Impact of rising rates on the housing market

[Seraphim]

http://www.zerohedge.com/news/2013-0...me-home-buyers

This is an excellent article.

In a non hyperinflationary rate rising environment, small rates of increase in the interest rate have a MONUMENTAL impact on house affordability.

This is why the Fed CANNOT stop QE.

"Rate normalization" (6-8%) would plunge housing prices by AT LEAST 20%, probabably more.

The Fed will keep buying MBS. Even if they taper their UST purchases (I don't think they will and if they do it won't last long) but the MBS side of the equation is a trap. If they stop - the banking sector will COLLAPSE.

[Zippyjuan]

Mortgage rates in 1982 were over 15% and people still bought houses. http://www.erate.com/mortgage_rates_history.htm If rates are higher they just won't buy as expensive of homes. People look mostly at their monthly payment. At lower interest rates, the interest protion of their payment is lower so they can buy one with a bigger price. At higher rates, the interest payment takes a larger portion of the payment so they buy a lower priced one. Housing prices may fall but sales won't go to zero.

[Brian4Liberty]

Was talking to a realtor a few days ago who said that the recent increase in rates is killing the market. We shall see. Realtors and construction companies have been putting their hope in money from China this year. Cash is king.

[Brian4Liberty]

Article intro:

No Country For First-Time Home Buyers

There was a time when the US housing market was not "driven" by hedge funds armed with government-subsidized, "REO-to-Rent" loans loading up on distressed properties, by banks refusing to release foreclosed properties into the market (thus creating a market subsidy) or by foreigners eager to park their "tax-evaded" wealth with the Anti Money-Laundering exempt National Association of Realtors. Instead, the main driver of US housing were first-time home buyers, "typically couples in their late 20s or early 30s" who historically have accounted for about 40% of home sales. Alas, last year, and all throughout the New Normal, this number has been about 25% lower, or representing just 30% of all sales (except for a brief spike to 50% in 2009 courtesy of recession-era tax credits). Then again, what 30 year old needs a home when one can now get an E-trade terminal under the bridge to generate "the wealth effect"?

[cubical]

Mortgage rates in 1982 were over 15% and people still bought houses. http://www.erate.com/mortgage_rates_history.htm If rates are higher they just won't buy as expensive of homes. People look mostly at their monthly payment. At lower interest rates, the interest protion of their payment is lower so they can buy one with a bigger price. At higher rates, the interest payment takes a larger portion of the payment so they buy a lower priced one. Housing prices may fall but sales won't go to zero.

The early 80s vs now are not even comparable. For one household income averaged about 42k in 1982, now its about 50k. Median home prices in 1982 were about 70k, now its about close to 200k.

And another thing we actually had savings as a country at that time. Now everyone is levered to the teeth.

[Jordan]

There really isn't a substantial difference between the Fed buying MBS vs. US Treasuries besides the amortization and refinance risk. Pulling from UST purchases is pretty much the same as yanking QE from the MBS market.

[Seraphim]

This.

The early 80s vs now are not even comparable. For one household income averaged about 42k in 1982, now its about 50k. Median home prices in 1982 were about 70k, now its about close to 200k.

And another thing we actually had savings as a country at that time. Now everyone is levered to the teeth.

[Zippyjuan]

The early 80s vs now are not even comparable. For one household income averaged about 42k in 1982, now its about 50k. Median home prices in 1982 were about 70k, now its about close to 200k.

And another thing we actually had savings as a country at that time. Now everyone is levered to the teeth.

You are right- it was different back then. Unemployment was higher at nearly ten percent, inflation was higher (also about ten percent which is why interest rates were higher as well) and were into the S&L banking crisis where hundreds of S&Ls were closing a year (there were over 100 in 1982- peaking at over 500 closed in 1989). http://www.calculatedriskblog.com/20...re-update.html

It is true that total debt levels are higher now in dollar terms but the lower interest rates makes servicing that debt only slightly higher than it was back then. The percent of disposable income going to service debt was about 10.5%. Today it is about 11%.



Red line shows total personal debt. Blue line shows percent of income spent servicing that debt.
http://www.google.com/imgres?imgurl=...9QEwBA&dur=620

[VBRonPaulFan]

You are right- it was different back then. Unemployment was higher at nearly ten percent, inflation was higher (also about ten percent which is why interest rates were higher as well) and were into the S&L banking crisis where hundreds of S&Ls were closing a year (there were over 100 in 1982- peaking at over 500 closed in 1989). http://www.calculatedriskblog.com/20...re-update.html

It is true that total debt levels are higher now in dollar terms but the lower interest rates makes servicing that debt only slightly higher than it was back then. The percent of disposable income going to service debt was about 10.5%. Today it is about 11%.



Red line shows total personal debt. Blue line shows percent of income spent servicing that debt.
http://www.google.com/imgres?imgurl=...9QEwBA&dur=620

unemployment was higher at nearly ten percent?

why don't you look up unemployment rates for people who might actually be considered 'first time home buyers' (lets say ages 16 - 30). 10% unemployment for younger workers would be a pretty good deal right now.

[Lafayette]

Unemployment was higher at nearly ten percent, inflation was higher

Our current 23% unemployment rate and 9% yoy inflation rate (peaking at 13% in 2008) would beg to differ.


(http://www.shadowstats.com/)

[cbc58]

Our current 23% unemployment rate and 9% yoy inflation rate (peaking at 13% in 2008) would beg to differ.

(http://www.shadowstats.com/)

I was selling houses in the mid-late 80's in New England and qualified buyers were treated like gold. Sellers wanted to know "what it would take" to sell their house and adjusted the price down accordingly. Amazing how fast prices could drop. IMHO - with taxes more than doubling, rates rising and real unemployment being what it is - some areas are sitting on an air pocket and it's much worse today than then. Even low rates won't help forever and the other shoe will drop. We never got capitulation and if you've never experienced that it is a sight to behold. Unreal bargains, and I think that's the grand plan... build it up, drop it like a rock and pick up assets cheap.

[Jordan]

Mortgages won't be that much more expensive. If people buy a home with a payment equal to 30% of their take home pay, a modest pay raise because of the ridiculously good Obamaconomy will offset higher interest expense.

[cubical]

You are right- it was different back then. Unemployment was higher at nearly ten percent, inflation was higher (also about ten percent which is why interest rates were higher as well) and were into the S&L banking crisis where hundreds of S&Ls were closing a year (there were over 100 in 1982- peaking at over 500 closed in 1989). http://www.calculatedriskblog.com/20...re-update.html

It is true that total debt levels are higher now in dollar terms but the lower interest rates makes servicing that debt only slightly higher than it was back then. The percent of disposable income going to service debt was about 10.5%. Today it is about 11%.



Red line shows total personal debt. Blue line shows percent of income spent servicing that debt.
http://www.google.com/imgres?imgurl=...9QEwBA&dur=620

The fact that we are paying as much to service our debt with the fed funds rate at 0, compared to a time when it was in the high teens, is supposed to give me comfort that the buying can continue?

You know why debt service dropped so much? Because people defaulted on their homes.

Household debt is irrelevant since we, as citizens, are responsible for the national debt.

But that is all details. In the 80s people could afford homes with interest rates at 15% because they had savings. They weren't "forced" into a home only paying 3% down. The artificial bidder was not in the housing market pushing up prices. Try to get this economy going where people are paying 15% interest on 97 or even 80% of their home. Not going to happen.

[puppetmaster]

The early 80s vs now are not even comparable. For one household income averaged about 42k in 1982, now its about 50k. Median home prices in 1982 were about 70k, now its about close to 200k.

And another thing we actually had savings as a country at that time. Now everyone is levered to the teeth.

Yep entire different situation.

[KrokHead]

Capitalists market correct? OH NO! At least the government doing something stupid like lower the interest rates back will help me own my 2nd home (moved out of the first) this winter.

Simply, if people are broke housing prices will fall. Now if the mortgage cost less than rent, another market correction will occur simply to increase housing prices that way a monthly mortgage is closer to a rent price. Here in NY homes increased by around 10 grand per 100K, but it's still cheaper than renting.

[wgadget]

What happens in a few years when millions of baby boomers expire/move to a nursing home/move in with their kids?

Housing prices will drop like a rock. Supply and demand, baby.

[Jordan]

What happens in a few years when millions of baby boomers expire/move to a nursing home/move in with their kids?

Housing prices will drop like a rock. Supply and demand, baby.

That assumes all the 20-somethings who want to buy a home but cannot right now won't snap up homes from the aging population.

[cbc58]

That assumes all the 20-somethings who want to buy a home but cannot right now won't snap up homes from the aging population.

What are you trying to say? That in a few years 20 somethings that can't afford a house at these levels right now will be able to in a few years? They are all going to get nice raises and save the housing market because they want to buy houses?

[Seraphim]

The government will buy them up at full face value from the banks and then classify them COMMUNITY HOUSING for all of the recently Amnestied Mexicans.

Bank on it.

What happens in a few years when millions of baby boomers expire/move to a nursing home/move in with their kids?

Housing prices will drop like a rock. Supply and demand, baby.

[Seraphim]

^^^^ Or level full neighborhoods to create artificial scarcity a la 1930's farm production.

[cbc58]

^^^^ Or level full neighborhoods to create artificial scarcity a la 1930's farm production.

they do that and it cuts tax revenue for schools, police, etc...

[Seraphim]

Inner city America is collapsing anyway.

Neighborhoods that don't have people owning the houses don't pay taxes anyway. They end up costing the city.

See;

Detroit, St-Louis, Baltimore, on and on.

Detroit is just the start of America's cascading "Muni Bankruptcy".

they do that and it cuts tax revenue for schools, police, etc...

[cbc58]

Inner city America is collapsing anyway.

Neighborhoods that don't have people owning the houses don't pay taxes anyway. They end up costing the city.

See;

Detroit, St-Louis, Baltimore, on and on.

Detroit is just the start of America's cascading "Muni Bankruptcy".

not the same thing - doesn't address the scarcity issue of properties people want to buy to facilitate demand - but i'm sure some bulldozing of city-owned properties in inner cities has to happen.

[ClydeCoulter]

All of this game playing with numbers and statistics is fun, except to the individuals that are really impacted (real people).

[torchbearer]

sucks to be on a variable rate.
all those bankers that suckered home owners into the line of credits on their homes- the squeeze, part infinity.

[KrokHead]

The government will buy them up at full face value from the banks and then classify them COMMUNITY HOUSING for all of the recently Amnestied Mexicans.

Bank on it.

Or corporations will by the homes at a steep discount because regular young Americans are drowned in debt and foolish with their money and rent them. (And yeah, get government money to subsidize the rent Americans can't afford.)

[Jordan]

What are you trying to say? That in a few years 20 somethings that can't afford a house at these levels right now will be able to in a few years? They are all going to get nice raises and save the housing market because they want to buy houses?

Yes. I mean, if prices drop like 10% and 20-somethings have a few years to save, get a promotion, delever, then yeah, they'll come into the market to buy a house. Even 20-somethings realize now is the time to finance a home if there ever was one.