Interest rates

[brellis1vt]

Earlier this year I was planning to buy a new house (a bad financial decision but wanted for a young family.) However, due to the tight market I was planning to buy a new house first and then sell my house afterwards.  I have accumulated enough cash for a down payment and been holding it in cash.  When I reran the numbers I can't justify the extra interest spend due to raising rates (2+% versus 5+%). Now I'm trying to figure out what to do with the cash. If rates go back down into the 3% range I would still consider buying a new house or if the prices of houses went down drastically.  When do you think rates will go down?  Our HCO area has a very tight market due to a lack of sellers (I assume for the same reason I am not selling.)  Should I leave it in cash?  I could lock it up for 6-12 months with YieldStreet and get 7-9%.  I could also invest it in the market.

[maizefolk]

If rates go back down into the 3% range I would still consider buying a new house or if the prices of houses went down drastically.  When do you think rates will go down?

Maybe tomorrow. But there's a reasonable chance we won't see 3% mortgage interest rates again in our lifetimes. 5% has historically been a very low mortgage interest rate to begin with.

[waltworks]

I would personally not expect to ever see <5% mortgage rates ever again, but my crystal ball is pretty crappy.

-W

[Michael in ABQ]

My parents were thrilled to get a mortgage at 8 or 9% back in the late 1970s. It was a special deal the bank was offering for the subdivision they bought it. Elsewhere rates were 10%+.

I don't think we'll see sub 5% rates again. It's going to take a couple of years though for the housing market to adjust and for prices to potentially drop - or at least not rise anymore. So much cheap money fueled an explosion in prices. Here in Albuquerque the median home price is now about $325k. A few years ago, before the pandemic it was about $250k. That's a huge increase if you consider wages went up maybe 10% over that time.

[brellis1vt]

Thanks guys.  I guess that's why my parents were always making double payments to pay off the mortgage when I was a kid.  I figure the only chance that I could see rates this low is if a fed induced recession gets really nasty.  Regardless I think my answer is pretty clear that I need to get the cash to work and sit tight.

[PDXTabs]

I would personally not expect to ever see <5% mortgage rates ever again, but my crystal ball is pretty crappy.

-W

Not to disagree with you, because I too can't see the future, but it wouldn't surprise me if I lived long enough to once again see 4% mortgages.

[affordablehousing]

You'll buy a house when you need a house. If you are getting hung up on rates, you don't really need a house. Housing had never been cheaper and you didn't pull the trigger. I think you must know deep down that you don't really need to move.

[clarkfan1979]

Earlier this year I was planning to buy a new house (a bad financial decision but wanted for a young family.) However, due to the tight market I was planning to buy a new house first and then sell my house afterwards.  I have accumulated enough cash for a down payment and been holding it in cash.  When I reran the numbers I can't justify the extra interest spend due to raising rates (2+% versus 5+%). Now I'm trying to figure out what to do with the cash. If rates go back down into the 3% range I would still consider buying a new house or if the prices of houses went down drastically.  When do you think rates will go down?  Our HCO area has a very tight market due to a lack of sellers (I assume for the same reason I am not selling.)  Should I leave it in cash?  I could lock it up for 6-12 months with YieldStreet and get 7-9%.  I could also invest it in the market.

Please consider that if rates were to go back to 3% you and everyone else would jump back into the buyer pool and compete for limited housing, likely resulting in many homes getting 20+ offers.

Because of the recent interest rate increases, houses currently on the market are much less competitive than 3 months ago. If I was currently looking for a house, I would use this as an opportunity to get a house that I really wanted.

[mavendrill]

I would personally not expect to ever see <5% mortgage rates ever again, but my crystal ball is pretty crappy.

-W

Not to disagree with you, because I too can't see the future, but it wouldn't surprise me if I lived long enough to once again see 4% mortgages.

For what its worth, I agree with you and expect the same.  I do not expect sub 3% rates, but 3 and 4% rates will happen again and relatively soon (soon as in, before I retire, I doubt they will happen in the next five years).

[less4success]

I would personally not expect to ever see <5% mortgage rates ever again, but my crystal ball is pretty crappy.

-W

Out of curiosity, why do you think this, @waltworks ?

It seems like the long-term trend for (real) interest rates is down. I've only briefly researched theories for why this is the case, but I'm curious to hear why recent low rates might be an aberration and not a trend.

[less4success]

In similar situation with cash waiting to spend it on real estate. Put a house-worth of cash in yieldstreet short term notes. so far so good with 4% returns..  Hope its easy to pull out when ready to buy real estate in 1-2 years

I'm not familiar with Yieldstreet, but with a plan to buy within 1 - 2 years my preference would be to protect principal, rather than reach for yield. I'm not trying to change your mind, but just putting this thought out for others reading this thread.

[Dicey]

I would personally not expect to ever see <5% mortgage rates ever again, but my crystal ball is pretty crappy.

-W

Out of curiosity, why do you think this, @waltworks ?

It seems like the long-term trend for (real) interest rates is down. I've only briefly researched theories for why this is the case, but I'm curious to hear why recent low rates might be an aberration and not a trend.

Not Walt, but the DIY answer is above in @maizefolk's awesome chart. LOL, I bought my first house in 1988. I also used to buy CD's that paid over 15%.

[maizefolk]

Interest rates (including mortgage interest rates) were trending downward from about 1981 to about 2021.

But before that they were tending up from about 1941 to about 1981. Before that they were trending down from about 1920 to about 1940. Before that they were in the 4-5% range.



Tends keep going until they don't. Maybe the current downward trend will keep going for another 40 years. Maybe it'll flatten out. Maybe it'll go on another 40 year upward run.

[waltworks]

My logic, essentially, is that rates were so low (in fact, negative in real terms) that in the absence of some sort of very specific outside intervention, they cannot go lower. Why would I loan you money at 4% if I make no real profit?

Assuming the folks handing out the money want to make at least 1-2% and inflation runs at least 2%, we already hit the lowest level I can conceive of. There's nowhere to go but up, even in low inflation scenarios.

My crystal ball is really shitty, though, so I wouldn't recommend investing based on anything I say. And I think you can get a like 0.5% mortgage in Japan right now or something.

-W

[maizefolk]

My logic, essentially, is that rates were so low (in fact, negative in real terms) that in the absence of some sort of very specific outside intervention, they cannot go lower. Why would I loan you money at 4% if I make no real profit?

Assuming the folks handing out the money want to make at least 1-2% and inflation runs at least 2%, we already hit the lowest level I can conceive of. There's nowhere to go but up, even in low inflation scenarios.

My crystal ball is really shitty, though, so I wouldn't recommend investing based on anything I say. And I think you can get a like 0.5% mortgage in Japan right now or something.

-W

For me the questions is what is the next best alternative to making the loan.

Lending at negative nominal rates is really hard to understand. Why would I loan you $100 for you to pay me back $90 next year if I could just hold on to the $100 and still have $100 a year from now? Europe back during the great recession showed people (or at least banks) were willing to make that trade anyway. But it still seems to me like it shouldn't happen.

Lending at negative real rates is a much easier scenario for me to understand. If I have $100 today that'll be worth $80 in a year as a result of inflation, lending it out to you for a year so that you pay me back $110 (which will be worth $88 by then) is $8 better than the alternative of not lending you the money.

If there is a lot of money chasing not that many good investments I could certainly imagine negative real interest rates persisting for quite a while. But with inflation closer to 9% than 2% at the moment, negative real rates and never seeing sub 4% 30 year mortgage rates again isn't mutually exclusive with never seeing <4% mortgage rates again in my lifetime.

But yeah. In the end we are all debating murky crystal balls at best.

[less4success]

Thanks, folks!

My uninformed take: I look at the long-term chart and see a general long-term downtrend, with significant and sometimes prolonged deviations. I've read theories about why this might be, and most of them seem to point to demographic graying, wealth/income inequality, and/or slowing productivity growth, all of which I expect to continue. I can't really critique these theories, but they make sense to me (esp. with respect to Japan).

I do expect sub-5% rates to come back, although I have no idea how long it will take. It's also possible that I'll be completely wrong, e.g. climate change kicks off severe resource shortages, leading to high inflation (actually, given our current trajectory, maybe that's the most likely case, as horrible as it sounds...).