The house price rise adversely affects only the people buying their first home over the period interest rates are unusually low, which is obviously a small proportion of homeowners. If you've already paid your principal, it's unchanged, but the value of your asset has increased and monthly payments have gone down for those on variable rate mortgages..
Even if you're a first time buyer affected by the price rise, you're better off with a high monthly payment to own a higher value house than a high monthly payment to transfer more interest to people who are wealthier than you.
It does affect people who already bought a home, because when interest rate changes, home price will change too. It's not a problem when equity increases, but in the other direction it could be.
When interest rates rise, prices fall. New buyers have a certain amount of money they're willing to pay each month and the market adjusts to that, so it makes little difference there. Existing owners would be the ones getting hit by rising interest rates, just as they were bagging outsized profits when rates were falling.
"House-Price" is a terrible metric that only house sellers really care about. Everyone else is more concerned with monthly total housing costs. If house prices stayed the same and interest rates increased 2-3x that means monthly payments for new mortgages also increase. Buyers are unable or unwilling to pay the higher monthly cost so they bid less and the price comes down but their total monthly payment does not decrease.
In some sense this is a transfer of wealth from home owners/sellers to banks/lenders and hopeful and prospective first time buyers see no benefit, aside from maybe smaller down payments.
House prices are like bond prices. When interest rates are low, prices go up. When rates rise, prices will fall. People buy houses based on the monthly payment they can qualify for. Right now, prices are high because the low interest rates mean lowish monthly payments on inflated prices. But when rates rise, the value of the houses will fall because buyers will not be able to qualify at the previous inflated prices. This will mean that a lot of homeowners will be underwater again. Even though they should be able to afford their payment, there will be a similar level of panic.
No, when interest rates rise, prices of houses will go down to what people can afford as monthly payments. Principal Price of house amortized + interest = monthly payments
If people's income have been increasing,they will be able to afford slightly higher monthly payments but it's all going to be eaten by interest.
Yes, most people do, it's just that increases in rates have a tendency to cause decreases in homes values because a larger proportion of monthly payments will now have to go towards paying the interest.
What people don't seem to understand is that the interest rate doesn't really change your monthly payment in aggregate for housing as you are competing with other people on the monthly payment who get roughly the same interest rate. If the interest rate goes up, more of your monthly payment goes to the bank and less to the existing homeowner. This is only beneficial if you can buy a house outright with cash i.e. the rich get to buy the dip.
People can't afford to move because higher interest rates decreased the value of their home, so especially if they bought recently, a lot of their down payment is gone.
This is actually advantageous to first-time buyers since higher interest rates (and lower prices) mean their down payments go further.
These aren’t independent variables as people on average can only pay so much for housing per month.
High interest rates lower the value of properties to keep things sufficiently affordable. Thus low inflation is actually really bad for first time home buyers who can a just afford the mortgage in year 1 and likely still just afford the mortgage in year 15.
When buying a home, people care about the total amount of money they will spend. They do not particularly care if the seller or the bank gets their money.
If 'the market' decides a property is worth 3000/month, interests rates directly impact the selling price of the home.
Of course, I'm playing a trick by having the market price the monthly mortgage payment, and not price the property. Some people aren't going to take a mortgage so they care about the selling price only. But I'd argue that most people care about their monthly payment.
Now compare two scenarios:
You by a home for 3000/month mortgage with a high interest rate, then rates drop.
You by the same home for 3000/month mortgage with a low interest rate, then they rise.
In the first case, you can either refinance if you rate was fixed, or if it's adjustable your monthly payment drops. Any your home value goes up for the reason already mentioned.
In the second case, if it's fixed, that's good, but you lose that rate if you sell,if its adjustable your monthly payment goes up. And your home value goes down for the reason already mentioned.
That is true and means current prices may not be much higher, but it makes homeownership much more risky. If interest rates ever go back up, the price would go down and you could wind up owning a house where your principal is much higher than it's current value. This is ok if you don't want to move. If you ever want to move though, even to a house with an equal price, you may end up owing the bank a lot of money.
Even with a fixed interest rate, you still owe the entirety of your borrowed amount on the $1m purchase to the lender, but your property value may drop if the interest rates go up because, assuming the market value is tied to the interest rate, new buyers won't be able or willing to borrow $1m to buy your place at a rate higher than what you borrowed your $1m at. For the same monthly payment as you have now, a new buyer may only be able to borrow enough to afford a $900k home.
Someone with the same income and monthly expense limit as you wouldn't be able to afford your home, assuming rates went up, which is why the value might drop - fewer buyers.
Market prices are set at the margin by people who are buying and selling today, so yes, the monthly payments of new buyers absolutely matter.
2018 purchase prices were much lower than now, so your argument about rates isn’t convincing me. It’s the combination of obscene prices and moderate rates that is the issue. Obscene prices only made a bit of sense when rates were pushing under 3%.
I’m a homeowner, so it’s not in my interest to see prices fall, but I also don’t see why anybody would buy my house today given how high the payment would be. I would not be able to rent it out for anywhere near that number. So the situation appears very unstable to me.
I don’t expect 8% inflation to persist for 30 years. Do you? You’re right that if we average 8% inflation over the next 30 years, folks should buy the biggest house they can get approved for as long as rates are below 8%. But that’s taking a pretty big risk. Inflation has never run that hot for that long in the U.S. before. The Fed targets 2% inflation and has spent most of the last 14 years falling short of their target.
But we are in a new financial regime now, and nobody really knows what’s going to happen for sure.
Certainly true. Though higher price with lower rates, assuming monthly payment is the same, can be beneficial as a larger percentage of your payment goes towards principal. That only holds as a positive if price doesn't drop due to interest rate increases.
But I'd definitely rather be buying a house in a high interest rate environment... don't like the tail risk given how low rates are.
It turns out people buy generally the most home they can afford, and this is in terms of monthly payment. As interest rates increase, demand falls for higher priced homes and the new equilibrium price ends up hitting just about the same monthly payment as you had before.
Low interest rates have the same effect in reverse. Prices adjust so that regardless of interest rate your monthly payment is about the same, but low rates do transfer huge wealth to existing homeowners.
As down payments have come down over time this is only more pronounced. From 50% down with a 5 year term in the early 1900s to peak-mortgage 5% down 50 year terms a few years ago.
Rising interest rates also mean that house prices should drop (or deaccelerate), right? If you figure a buyer has a fixed budget, the more they are paying in interest the less they can pay in principal. Not saying 0.25% will have much effect, but in principle don't they have that relationship?
When you’re talking about the price of the most expensive purchase most people will ever make, it seems like house owners (around 2/3 of American households) would be quite interested in the topic.
First-time buyers benefit from both the decrease in down payments and the easier ability to pay down principal as nominal salary grows and/or if interest rates fall during the mortgage term.
Even if you're a first time buyer affected by the price rise, you're better off with a high monthly payment to own a higher value house than a high monthly payment to transfer more interest to people who are wealthier than you.
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