Last month, 30-year fixed mortgage rates hit 5%, up from 3% at the end of 2021. But that didn't even slow them down. Rates busted right past that 5% level and are now at 5.27%:
How much is this really? Here's a chart that shows how much the rise in interest rates has affected the monthly payments on a $500,000 mortgage:
At the beginning of the year, the monthly payment on a $500,000 loan was $2,138. By the middle of April, when interest rates hit 5%, that had gone up $546. In the past few weeks, it's gone up by another $83.
In all, monthly payments on a $500,000 mortgage have gone up from $2,138 at the beginning of the year to $2,767 this week. That's an increase of $629 for this particular size of mortgage. If you prefer percentages because they stay the same no matter the size of the mortgage, it's an increase of 30%. But no matter how you like to look at things, this is a very, very big surge. Can the current housing boom withstand this?
Ouch! That's a freaking car payment's worth in extra mortgage payment cost.
Ouch, but yes, because what buyers actually have to do is adjust downward the size/location of house they are considering.
There is actually another chart Kevin likes which I think plays in to this - with a strong jobs market not only do people not need to sell, but they don't want to sell
Which keeps inventory incredibly low, as it is now.
Ouch, but yes, because what buyers actually have to do is adjust downward the size/location of house they are considering.
You're right that many buyers will try do this, of course. But the capacity of the market to adjust downwards in the manner you suggest isn't unlimited. The person who was primarily interested in moving because they needed more space may simply opt to stay put. The entry-level buyer who was scraping bottom of the barrel already may not have cheaper options. And the higher-end seller may be forced to drop their price (which could have ripple effects downwards, depending on how high rates go). Also, the inventory crunch you cite may not materialize, if sizable numbers of potential sellers rush to list quickly (in an effort to beat deteriorating conditions) and/or if buyers, sensing weakness in the market, begin to get choosier. And this is all assuming we don't see actual recessionary conditions at some point with significant job losses.
Am I suggesting a severe national correction? No, but a sizable one could be in the cards. How does a seller's market turn to a buyer's market? Gradually at first. And then suddenly.
I'm buying a house right now. It's killing me that if I had just done this six months ago...
I'm in market right now, and have been for a long time, competing with other buyers. I can tell you from recent first-hand experience that prices are still shooting upwards and that whatever your comps got last month, the house you're looking at now is worth more.
In some markets, the answer is a resounding yes. In some others, a qualified yes.
I fully expect the bubble to pop the day after I close, in the meantime the prices keep shooting up.
"The market can stay irrational longer than you can stay solvent," as they say. Markets always obey the fundamentals eventually. But "eventually" can be longer than you might like.
This. Definitely seeing this happen right now. We saw a house last week get 13 offers over list, and end up 20% over asking. The nearly identical house right next door was just listed for 20% over that 20% over asking price. I think they're a bit nuts and are pushing things, but I'm fully prepared to be proven wrong by seeing this thing sell by next Monday.
Here in St. Louis, this might be affecting the "higher end" of the market (say >$450K). But the "low end" ($200K-$450K), prices are still going nuts, and anything decent sells in 3 days. There's enough cash buyers in that price range, or at least folks willing to put in a substantial amount of cash, that they are not worried about the 2% interest change in the past 6 months.
There's definitely a market around here below $200K, but either very marginal neighborhoods and/or needs serious rehab. And rehab around here, even pre-pandemic, was always very expensive relative to housing prices. Nowadays, with supply chain issues and labor shortages in those sectors, rehab is an even harder game to play. (Although if you do have the building connections, there's some really potentially beautiful stuff that needs love.)
Maybe as excess savings continue to drain a bit more, and interest rates go up another notch or two, things change. In fact, I think people looking 6 months into the future is what's fueling this lower price range frenzy at the moment.
Way back when I was buying my first house in 2001, our local market was seeing houses routinely sell at $30,000 over asking price, when asking prices averaged about $200,000, and mortgage rates were at 6%. The only reason we managed to snag a house was because a lot of buyers paused for a few weeks right after 9/11. Then things went right back to crazy-town.
When people are convinced that they must buy now, or be priced out forever, they find ways to keep buying.
People owners? No
Bank/investment owners? Easily
AirBnB and short-term rentals? Unclear
The thing about the investor owners, though, is that you'd think they'd be super panicky about an impending bubble.
I think we're probably in a bubble, but I'm happy to buy anyway because I mean to live in the house, not flip it. If its sale price falls by 30% after I close, that's a paper loss. It's of no consequence to me, other than maybe I get a break on my property taxes.
Seems to me an investor could really take a bath if they're leveraged up to hold a bunch of houses that lose 30% of their value. But I don't really know anything about the home-investor world, so that's pretty empty speculation.
We bought a new house in 2004 for $310,000. During the Great Recession it fell in value to $180,000. Just a paper loss as we're still in our house, and it's now worth around $475,000. A paper gain, as we're still not selling. It does make us look great as far as our net worth goes.
Where in the SF Bay do you get a house for $475k? Asking for a daughter.
Rio Vista, Solano County
It depends: are you buying to flip soon, or buying to hold and rent and sell 0 years down the line? Here, I wouldn't buy to flip without having well-established relationships with contractors I trusted (and were probably sharing directly in the profits). Time scales for renovations have gotten stretched out, and you have to expect that anything you buy today is going to take *at least* 9 months to renovate, if not longer, and who the heck knows what happens to the market on that time scale.
But, rents are also going up, and you can rent a modest house at a decent return, still. And holding a house 10 years, you'll probably do OK so long as the rental income is good. But again, at least here that's continued pressure on the lower end of the market, less so on the higher end. Most people don't need to rent a 4500 sq. ft. house. (There's a lot of those around here, above a certain, not unreasonable by my former Northeast standards, price point.)
I'm glad I went through the hassle of refinancing early last year - I managed to lock in a 2.7% APR. I don't think I'll be seeing anything that low for quite a while.
We did too. 2.99%
The market is so crazy right now the wife and I are considering selling our house, moving to an apartment for a couple years, and then buying a new house for half the current price after the bubble pops.
I can't recommend engaging in market timing enough. It never fails to produce fat profits.