WTF is going on with interest rates right now?

[englishteacheralex]

The Fed giveth, and the Fed taketh away...but how many people are getting hosed right now because they're raising the interest rates so quickly? Why are they doing this SO quickly? It just seems like we're getting the worst of both worlds--houses are at historically high prices because of (among many other things, I know) historically low interest rates...and then they raise the rates so quickly that prices are still crazy high AND interest is higher?

Yes, yes, I know that interest rates are still historically now and the 70's/80's blah blah blah. It's not the rates, per se, it's the rapid pace of change. Big, fast change is de-stabilizing and hard to plan for. Bad for markets. Why the quick change? What are they so afraid of that justifies such a huge, rapid shift?

Context: we got really lucky with our latest real estate move, coming in juuuuust under the wire for this huge shift--locked in our 2.99% mortgage on a new property in December, sold the previous property at a really high price a month later to a buyer that must have also gotten a decent rate on their mortgage, and everything worked out. But I personally know two families that are getting hosed by the quick rise in rates due to their timing in buying (they've signed contracts months ago for houses in various stages of completion and they can't lock in a mortgage rate until the houses are finished).

I'm just curious on a macro-level...what is this fast, paradigm-shifting change in interest rates gonna do to the economy? So I'm starting a speculative, "whelp, in my opinion...." thread. I'll probably regret this. :)

[PDXTabs]

The Fed giveth, and the Fed taketh away...but how many people are getting hosed right now because they're raising the interest rates so quickly? Why are they doing this SO quickly? It just seems like we're getting the worst of both worlds--houses are at historically high prices because of (among many other things, I know) historically low interest rates...and then they raise the rates so quickly that prices are still crazy high AND interest is higher?

I would argue that they have only raised interest rates once and by 0.25% which is nothing but the market is reacting to the perception of persistent inflation and future rate hikes. Also, historically, if inflation is running ~6% we would expect the Federal Funds Rate to be over 6%. Interest rates are stupid low right now.

[Cranky]

Inflation, and I agree that they have moved shockingly slowly.

[Telecaster]

Inflation was stuck at basically zero for a long time.  Then suddenly jumped up a lot.   A lot of people thought it was going to be transitory so interest rates didn't budget much, but now that inflation seems to be sticking around interest rates have been moving fast.

 Tough if you are in the market currently.

[affordablehousing]

Yup, I work in real estate and rising rates are breaking a lot of commercial deals right now.

[boarder42]

Inflation was stuck at basically zero for a long time.  Then suddenly jumped up a lot.   A lot of people thought it was going to be transitory so interest rates didn't budget much, but now that inflation seems to be sticking around interest rates have been moving fast.

 Tough if you are in the market currently.

How is it not still transitory. Inflation is sticking around bc it's year over year increases and we were around 1 for 2 straight years when it should have been 2-3.   If it's still 7 next year this time then it's a problem but the latest numbers already show certain areas subsiding and the start of the larger inflation was in June of 2021. People are so worried about this it's dumb see mmm post about it thats all that's happening right now.

As to the OP. Umm sorry you missed the boat on the lowest rates in history this is typically how rate markets react to the future. This isn't anyone trying to hurt you financially. It's why I always tell people put 3% down and buy the house you want today at today's rates bc by the time you have 20% who knows what the rate market will be and if it goes down you can always refi. If it goes up then you can't go back in time.

[PDXTabs]

Inflation was stuck at basically zero for a long time.  Then suddenly jumped up a lot.   A lot of people thought it was going to be transitory so interest rates didn't budget much, but now that inflation seems to be sticking around interest rates have been moving fast.

 Tough if you are in the market currently.

How is it not still transitory. Inflation is sticking around bc it's year over year increases and we were around 1 for 2 straight years when it should have been 2-3.   If it's still 7 next year this time then it's a problem but the latest numbers already show certain areas subsiding and the start of the larger inflation was in June of 2021. People are so worried about this it's dumb see mmm post about it thats all that's happening right now.

Well, the Fed stopped calling it transitory and PCE keeps going up every month. PCE happens to be the Fed's favorite inflation gauge.

I don't personally "worry" about it. Inflation has winners and losers. Negative real rates have winners and losers. I'm not personally concerned either way but it might be a long time before I can get another 30 year mortgage at 3.85% let alone some of the rock bottom rates that others got.

Along those lines Marketplace had a recent interview with Brandeis International Business School professor Stephen Cecchetti who stated that "[t]here are no instances in the record where inflation came down without interest rates being above inflation." Marketplace: Just how high will interest rates go?

[Mr. Green]

Inflation was stuck at basically zero for a long time.  Then suddenly jumped up a lot.   A lot of people thought it was going to be transitory so interest rates didn't budget much, but now that inflation seems to be sticking around interest rates have been moving fast.

 Tough if you are in the market currently.

How is it not still transitory. Inflation is sticking around bc it's year over year increases and we were around 1 for 2 straight years when it should have been 2-3.   If it's still 7 next year this time then it's a problem but the latest numbers already show certain areas subsiding and the start of the larger inflation was in June of 2021. People are so worried about this it's dumb see mmm post about it thats all that's happening right now.

As to the OP. Umm sorry you missed the boat on the lowest rates in history this is typically how rate markets react to the future. This isn't anyone trying to hurt you financially. It's why I always tell people put 3% down and buy the house you want today at today's rates bc by the time you have 20% who knows what the rate market will be and if it goes down you can always refi. If it goes up then you can't go back in time.

In the March inflation report, BLS reported food increased 1% in one month. Food at home went up 1.5%. That's 12% and 18% annually. Those are very ugly numbers and that's just the most recent month, not year-over-year.

[englishteacheralex]

I didn't miss out--we were super lucky and got a very good rate (2.99%) in December. My post is more general, reflecting on how lucky we were, and how this quick shift in rates has to be causing turmoil for people who were in the middle of real estate deals and for one reason or another hadn't locked in a mortgage yet. The quick uptick in mortgage rates just doesn't seem good for the general economy, and my vastly oversimplified understanding of how interest works is that it is intentional.

I understand that inflation is running hot right now, but I don't see how raising interest really helps with that. I guess on a macro level, sure. But for the housing market, it just seems like it's causing a ton more pain...and there already was quite a bit of pain. 

[Cassie]

Rates have been ridiculously low for a long time. I am not surprised at all.

[PDXTabs]

I understand that inflation is running hot right now, but I don't see how raising interest really helps with that. I guess on a macro level, sure. But for the housing market, it just seems like it's causing a ton more pain...and there already was quite a bit of pain.

All things being equal it should slow house price increases which is good for people who have more money and less access to credit. But more fundamentally ultra low rates (and negative real rates) are good for the well off, or at least that's what Karen Petrou argues in Engine of Inequality which I highly recommend.

[Cranky]

Higher interest rates cause people to buy fewer houses, which may indeed be painful for those individuals, but will cool down the market overall.

It should calm down the market/prices for all the things people buy when they get a new house - couches, lumber, etc.

We’ll see.

[Mr. Green]

People buying less houses may be just what the doctor ordered right now. It could give the supply chain a break and cause a home price correction to more reasonable values. The drop in demand could have a spill over effect into other areas of the supply chain that help prices stabilize, in short slowing inflation. The big question is whether this causes a recession. Who knows, but enduring a short recession from the position we are now (hot, tight labor market) seems like it would be better than inflation continuing to run hot and home prices going further into the stratosphere.

[habanero]

How does a 30y mortgage work in the US? If you got one at 2.whatever % it was shortly you're obv sitting on a golden deal compared to where rates are now. But if you want to move and sell your home and buy a new one - what happens to the golden mortgage you are sitting on? Do you get out the "market value" of it when you pay it down? Can you transfer it to your new home or is the golden mortgage gone forever if you sell and buy something else with a new mortgage?

[Telecaster]

How does a 30y mortgage work in the US? If you got one at 2.whatever % it was shortly you're obv sitting on a golden deal compared to where rates are now. But if you want to move and sell your home and buy a new one - what happens to the golden mortgage you are sitting on? Do you get out the "market value" of it when you pay it down? Can you transfer it to your new home or is the golden mortgage gone forever if you sell and buy something else with a new mortgage?

Your golden mortgage is gone forever when you sell.   

[habanero]

Your golden mortgage is gone forever when you sell.

Ok thx. Thats gonna disincentivise quite a few from relocating I guess...

A fun fact which might be of interest: If a 30y mortgage did not have the refinancing option, the rate would be about 0.85% lower in the current market- that's the value of the embedded optionality in the mortgage giving the possibility to refinance if rates drop by a meaningful amount. As its a one-way bet for the borrower the lender obv charges for it. Last time I heard the number, 3-4 years ago the value was .55% so it's gone up a bit with more volatility in the market.

[maizefolk]

Your golden mortgage is gone forever when you sell.

Ok thx. Thats gonna disincentivise quite a few from relocating I guess...

A fun fact which might be of interest: If a 30y mortgage did not have the refinancing option, the rate would be about 0.85% lower in the current market- that's the value of the embedded optionality in the mortgage giving the possibility to refinance if rates drop by a meaningful amount. As its a one-way bet for the borrower the lender obv charges for it. Last time I heard the number, 3-4 years ago the value was .55% so it's gone up a bit with more volatility in the market.

That optionality is really the only way to win with mortgage interest rates and buying a house. When rates are low houses are expensive so you pay a low rate on a high balance = $$$. When rates are high, houses are more affordable but you're paying a much higher rate on that smaller balance = $$$.

So all things being equal and with perfect foresight, the optimal strategy is t buy a house cheaply when interest rates are high but time it so interest rates immediately come down, letting you refinance the small balance at a low rate.

Speaking of disincentivizing relocating, losing golden interest rates matters a little, but if housing prices get back to something reasonable now that mortgage rates are starting to respond to inflation + the fed rate hike, a lot of people who bought in the last year or so may find themselves underwater on their mortgages, which will be a much larger disincentive to relocate.

[habanero]

That optionality is really the only way to win with mortgage interest rates and buying a house. When rates are low houses are expensive so you pay a low rate on a high balance = $$$. When rates are high, houses are more affordable but you're paying a much higher rate on that smaller balance = $$$.

The US mortage market works in one way, but there are other ways to run one. Almost all mortages here are adjustable, which means that the lender can adjust the rate at any given time (in practice mostly after a central bank decision, but not limited to that). As the rate is adjustable, the value of it is pretty much always equal to par, so if you sell your house you pay it down and get a new one on the same terms. I have part of my mortgage as a fixed rate - which I actively applied for, but there is no optionality in it so it carries a market value. If I for one reason or the other don't want it anymore (paying it down, selling house or whatever) it has a mark-to-market. If market rate for remaing term is higher than my rate, I get paid the profit. If it's lower I pay the loss. I took a fixed rate for 10 years which is the longest you can get.

The way to "win" in this sytsem is to lock in a long-term fixed rate when they are very low. It obv carries the risk that floating rates "never" go back up again, like pretty much the last 10+ years. When rates are very low (whatever that means) you can argue that you don't really need the refi option, but it's obv a lot handier if taking out a high-rate mortage for 30 years as it's a fair assumtion that sometime during the life of the mortgage rates will be lower.

Not arguing that one system is better than the other, but here has been triving and horrible housing markets under any system for financing and a market works the way it does mostly for historical reasons. I personally think it's abseloutely bonkers that almost everyone here has a resettable-rate mortgage, but that's how it is and has "always" been so its the normal thing to have. It's obv very risky as rates can go up a lot and you balace ain't going down, so a lot more $$$ then what you budgetet for.

The massive securitization market for US mortgages is a very US thing and the market is fundamentally different pretty much all over Europe.

As an aside almost all "fixed rate" mortages in Sweden have a fixed rate period of 2 years or shorter - a lot only 1y fixed rate. That ain't much of a hedge when rates go up a lot.

[YttriumNitrate]

I understand that inflation is running hot right now, but I don't see how raising interest really helps with that. I guess on a macro level, sure. But for the housing market, it just seems like it's causing a ton more pain...and there already was quite a bit of pain.

Taming inflation tends to be painful. Just look at Volcker's actions in the 80s and the resulting fallout.

[GuitarStv]

Interest rates are stupid low right now.

Interest rates have been stupid low for what, two decades now?  A lot of people today have never heard of/don't understand what normal interest rates are.

[geekette]

Yeah, my mom, who's in her 80's, mentioned that interest rates used to be "3/6/9" as in pay 3%, charge 6%, and be on the golf course by 9.

[affordablehousing]

People just need to sit on their hands until prices recognize the impact of rising rates and adjust. That could take many months, a year, who knows. Until then there are tons of folks sitting on a pile of cash who don't need to care in the direct sense of affording a home, and that will help extend current prices. Friction comes during change, and that's what's happening right now.

[PDXTabs]

Interest rates are stupid low right now.

Interest rates have been stupid low for what, two decades now?  A lot of people today have never heard of/don't understand what normal interest rates are.

Not two decades. The Federal Funds rate in the USA was 5.25% in 2007.

[Mr. Green]

Interest rates are stupid low right now.

Interest rates have been stupid low for what, two decades now?  A lot of people today have never heard of/don't understand what normal interest rates are.

Not two decades. The Federal Funds rate in the USA was 5.25% in 2007.

14 years since the Fed Funds rate has been close to 3%. That's basically an entire generation of people.

[dmc]

We bought our current house around 2 years ago.  We could have paid cash, but decided to borrow about 60% since 30 yr rates were 3%.  I was honestly surprised that I could get a 30 year loan being I was 63 and my wife is 60.  And we both ER’d at 50.

We could always pay it off if needed, but we save a little on taxes since we itemize, but hopefully that will change soon as our health insurance cost are going down some.  It also means we don’t have to take as much out of our IRA’s since we now have some cash on hand.

[Cassie]

Dmc, you can get a mortgage at any age if you qualify. They can’t discriminate.

[Michael in ABQ]

How does a 30y mortgage work in the US? If you got one at 2.whatever % it was shortly you're obv sitting on a golden deal compared to where rates are now. But if you want to move and sell your home and buy a new one - what happens to the golden mortgage you are sitting on? Do you get out the "market value" of it when you pay it down? Can you transfer it to your new home or is the golden mortgage gone forever if you sell and buy something else with a new mortgage?

There is one exception I know of - a VA loan can be assumed by another borrower. And the other borrower doesn't even have to be a veteran as long as they meet the other criteria. However, it can't transfer to a new property.

In practice I think this is fairly rare as a lot of times the mortgage balance may be far less than the cost of the home. Assuming a 3% mortgage on a $500k house would be great - but not if the mortgage is only for $150k and you don't have $350k in cash for the balance of the cost. For most borrower, getting a mortgage for 80% or more of the purchase price is more important.

[shureShote]

Depending on how the next several years go, I am at least a little happy that as we have gone through numerous corporate relos in the last decades that we have used our equity to take smaller loans each time. Now, we have a mid five figure loan at 2% (holy heck!), but there is no way we will be in this location for the term. Regardless of the math (never let facts get in the way of an argument), I worry less right now about falling victim to bad timing and needing to get a large loan at a rate that just happened to peak when the company wants to send us somewhere else. We also may retire before we move, and being able to sell our current place and having a large equity check in our hand as we look for a retirement home will provide some flexibility. Sort of help mitigate our personal rate risk. Not that refinancing wouldn't fix the problem.

[YttriumNitrate]

Dmc, you can get a mortgage at any age if you qualify. They can’t discriminate.

Also, the median duration of home ownership is about 13 years [1]. If you buy a house at 60 with a 30-year mortgage and stay in it till 80, you'll be paying on the loan longer than most people.

For what it's worth, parents of my friends are in their mid-80s and a few years ago bought a house with a 30-year mortgage.

[PDXTabs]

Dmc, you can get a mortgage at any age if you qualify. They can’t discriminate.

That's true in the USA. The other countries where I have looked into getting a mortgage such as Portugal and the UK it is totally legal and normal to discriminate based on age. The USA is probably the best place on the planet to get a mortgage. 30 year fixed rate and tax deductible is also basically unheard of in any other country.

[Fishindude]

Interest rates have been stupid low for what, two decades now?  A lot of people today have never heard of/don't understand what normal interest rates are.

This is reality.
Was doing some home cleanup and destroying a lot of old paperwork and files recently when I ran across our mortgage from 1990.   
It was a 15 year fixed rate loan for 9.9%.   That was a fair rate at the time and we managed fine.

[Mr. Green]

Interest rates have been stupid low for what, two decades now?  A lot of people today have never heard of/don't understand what normal interest rates are.

This is reality.
Was doing some home cleanup and destroying a lot of old paperwork and files recently when I ran across our mortgage from 1990.   
It was a 15 year fixed rate loan for 9.9%.   That was a fair rate at the time and we managed fine.

If rates return to 9.9% homebuyers will continue to manage fine because home prices will collapse. The only thing that matters is the monthly payment. This is why subscriptions have become so popular. People can't afford one time large charges because their income can't support lumpy billing. So a $1,500 a month mortgage payment will remain $1,500. It will just be much more interest and a lot less principal because houses will be worth half to a third of what they are today.

[waltworks]

https://calculatedrisk.substack.com/p/lawler-the-sharp-increase-in-monthly?utm_source=substack&utm_medium=email&utm_content=share&token=eyJ1c2VyX2lkIjoxMzAwMDU4MywiXyI6IkFGNXV5IiwiaWF0IjoxNjUzMDU4MjQ5LCJleHAiOjE2NTMwNjE4NDksImlzcyI6InB1Yi00NDMxNTUiLCJzdWIiOiJwb3N0LXJlYWN0aW9uIn0.sm7yYuEG-iJ-SbIEN4NAL4sq9QUwXBEsMIpJ0mJclOk&s=r

Sorry for the long URL.

TL;DR - this situation (much higher monthly payments due to interest rate increases) has happened before! The effect that time was some real price declines (about 11%), but not large ones. Nominal prices stayed flat/rose slightly in the same time period.

If you're hoping for/predicting a crash like 2007, I think that's very unlikely.

-W

[maizefolk]

https://calculatedrisk.substack.com/p/lawler-the-sharp-increase-in-monthly?utm_source=substack&utm_medium=email&utm_content=share&token=eyJ1c2VyX2lkIjoxMzAwMDU4MywiXyI6IkFGNXV5IiwiaWF0IjoxNjUzMDU4MjQ5LCJleHAiOjE2NTMwNjE4NDksImlzcyI6InB1Yi00NDMxNTUiLCJzdWIiOiJwb3N0LXJlYWN0aW9uIn0.sm7yYuEG-iJ-SbIEN4NAL4sq9QUwXBEsMIpJ0mJclOk&s=r

Sorry for the long URL.

TL;DR - this situation (much higher monthly payments due to interest rate increases) has happened before! The effect that time was some real price declines (about 11%), but not large ones. Nominal prices stayed flat/rose slightly in the same time period.

If you're hoping for/predicting a crash like 2007, I think that's very unlikely.

-W

Interesting read, thanks for posting! Since people are much more likely to have fixed rate mortgages today than in 2007 a big increase in rates won't force people out of their homes, it'll just make it much harder for people to afford to buy those houses for more than the total owed on the mortgage. If people are underwater on their mortgages but can afford their monthly payment (having locked in fixed mortgages at low interest rates), they'll be much less likely to sell and supply will dry up, limiting how much housing prices can decline.

So we'll end up with many fewer first time home buyers and less geographic mobility to allow people to move to different parts of the country in response to new job opportunities, which slows economic growth and, particularly, recovery from recessions as during recoveries we often add new jobs in different parts of the country from where jobs were destroyed on the way down.

[waltworks]

Yes, I think a sort of housing market "freeze" with much lower levels of activity is likely, but not a big decrease in prices.

I could of course be totally wrong (and in fact I sold all my rental properties about 5 years ago, so my RE market timing abilities suck!)

-W

[Mr. Green]

It's interesting that the year-over-year spike in mortgage rates back in 79/80 was very short. And the total change (as a percentage) was more minor. Total travel of the YoY percent change in one year maxes out at about 40%. The total travel over the last year is double that and I suspect we're just getting started. If the Fed raises interest rates another 2% by year-end we'll be looking at mortgage rates between 7-8%, and that YoY chart line will stay significantly elevated. No one will want to move because of how expensive a new mortgage will be, but the dam has to break somewhere. Will the lack of supply keep prices elevated? As bond yields become significant wall street money may shift away from RE into other vehicles, further decreasing demand on the buyer side of the equation. It seems more young people than ever are already struggling to afford mortgage payments or increased rents. Will demand at current prices become so weak that large price reductions have to occur to draw buyers back? It's really hard to say. The psychology of almost 20 years of low rates may create strong resistance to people simply shrugging their shoulders and increasing their monthly payments by 50-100%. Being the person who has to game this stuff out right now doesn't sound like much fun.

[anni]

https://calculatedrisk.substack.com/p/lawler-the-sharp-increase-in-monthly?utm_source=substack&utm_medium=email&utm_content=share&token=eyJ1c2VyX2lkIjoxMzAwMDU4MywiXyI6IkFGNXV5IiwiaWF0IjoxNjUzMDU4MjQ5LCJleHAiOjE2NTMwNjE4NDksImlzcyI6InB1Yi00NDMxNTUiLCJzdWIiOiJwb3N0LXJlYWN0aW9uIn0.sm7yYuEG-iJ-SbIEN4NAL4sq9QUwXBEsMIpJ0mJclOk&s=r

Sorry for the long URL.

TL;DR - this situation (much higher monthly payments due to interest rate increases) has happened before! The effect that time was some real price declines (about 11%), but not large ones. Nominal prices stayed flat/rose slightly in the same time period.

If you're hoping for/predicting a crash like 2007, I think that's very unlikely.

-W

Just so you know for next time, you can delete everything from the '?' onward in the URL to shorten it. That's all marketing tracking mumbo jumbo.

[roomtempmayo]

https://calculatedrisk.substack.com/p/lawler-the-sharp-increase-in-monthly?utm_source=substack&utm_medium=email&utm_content=share&token=eyJ1c2VyX2lkIjoxMzAwMDU4MywiXyI6IkFGNXV5IiwiaWF0IjoxNjUzMDU4MjQ5LCJleHAiOjE2NTMwNjE4NDksImlzcyI6InB1Yi00NDMxNTUiLCJzdWIiOiJwb3N0LXJlYWN0aW9uIn0.sm7yYuEG-iJ-SbIEN4NAL4sq9QUwXBEsMIpJ0mJclOk&s=r

Wow, lots of interesting inferences to be had in the comparison of those two eras.

What jumps out at me is that in 1981 the typical P&I payment in Minneapolis was $830.  Forty years later in May of 2021, it was $1161, which is only $389.47 in 1981 dollars. 

In real dollar terms, the 2021 Minneapolis housing market cost less than half of what it did in 1981.  Thinking of the cost as a percentage of household income would probably make 2021 look even cheaper.

[clarkfan1979]

https://calculatedrisk.substack.com/p/lawler-the-sharp-increase-in-monthly?utm_source=substack&utm_medium=email&utm_content=share&token=eyJ1c2VyX2lkIjoxMzAwMDU4MywiXyI6IkFGNXV5IiwiaWF0IjoxNjUzMDU4MjQ5LCJleHAiOjE2NTMwNjE4NDksImlzcyI6InB1Yi00NDMxNTUiLCJzdWIiOiJwb3N0LXJlYWN0aW9uIn0.sm7yYuEG-iJ-SbIEN4NAL4sq9QUwXBEsMIpJ0mJclOk&s=r

Wow, lots of interesting inferences to be had in the comparison of those two eras.

What jumps out at me is that in 1981 the typical P&I payment in Minneapolis was $830.  Forty years later in May of 2021, it was $1161, which is only $389.47 in 1981 dollars. 

In real dollar terms, the 2021 Minneapolis housing market cost less than half of what it did in 1981.  Thinking of the cost as a percentage of household income would probably make 2021 look even cheaper.

100% agreed.

Based on my social circle, which is probably slightly above the median household income, 2021 was a very affordable year for housing. I'm also 42, so my social circle is buying their 2nd or 3rd house, not their first house. Younger people might struggle coming up with the down payment. However, for those who had a 20% down payment available, the monthly payment was very low relative to income, which was a big reason for the price increases.

Some people were a little too hung up on the price. Others were comfortable locking up a 30-year mortgage at 2.75%, despite the sticker shock. 

[rocketpj]

I envy the 30 year terms people get in the US.  Here in Canada 5 year terms are the norm.  About 7 years ago I thought I was Nostradamus and that rates would go up, so negotiated a 10 year term on our home mortgage.  Still pretty reasonable, but my timing was off by 5 years.  (At the time we had young kids and the fixed payment was very appealing for various reasons).

Luckily for me I've been making extra payments all along, so when it does come up I'll be down to a couple of years whatever the rates are.  But yeesh, a 30 year term sounds just dreamy.

[JLee]

https://calculatedrisk.substack.com/p/lawler-the-sharp-increase-in-monthly?utm_source=substack&utm_medium=email&utm_content=share&token=eyJ1c2VyX2lkIjoxMzAwMDU4MywiXyI6IkFGNXV5IiwiaWF0IjoxNjUzMDU4MjQ5LCJleHAiOjE2NTMwNjE4NDksImlzcyI6InB1Yi00NDMxNTUiLCJzdWIiOiJwb3N0LXJlYWN0aW9uIn0.sm7yYuEG-iJ-SbIEN4NAL4sq9QUwXBEsMIpJ0mJclOk&s=r

Wow, lots of interesting inferences to be had in the comparison of those two eras.

What jumps out at me is that in 1981 the typical P&I payment in Minneapolis was $830.  Forty years later in May of 2021, it was $1161, which is only $389.47 in 1981 dollars. 

In real dollar terms, the 2021 Minneapolis housing market cost less than half of what it did in 1981.  Thinking of the cost as a percentage of household income would probably make 2021 look even cheaper.

100% agreed.

Based on my social circle, which is probably slightly above the median household income, 2021 was a very affordable year for housing. I'm also 42, so my social circle is buying their 2nd or 3rd house, not their first house. Younger people might struggle coming up with the down payment. However, for those who had a 20% down payment available, the monthly payment was very low relative to income, which was a big reason for the price increases.

Some people were a little too hung up on the price. Others were comfortable locking up a 30-year mortgage at 2.75%, despite the sticker shock.

I think that really depends where you are -- my $140k-in-2013 Phoenix house is estimated at $471k on Zillow right now (I sold in 2018 for $250k). Some parts of the country went from affordable to outrageously expensive.

A decade later, I could afford that house now -- but I make 5x what I did when I bought it...not everyone is so fortunate.

[sonofsven]

Will prices collapse or will terms increase in length?
40 year fixed?

[JLee]

Will prices collapse or will terms increase in length?
40 year fixed?

Going from a 30 year to a 40 year only cuts the mortgage payment by 8.2% - $500k @ 6% $2997.75 -> $2751.07.  I don't think it's enough of a drop to really make much difference.

[roomtempmayo]

https://calculatedrisk.substack.com/p/lawler-the-sharp-increase-in-monthly?utm_source=substack&utm_medium=email&utm_content=share&token=eyJ1c2VyX2lkIjoxMzAwMDU4MywiXyI6IkFGNXV5IiwiaWF0IjoxNjUzMDU4MjQ5LCJleHAiOjE2NTMwNjE4NDksImlzcyI6InB1Yi00NDMxNTUiLCJzdWIiOiJwb3N0LXJlYWN0aW9uIn0.sm7yYuEG-iJ-SbIEN4NAL4sq9QUwXBEsMIpJ0mJclOk&s=r

Wow, lots of interesting inferences to be had in the comparison of those two eras.

What jumps out at me is that in 1981 the typical P&I payment in Minneapolis was $830.  Forty years later in May of 2021, it was $1161, which is only $389.47 in 1981 dollars. 

In real dollar terms, the 2021 Minneapolis housing market cost less than half of what it did in 1981.  Thinking of the cost as a percentage of household income would probably make 2021 look even cheaper.

100% agreed.

Based on my social circle, which is probably slightly above the median household income, 2021 was a very affordable year for housing. I'm also 42, so my social circle is buying their 2nd or 3rd house, not their first house. Younger people might struggle coming up with the down payment. However, for those who had a 20% down payment available, the monthly payment was very low relative to income, which was a big reason for the price increases.

Some people were a little too hung up on the price. Others were comfortable locking up a 30-year mortgage at 2.75%, despite the sticker shock.

The problem with looking at the payment instead of the price is that you can always refinance a high rate later.  You're always stuck with the principle, regardless of what the market does.

[waltworks]

Will prices collapse or will terms increase in length?
40 year fixed?

I think prices (and sales volume) will just freeze up. Nobody wants to sell their house with a 3% mortgage (including me, even though I kinda want to move).

Then again, there's an all-time record amount of housing under construction. Those places will hit the market in the next year, mostly, excepting some of the really big multis.
We could see meaningful (nominal, even) price declines. We'll certainly see real ones.

As a random data point, my zillow number dropped a cool hundred grand last week as folks in the neighborhood started cutting their prices.

-W

[Sibley]

Will prices collapse or will terms increase in length?
40 year fixed?

I think prices (and sales volume) will just freeze up. Nobody wants to sell their house with a 3% mortgage (including me, even though I kinda want to move).

Then again, there's an all-time record amount of housing under construction. Those places will hit the market in the next year, mostly, excepting some of the really big multis.
We could see meaningful (nominal, even) price declines. We'll certainly see real ones.

As a random data point, my zillow number dropped a cool hundred grand last week as folks in the neighborhood started cutting their prices.

-W

I just checked my zillow number and wow, it's up to $215k. I bought at 135k! My parents, who bought a year ago at 198k zillow now says 218k.  Realtor.com says 189 and and 182, respectively. Parents have no mortgage and are unlikely to move unless to assisted living/nursing home. I have no plans to move, regardless of mortgage rates.

[franklin4]

Will prices collapse or will terms increase in length?
40 year fixed?

I think prices (and sales volume) will just freeze up. Nobody wants to sell their house with a 3% mortgage (including me, even though I kinda want to move).

Then again, there's an all-time record amount of housing under construction. Those places will hit the market in the next year, mostly, excepting some of the really big multis.
We could see meaningful (nominal, even) price declines. We'll certainly see real ones.

As a random data point, my zillow number dropped a cool hundred grand last week as folks in the neighborhood started cutting their prices.

-W

I agree that prices will stagnate and sales will slow way down very soon. Price drops will follow. There are always some people who have to sell. Not a good time to be flipping a house!

There's a good chance for upward pressure on rents too with higher rates/inflation. More unemployment and a recession would moderate that. My crystal ball is hazy about how that will work out:) It could be very market specific depending on which industries are hit hardest.
 

[franklin4]

Redfin laid off 8% of their staff this week because of slowing sales and their stock has collapsed, from 90+ in Feb '21 to 7 now. That price curve looks like a tech stock in 2000!