The 30 year mortgage rate went from under 3% to over 6% so the monthly payment on a $500K house went from $2100 to $3000. Don't believe anyone got that big of a raise. Entirely predictable.
I've never understood why offering adjustable mortgages to people at the edges in the credit calculations isn't guaranteed to create a housing crash when rates go up.
A significant number of people will absolutely have to sell as they can't afford the new monthly payment, and the value has just dropped for anyone who can model probable futures, and a significantly smaller number of people will buy given the raise in mortgage costs.
Regardless of fixed or ARM,
the market takes awhile to
really shift. Most adjustable mortgages take 5-7 years to reset rates, and 30 year mortgages if you got one at a low rate is low risk (from a monthly payment perspective), assuming no one loses their job.
That means existing owners can often hold on for awhile.
It will dry up new buyers and the already low liquidity markers lock up though as new buyers at the existing prices disappear.
And the fed expects the funds rate to go up to 3.4% by year end which assuming its not priced into the mortgage rate would put rates about 7.5% with a 3500 dollar payment. One thing also to note is how much prices would have to fall to get back to the 2100. For 6% and 7.5% a 500,000 dollar house would have to go to 350000 and 300000 respectively. This would basically flip new home buyers upside down.
The perils of buying at the end of a macro cycle. Real estate was overvalued due to zero interest rate policy, and their values must now fall (buyers buy a payment governed by wages/income and mortgage interest rates).
New home buyers will be fine as long as they intend to live in their home. If you’re in the market, wait 3-6 months (or longer, based on Fed meetings raising rates) if you can as values decline. Anyone selling right now is still trying to get out at the top, which has already passed.
It typically takes several years for these type of shifts to work their way out market wise - existing sellers want to hold on hoping prices will recover, and it takes awhile for them to to HAVE to adjust prices.
Sure, the more motivated you are, the more you’re likely to cut your price. If you’re selling, you’ll have to cut your price eventually. If you can afford to or your circumstances permit, you’ll hold out as long as you can servicing the debt. Maybe the incoming recession is deeper or lasts longer than expected, making servicing that debt challenging forcing a sale faster.
"the macro cycle" won't end. In fact, when the interest rate is zero and we are not in a liquidity trap, one would expect there to be no cycles whatsoever.
yes, plus there's already talk about "Australian" mortgages (also known as an "all-in-one") plus you'll see the return of ARMs, and I'm already advising my sellers to consider carrying contracts themselves where possible. Point being, the market adjusts to conditions.
Let’s say you have reasons to sell your property, but you don’t need all the money right this minute. Maybe interest rates are at like 6.5%, but you’d be willing to carry the contract for 5%. Everybody wins - the buyer gets a better deal than they would get from a traditional lender, they get the house they want, the seller gets the house sold and gets paid out with a rate of return that makes it worthwhile for them. When rates are low, it doesn’t make any sense apart from land contracts (which is a separate discussion) but as rates go up it can be a good solution for everyone.
Maybe you won’t see this in urban markets, but in rural markets it is not uncommon - I did several in the last year and when I talk to other agents in similar markets they report the same.
My point is - lending trends tend to change in order to keep business flowing.
Rising rates is actually the typical NIMBYs worst nightmare.
Around 1/3rd of all Americans are over the age of 55 [0], and of those Americans around 75% of them own property [1]. They vote consistently, and tend to favor short term policies which aim for boosted asset prices (as they near retirement) [2] and support for medicare (same reason).
The median baby boomer has ~200k in savings [3], so of course housing value has been collectively used as an investment to shore up their futures thru NIMBY political action. Since the boomers had relatively few children they need to rely on other people's children to maintain their lifestyles - i.e. have enough money to pay people.
Unfortunately the demographic reversal we are experiencing means there will be ever more money chasing fewer people and barring some major productivity gain they will suffer regardless.
As the fed continues to raise rates due to rising costs cause by the above, expect to see desperate people vote in politicians willing to abandon the independent fed and drop rates to 0 so they can maintain their lifestyles. They will also desperately avoid medicare for all style health changes to avoid losing out on the health dollars aimed only at them, extracted mostly by working Americans.
From each according to their ability, and to each according to their need after all!
