This is a really important point that more people need to think about. Sticker price and interest rate have an inverse relationship. But the price you paid is set in stone when you buy, though the interest rate can change over time.
For those who bought when rates were high and sticker prices were low, declining rates brought higher valuations. Additionally, the ability to refinance at lower rates meant that monthly payments were able to decrease along with total interest paid out on the loan.
For those who bought now (me!) at high sticker prices and low interest rates, the mechanics don’t work in our favor. Interest rates are only likely to go up, which doesn’t allow refinancing at a cheaper rate. At the same time, (inflation-adjusted) sticker prices will go down.
So while renting gotten ridiculously more expensive, home ownership also looks like an increasingly worse deal.
>At the same time, (inflation-adjusted) sticker prices will go down.
Who cares about inflation adjusted price when you have a mortgage ? Your rate will be X for Y years, as long as your income keeps up with inflation you'll get a net discount. Buying a property with loans is a good way of betting on inflation - I don't know if it will happen but if it does you'll win.
Worst case scenario is recession, you have reduced income and housing prices plummet - I don't see this playing out, running low interest rates to high inflation seems likely to me.
> Worst case scenario is recession, you have reduced income and housing prices plummet - I don't see this playing out, running low interest rates to high inflation seems likely to me.
And the standard case scenario is rising interest rates, where your highly-leveraged asset drastically underperforms the market (and may even produce negative real returns, if it doesn't keep up with inflation).
The FED and mainstream economists know that if interest rates will go up it will create huge deflationary forces (on top of existing ones) so they will do everything in their power to keep them low. I doubt we will see high interests for the next few years until debt ratios go a bit lower. The FED even mentioned that they’re willing to allow inflation to run higher for a while. That being said, it’s not a given that we will see inflation.
For debt ratios to decline, people have to stop going into debt as much. Or, they pay off their existing debts instead of using that cashflow to qualify for more debt. It's hard to imagine reducing debts unless you have a shock like '08 GFC, which changed the standards for acceptable underwriting.
> For debt ratios to decline, people have to stop going into debt as much.
Low interest rates and high perceived inflation causes people to take on increasingly higher amounts of debt. In some cases, it makes sense to borrow at 3-8% interest if you expect an ROI of 12-20% and you set aside 1/3rd of your gross return for taxes.
However this system has some positive effects. If you go out and build 3 homes and people buy them, you’ve effectively created 3 homes worth of wealth.
The long term historical trend is falling interest rates. So at least for the last 100+ years, the standard case scenario has been that your highly leveraged and refinanceable asset outperforms the market.
Interesting, looks like you're right. Also looks like you can improve the home (even DIY) and use that improvement to erase negative equity. Though of course it has to be the 'right' improvement, like kitchens and baths.
With fixed mortgages this is true, but if you get an adjustable rate, you’ll need to refinance and that’s when you need to requalify and meet loan to value ratios.
Half-facetiously, what about people who bought at (comparatively) low sticker prices _and_ low interest rates? If you had bought a house in (say) Austin 10 years ago, you would have gotten about a 3-4% rate, and the value of your house on the market today would be almost double what it was then.
It's easy to find individual markets (or time periods) where people have been lucky with overperforming house prices. I'm more concerned right now with what the future looks like for the median case.
Home ownership is still probably a decent deal overall (I bought two years ago). But home ownership was an incredible deal for boomers who have been able to refinance at progressively lower rates while seeing a disproportionate rise in home value.
Millennials now are stuck buying those homes with highly-inflated prices with not nearly as rosy a probable future. While it's certainly possible that housing prices continue to rise drastically, my own read of the available information shows that this was chiefly a side-effect of declining interest rates, which frankly can't get that much lower.
Nominal interest rate (which is the rate quoted on your loan) cannot go negative. So your actual amortized payments for acquiring a home will never be subsidized by a "negative" mortgage APR.
For a consumer to borrow funds the nominal rate is negative? Where have you seen this? I'd like to see a citation.
The reason this rate cannot be negative is that demand will immediately fill it up and use it for arbitrage (shove the money under a mattress and pay back the loan later) before it can become negative.
> For those who bought now (me!) at high sticker prices and low interest rates, the mechanics don’t work in our favor. Interest rates are only likely to go up, which doesn’t allow refinancing at a cheaper rate. At the same time, (inflation-adjusted) sticker prices will go down.
This ignores the fact that, in some countries at least (e.g. Denmark), you reduce your debt if you refinance at a higher interest rate.
For example, if you financed your house with a $200,000 2% fixed-rate 30 year Realkredit loan, and the rate of interest increases to 4%, then you can refinance you existing mortgage at 4% but now you only owe $100,000.
This is how bonds work in general: a doubling of the rate of interest halves the bond price, and a halving of the rate of interest doubles the bond price.
For those who bought when rates were high and sticker prices were low, declining rates brought higher valuations. Additionally, the ability to refinance at lower rates meant that monthly payments were able to decrease along with total interest paid out on the loan.
For those who bought now (me!) at high sticker prices and low interest rates, the mechanics don’t work in our favor. Interest rates are only likely to go up, which doesn’t allow refinancing at a cheaper rate. At the same time, (inflation-adjusted) sticker prices will go down.
So while renting gotten ridiculously more expensive, home ownership also looks like an increasingly worse deal.