Last year home prices increased about 17% according to the Case-Shiller 20-City composite. That's an increase of 12% when adjusted for inflation. After you account for the drop in 30-year fixed mortgage rates, monthly payments—which are what really matter—were up 10%.
That's . . . a lot. Still, payments in 2021 remained lower than pre-housing-boom payments. It was, just barely, manageable.
But the good times might be over. If home prices increase at the same rate this year and mortgage rates hit 5%, average monthly payments will skyrocket by about 40% in 2022:
This is obviously not sustainable, which means that home prices can't possibly increase in 2022 at the same rate as last year.
(We can cross our fingers and hope that mortgage rates don't go up to 5%, but that's a vain hope. Mortgage rates are already at 4.2%, and Jerome Powell has made it clear that (a) the Fed will raise the fed funds rates quite a bit this year, and (b) the Fed will stop net purchases of mortgage securities this month. Some of that has already been priced into mortgage rates, but surely not all of it. Freddie Mac says "mortgage rates should continue to rise over the course of the year," and that sure seems likely to me. The workhorse 30-year fixed mortgage is almost certain to average 5% or more over the rest of this year.)
So one of two things has to happen. If we make the reasonable assumption that buyers can't tolerate a payment increase of more than 10%, either:
- Home prices have to drop 10%.
or
- Bankers have to start playing big-time games again.
I'm guessing that home prices take a big drop. But I'm always a housing boom pessimist, and maybe I'm not thinking of something. Or maybe this time will be different. Maybe.
I like a good chart, but is this chart saying that the average monthly payment is still less than in 2000? Adjusted for inflation I assume.
That's over 20 years. I mean, you could also just as easily point out that the average monthly payment has plenty of room to increase.
I mean, that of course begs the question of whether the average monthly payment of housing ought to always be flat, which is sort of what the people arguing that there are not enough units are arguing -- housing, like, I don't know, food? has to remain in some sort of affordability range.
But there are so many variables, not just interest rates. Including the now ubiquitous 20% down no fudging rules, which radically changes the whole analysis, plus, after a couple of years of rising prices, average home equity could be hitting 40%, which massively affects down payments on homes bought after the buyers sell the prior home.
My brother put down 3.5% to buy his house. This was in 2012. Perhaps things have gotten stricter since then, but I doubt it: this was a mere four years after the housing market crash. I doubt he's one in a million.
Yeah my partner and I put down just 10% of our own money, and the mortgage people found some bank to give us a 10% loan to make the 20% down for our 80% 30-year mortgage with another bank. We’ve got awesome credit scores so maybe they don’t offer those packages to everyone but… it did seem shady to be able to borrow half of the 20% down and I wouldn’t be surprised if other lenders are getting more “creative” with the tighter lending rules.
(This was in 2021.)
This is basically PMI.
FHA, PMI, and first time homebuyer grant programs would like a word.
Careful Kevin. Yogi Berra is always watching.
I absolutely don't understand the note on the chart: "Adjusted for inflation and interest rates."
I understand you have to adjust for inflation--that's just normalizing the scale. But interest rates? Isn't that what monthly payment is all about? The whole deal about monthly payments is that interest rates to up, and interest rates go down, and that's the main driver of monthly payments. How the heck do you "adjust for interest rates?"
I believe he is starting with the average purchase price, then adjusting for inflation and interest rates to estimate the average monthly payment for this average purchase price.
In this case, it might be the inflation adjustment that doesn't really make much sense. If we are trying to determine homeowners appetite for higher monthly housing payments, adjusting the payment by the inflation rate doesn't give us better insight.
Home prices won't drop 10% so quickly, because the buyers who aren't willing to pay that will just filter down or filter out. That will help prices drop some, yes, but supply and demand are just too out of balance for interest rate increases to be one of the major price factors.
Said wishcasting homebuyer for the tenth time.
I don't know about a drop. A deceleration? Maybe. But most of that period had LOW INFLATION. So, like factor that in man.
OK, and not to be that guy, but yes, if come prices increase by 12%, and interest rates increase by basically 1.5%, from 3.5 to 5 (I think this is wrong, I bet not many home buyers have 3.5, maybe more like 4).
By the way, since the interest rate is only one component of the monthly payment, 1.5 per cent increase (about 30% increase in the rate) is only about a 15% increase in the payment.
Anyway, what happens when prices go up is that people either put off buying or buy something less expensive.
And further, prices and interest rates going up only affects new buyers and non-fixed rate mortgage holders, don't know what percentage that is but ....
It does not pencil out to a 40% increase in monthly payments.
So housing bust in time for 2024 as per usual since Fed always spikes economy for a Dem pres.
"... and maybe I'm not thinking of something .."
Prices remain high but sales drop. Buyers can refuse to buy at higher prices but sellers don't have to drop their price in response.
Only privileged sellers can keep homes because they don't like the prices. Most people sell because they move (and the reasons for moving are usually compelling) and they need their equity to make a down payment at the new location.
If we make the reasonable assumption that buyers can't tolerate a payment increase of more than 10%, either:
Is that reasonable? We'd have to know something about average household finances. Just how stretched are they? What's an average mortgage payment as a percentage of income? Household finances are likely to be getting an assist from falling gas prices in the months ahead.
I think a cooling off of the housing market is highly likely. Not so sure about a "big drop" though.
My house goes on the market in a week. In San Jose. A Canary in the coal mine. Will report results. Days on market and stuff.
Days? Shirley that should be hours?-)
Ours? Shirley, you jest.
Any offer close to asking will be accepted. Hopefully it will be sold before going on the market.
Individual buyers may be out of luck but investors will gobble up whatever else is out there. We own a multifamily in a very desirable city and not a day goes by without my wife and myself getting at least one voicemail from investors looking to pay cash without seeing the property. We are also surrounded, on all four sides, by new developments - old multi-families being converted to multiple shoebox sized condos for young families with more money than sense. I mean what sort of dipshit buys an overpriced, small two bedroom to raise a family? Especially in a city with roving packs of hoodlums that will still Amazon packages, propane tanks and flower pots.
I mean what sort of dipshit buys an overpriced, small two bedroom to raise a family?
People with less wealth than you. My downstairs neighbors are in 750 square feet. They're a couple with two young girls.
Whatever happens, the GQP will blame it on James Earl Carter, Jr., & Black people.
My guess would be that this price drop will be regionally quite different. In places with a genuine housing shortages (like here in San Jose) there are countervailing forces. I suspect w will see a rise in homelessness (which is already very high!).
in my neck of the wood (Westchester NY), the last retired babyboomer in my street put her home for sale.
Remember that the last bust(2009) did delay replacement as people waited years to recover their expected sale price.
In the last 10 years the babyboomers have been replaced by young families. That means there will be no more room for the families coming from NYC or Brooklyn that want to move out from their cramped apartments.
Interesting enough, we witnessed a large number of apartments build up in the area. the asking rent is crazy and very few of them have 3+ bedrooms.
As someone said earlier, the correction will be very variable by markets.