sponsored entity's (GSE) own equity would protect buyers of these repackaged bonds. In practice they did not and the government had to step in.
However, none of this protects against interest rates. If you take a bunch of 2 percent APY loans and bundle them, the resulting bonds are still 2 percent APY and everything seems good from GSE perspective. If rates rise to 7 percent, its just as easy to buy 7 percent rate conforming loans and bundle them into bonds paying 7 percent.
The problem OP brings up is one which the GSEs do not solve: if I own a 3 percent bond but the GSEs are selling 7 percent bonds, I have to sell mine for less than what the GSEs do to compete. The rule of thumb is the asset value drops one percent per APY point below market _per year of duration_. Knowing this, you would naturally shy very far away from mortgages because every percentage point is 30 percent of your delta. (It's a heuristic though, so its not like the example I gave actually trades at a negative price; performs better during "normal" sub 1pct changes.)
In practice people try to find arbitrage opportunities with ever more sophisticated instruments like interest rate swaps to "hedge the risk," but if markets are efficient this is a very small delta that could end up being a negative number. What we saw in 2008 was that the buyers were things like money market funds that prioritized retention of principal, but were dabbling in yield[1] enhancement strategies, given the whole "zero interest rate environment" thing.
[1]: https://www.bogleheads.org/wiki/The_2008_money_market_crisis
> if I own a 3 percent bond but the GSEs are selling 7 percent bonds
“The SVB conundrum”
“The SVB conundrum”
Simple answer is prepayment risk is baked in into spreads. That is why it is higher than in Europe especially now give the risk of prepayment (in the form of refinance) is probably at all times high
Lenders are making certain bets that can come back to bite them. There are also various ways to hedge with credit swaps. etc. (Also per other comments, as a matter of policy, the US government has long wanted people to own homes.)
How the fuck can it be illegal/penalized to ... pay back your debts? Nope sorry, we don't want your money back yet.
You typically can pay off mortgages in the US early but there's nothing magical about a loan generally that says I can just pay it off at any time for free. It depends on the term of the loan I signed. I may have lent you money because I want a steady stream of income for the next ten years.
It's the same way some bonds are callable and others aren't.
It's the same way some bonds are callable and others aren't.
In most countries buying a house doesn’t involve taking out loans that take 30 years to pay off in the first place.
True, you get robbed much quicker.
I don't know, high house prices are pretty much all over the west
What does the process look like in Europe?
Usually an overpriced 30 year ARM (with a fixed period at beginning) and a restriction that you pay it off before retirement (so no 30 year mortgage if you're 45 for instance). Also a much tougher application process where people without "permanent" jobs are screwed. Of course, many, many people are on temporary contracts (because firing perm employees is hard). Possibly a stiff deposit req (I'd need a 20% deposit) and you can only borrow 4x your income. Having kids counts against you too.
At least this is the case in Ireland. I bought my house in cash.
At least this is the case in Ireland. I bought my house in cash.
> Possibly a stiff deposit req (I'd need a 20% deposit)
Note that, for Ireland, this is because you're a second-time buyer. It's 10% for first time buyers.
Today, mortgage rates in the US start at about 6% for a variable rate, or 7% for a 30 year fix. If you have <20% deposit you'll pay about 1% PMI, too. In Ireland, the age of the 2% mortgage is definitely gone, but you'll pay about 4% variable, or 4-5% for a normal 10 year fix. Avant will give you a 30 year fix for about 4%, though there is limited actual demand for such a product in Ireland.
By the way, you can get a mortgage that goes into retirement, though the bank will certainly want to see evidence of a pension... You can also get a mortgage if you're self-employed; you'll want about three years accounts and for either of these cases you'll probably need a broker.
So, really, it's swings and roundabouts to an extent; Irish mortgages are a lot cheaper than US ones. To some extent this is structural weirdness; the banks have more deposits than they know what to do with, and under ECB stress testing rules they have limited things they can feasibly _do_ with those deposits, so their cost of funds is relatively low.
Note that, for Ireland, this is because you're a second-time buyer. It's 10% for first time buyers.
Today, mortgage rates in the US start at about 6% for a variable rate, or 7% for a 30 year fix. If you have <20% deposit you'll pay about 1% PMI, too. In Ireland, the age of the 2% mortgage is definitely gone, but you'll pay about 4% variable, or 4-5% for a normal 10 year fix. Avant will give you a 30 year fix for about 4%, though there is limited actual demand for such a product in Ireland.
By the way, you can get a mortgage that goes into retirement, though the bank will certainly want to see evidence of a pension... You can also get a mortgage if you're self-employed; you'll want about three years accounts and for either of these cases you'll probably need a broker.
So, really, it's swings and roundabouts to an extent; Irish mortgages are a lot cheaper than US ones. To some extent this is structural weirdness; the banks have more deposits than they know what to do with, and under ECB stress testing rules they have limited things they can feasibly _do_ with those deposits, so their cost of funds is relatively low.
Some of these aren’t that far off from the American process. It being an ARM, not being able to get a house if you’re going to retire, and the impermanent job type are a bit weird though. Usually for Americans, you need to show some years of steady income to qualify. It doesn’t entirely matter what your job is - as much as you can show with your tax returns that you’re making steady money (for years) that can afford the home. The having kids thing is weird and I don’t get why that would be against you.
I’m guessing there are much stronger tenant rights in Ireland where they have a harder time evicting the person and making it impossible for them to find housing later. (Credit score, legal records, etc.)
The 4x income and 20% deposit is very common here too. Going past 4x would require unusual circumstances. People doing lower deposits and/or higher ratio incomes are not common especially in the major cities. You might qualify for a special loan from the VA or through FHA but it has penalties like having to pay PMI and being locked to only homes of a certain price.
I’m guessing there are much stronger tenant rights in Ireland where they have a harder time evicting the person and making it impossible for them to find housing later. (Credit score, legal records, etc.)
The 4x income and 20% deposit is very common here too. Going past 4x would require unusual circumstances. People doing lower deposits and/or higher ratio incomes are not common especially in the major cities. You might qualify for a special loan from the VA or through FHA but it has penalties like having to pay PMI and being locked to only homes of a certain price.
Interesting, thanks. I came of age in the mid-noughties (and then moved to Ireland) so my perspective on US is skewed.
Reposession in Ireland takes years. And the existence of strong protections against firing means banks only (usually) lend to people with permanent jobs, even if you have years of income on temp contracts.
Reposession in Ireland takes years. And the existence of strong protections against firing means banks only (usually) lend to people with permanent jobs, even if you have years of income on temp contracts.
20% down and strict underwriting standards used to be the norm in the USA also.
I know a guy who just did a refinance with equity cash out for 30 years. He’s nearly 70. He clearly plans to die broke.
I know a guy who just did a refinance with equity cash out for 30 years. He’s nearly 70. He clearly plans to die broke.
"Most" is probably literally true but I don't see people talking about the cheap housing in European cities like London. Yes, most people have historically taken out 30-year fixed rate loans in the US, in part because they are tax-advantaged. But nothing is keeping you from taking out a loan for a shorter period. I did when I refinanced my current house.
What are you talking about? It's exactly the same in Europe. Unless they get help from their parents, most middle class people need 30 years to pay off their homes here too.
It's the same shit everywhere in the west. Real estate is priced at the maximum amount the market would bear.
It's the same shit everywhere in the west. Real estate is priced at the maximum amount the market would bear.
> It's the same shit everywhere in the west. Real estate is priced at the maximum amount the market would bear.
And the market would bear to pay the amount banks will allow buyers to borrow (to first approximation).
So if banks allow 30 year mortgages, the market would bear up to 50% or so more than if banks allow 20 year mortgages.
And the market would bear to pay the amount banks will allow buyers to borrow (to first approximation).
So if banks allow 30 year mortgages, the market would bear up to 50% or so more than if banks allow 20 year mortgages.
In most countries only the rich can buy homes.
So yes your statement is true, because most people can never buy a home so there's no loan involvement at all.
But I'm pretty sure that's not what you wanted to say.
So yes your statement is true, because most people can never buy a home so there's no loan involvement at all.
But I'm pretty sure that's not what you wanted to say.
On second thought, this comment is a mix of peak anti-Americanism combined with a lack of financial knowledge.
If you have ever taken a mortgage in the US, you know there are a lot of time horizons available.
If you have ever taken a mortgage in the US, you know there are a lot of time horizons available.
Fixed rate means houses on the whole are more expensive though
My personal prediction is that the higher interest rates will make companies and institutional investors withdraw from the housing market, especially office buildings. That would ease competition for land, thereby reducing housing prices for average citizens.
Reducing prices requires increasing supply - but what is going to incentivize folks sitting on a 30year mortgage at 3% to sell?
The Fed's low rate policy during pandemic and then the rapid rate rise has broken the housing market. There is no reason to sell and no reason to buy.
That's why you see a severe transaction drop but roughly no change in prices. It'll be this way for awhile.
The Fed's low rate policy during pandemic and then the rapid rate rise has broken the housing market. There is no reason to sell and no reason to buy.
That's why you see a severe transaction drop but roughly no change in prices. It'll be this way for awhile.
> Reducing prices requires increasing supply
Or reducing demand, as GP said, from companies withdrawing from the market.
Or reducing demand, as GP said, from companies withdrawing from the market.
2/3rds of single family housing is owner occupied. Half of the remaining are owned by 'mom and pop' landlords.
So being very generous, maybe 10% of the supply is really counting on price appreciation versus income.
If demand withdrawals, supply will as well.
So being very generous, maybe 10% of the supply is really counting on price appreciation versus income.
If demand withdrawals, supply will as well.
This is one of a few areas where having an MBA is actually useful. Interest rate risk and how things behave when interest rates are going up are good to know.
Yet all of the MBAs at Silicon Valley Bank and working for Sand Hill Road VC firms were apparently blindsided this spring, not recognizing the risk and failing to take precautions.
Having huge layoffs when interest rates rise is the precaution. Their revenue didn't drop so the only justification would have to be (playing their cards in the wage increase/work from home tug of war) fear of not making payroll in a couple years if their debt laden customers did less business than before.
(I don't think big tech's revenue is going to drop, to be honest, because so much could happen before it stopped growing.)
(I don't think big tech's revenue is going to drop, to be honest, because so much could happen before it stopped growing.)
You can also learn that by reading a book or two.
Yeah, but will you? Or do you need some sort of a structured enforced learning for knowledge to stick?
If you’re curious (many HN readers are) and have basic math literacy (ditto) once you come across the concept, grokking interest rate risk takes about an hour at most.
Another step closer to revolt. There's only so much pressure the general public will be able to handle. History has taught us when there is a massive unbalance in "haves" and "have nots" things don't play out in ways where we just "sit down and discuss what's going on."
You've seen the stuff that says the vast majority (~80%) of the US can't meet basic army fitness standards, right? You think these people are capable of revolt?
Nah history has taught us mortgages can go way higher. Your part of the online crowd constantly trying to say the next French revolution is coming (been hearing that refrain since the 00s). Also when you buy a house - if you didnt factor in mortgage rates changing thats 95% on you. 6 % isnt even that high. Mortgage is too high offload and move elsewhere. People need to take some responsibility for their purchases.
It’s high when home prices have grown substantially since the last time mortgages were 7%.
Also, it’s not really a “haha, you suck at planning” so much as a new generation is hit with much higher home prices when they are entering buying time of their life.
Mortgages have been 4% for the last 20 years or so, so an entire generation has had 4% mainly due to government subsidization. And now the government can’t or won’t do that any more. If the next generation can’t buy homes because prices and rates are too high, that’s not good for social stability.
I don’t think it’s the French Revolution, but I do think there will be “why are we not paying for social programs when we have mortgage interest rate deductions for people with $750k mortgages [0]. That was palatable when the middle class had mortgages. But people who are stuck perpetually renting will likely vote to stop that.
[0] https://www.rocketmortgage.com/learn/mortgage-interest-deduc...
Also, it’s not really a “haha, you suck at planning” so much as a new generation is hit with much higher home prices when they are entering buying time of their life.
Mortgages have been 4% for the last 20 years or so, so an entire generation has had 4% mainly due to government subsidization. And now the government can’t or won’t do that any more. If the next generation can’t buy homes because prices and rates are too high, that’s not good for social stability.
I don’t think it’s the French Revolution, but I do think there will be “why are we not paying for social programs when we have mortgage interest rate deductions for people with $750k mortgages [0]. That was palatable when the middle class had mortgages. But people who are stuck perpetually renting will likely vote to stop that.
[0] https://www.rocketmortgage.com/learn/mortgage-interest-deduc...
[deleted]
Also people in most other countries economically comparable to the U.S. have variable rate or 5 year fixed rate mortgages. The U.S. government backstops most 30 year fixed rate mortgages. The banks don't wouldn't offer 30 rates so low, given the interest rate risk.
Yeah, my first mortgage on my house in the late 90s was, I believe, 6 or 7% and that wasn't even considered especially high. (I eventually refinanced for a bit under 5% or something like that.)
Interest rates these days aren't so low you can almost ignore them (e.g. you probably don't want to keep a lot of money in literal cash) but they're not late 70s/80s often double-digits either.
Interest rates these days aren't so low you can almost ignore them (e.g. you probably don't want to keep a lot of money in literal cash) but they're not late 70s/80s often double-digits either.
Is that what History taught us? I thought it taught us that humanity could go for literally centuries with a minuscule group of elites owning everything and the rest of the population owning nothing more than their clothes.
Exactly. When people barely survive, they don't have the energy or time to revolt.
Revolutions often historically start from disillusioned middle classes who have the time and energy, desire to have things (political power, economic means, etc.) and means of organising, and/or students. When they have some and don't have to worry about the next meal on the table, but want more.
There are definitely big swathes of the US population which has some political and economic power, yet are severely disenfranchised and ignored politically, and squeezed financially on all sides. Add in severe partisanship and general mistrust, agressive propaganda, and yes, you do have favourable conditions for a revolution. Not in any way guaranteed of course.
Revolutions often historically start from disillusioned middle classes who have the time and energy, desire to have things (political power, economic means, etc.) and means of organising, and/or students. When they have some and don't have to worry about the next meal on the table, but want more.
There are definitely big swathes of the US population which has some political and economic power, yet are severely disenfranchised and ignored politically, and squeezed financially on all sides. Add in severe partisanship and general mistrust, agressive propaganda, and yes, you do have favourable conditions for a revolution. Not in any way guaranteed of course.
Apparently you haven't done your researc.
The US public seems to have the capacity to absorb an incredible amount of misery while just acting up at tame things like elections. There are occasional protests and riots, but really quite few - and they dissipate quickly.
Hell, we had 30 years of hollowed-out de-industrialization in the Rust Belt, with hardly a peep on the "revolt" front. There's been slow electoral changes, however.
Hell, we had 30 years of hollowed-out de-industrialization in the Rust Belt, with hardly a peep on the "revolt" front. There's been slow electoral changes, however.
History hasn't taught you anything about communism?
The amount I can pay each month hasn’t changed drastically. If interest payments to my credit union go up, then the principal payments I can make to a seller have go down. The price I can pay is less than it was a couple of years ago. That means your commissions will be dropping, too, Mr. Liniger. You’ll just have to live with it.