How Will Homebuyers Swallow these Mortgage Rates?

Many of them say they won’t. And they can’t.

It’s called sticker shock: you look at something that you very rarely buy, and when you see how much it would set you back, you go into shock. This is what is happening with mortgage rates when potential homebuyers figure how much the monthly payment would be for a given house.

On Friday, lenders quoted conventional 30-year fixed-rate mortgages between 4.375% and 4.5% for prime borrowers. While that’s still historically low, it’s up well over half a percentage point over the last four weeks, the highest since April 2014, and up over a full percentage point from many low points during this period.

Home prices have soared in recent years, in part due to historically low mortgage rates. But today’s higher mortgage rates make those homes a lot more expensive in terms of the monthly payment, at a time when home “affordability” in many cities is already a huge issue for what remains of the middle class.

The industry hopes fervently these higher rates will cause a burst of home-buying, as people try to lock in whatever rate they can get before it rises even more. This happened before when rates jumped, for example during the times when QE was ending before a replacement was hurriedly announced, or during the Taper Tantrum in the summer of 2014.

But each time, people have learned that mortgage rates would fall again to even lower levels than before, and that they didn’t have to rush and could have waited, and this lesson might carry forward now, with potential buyers hoping for rates to fall to new lows once again. But time, rates might only back off a little, without hitting new lows, or without even falling a significant amount – because this time, the dynamics have changed.

How homebuyers might react to higher rates is something everyone wants to know. There are those hoping for a burst in home-buying activity. Others in the industry say that it won’t be a big deal; after the sticker shock blows over, people will get used to paying more, and they’ll stretch even further to buy that home.

But here are the people who are supposed to get used to paying more, in a survey by real estate broker Redfin conducted in 38 states and Washington D.C. These are active homebuyers who used Redfin.com in their home-buying process and were either looking to buy over the next 12 months or were already under contract. Their responses are not propitious for home sales, and ultimately home prices.




To the question how important mortgage rates were in their decision to buy, over two-thirds of the respondents – they’re all active homebuyers, so it’s not a theoretical question – said either “very important” or “important”:

  • Very important: 34.5%
  • Important: 33.4%
  • Somewhat important: 20.7%
  • Not important: 11.4%

And if mortgage rates increased by a point or more, “how would it affect your decision to buy?” This is what the respondents said at the time:

  • I’d give up for now: 7.5%
  • I’d look for a less-expensive house:  46.0%
  • I’d save for a larger down-payment:  18.0%
  • It wouldn’t change anything, I’m not sensitive to rates 28.5%

So only 28.5% of the potential homebuyers would not be impacted by higher rates. The rest would act in a manner that would let the hot air out of the market.

Over 25% would either “give up for now” or save for a larger down-payment, which could take years. They’d just disappear from the market.

The survey, released in December, was conducted between November 7 and 11, on both sides of Election Day. The mortgage rate mayhem started on November 9 but when it did show up in the mainstream media days later, it was buried under the much more fascinating post-election drama. So few respondents would have been aware of it at the time they responded. But since then, mortgage rates have jumped and are now closing in on that one-point increase that the question proposed.

The report tried to reflect the industry’s optimism in face of uncertainty, or rather in face of the potential nightmare of higher rates at the peak of Housing Bubble 2, which has blown past – in many cities, by a fat margin – the original Housing Bubble that had imploded with such spectacular results. Redfin:

“Most buyers are looking for a home because of their personal economy, such as an expanding or shrinking family, or a job relocation, rather than only because of the broader economy,” said Redfin real estate agent Danielle Field in Louisville. “Yes, a few people will be kept from the market because of interest rates, but for many people moving homes just isn’t something you can time to the market like the buying or selling of a stock.”

There is some truth to that. People want to move on with their lives. But reality is this: when sky-high home prices that are barely affordable for many buyers even at super-low mortgage rates meet surging mortgage rates, something has to give.

And this time, it might not be mortgage rates. Because the dynamics have changed. Even Fed doves are making unpleasant noises about long-term rates! This could get interesting. Read…  Trump Talked, the Fed Listened: Let’s Shrink the Balance Sheet, Bullard Says




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  79 comments for “How Will Homebuyers Swallow these Mortgage Rates?

  1. Dec 19, 2016 at 11:19 am

    Excellent article.

    PERSPECTIVE : When I bought my first house out of college in 1979 rate 12.5 % I was envious of the 4.5% mortgages my parents had had in the early 60s and later. Some of my parents friends had mortgages even lower than that !

    I came to understand that LBJs guns’n’butter debt — and the subsequent monetization of that debt — led to real inflation, and Volcker made my generation pay that bill with seriously higher rates.

    Oh well, never mind. It’s all relative.

    RATES ARE NOT TOO HIGH.

    House prices need to drop a lot to make the mortgages affordable.

    Sigh. I’ll get less for my house when I sell it by age 70

    Oh well

    SnowieGeorgie

  2. Richard Clark
    Dec 19, 2016 at 11:32 am

    Wolf,
    Big fan of your musings and observations, you have been spot on with so many things. I do want to be careful of negative confirmation bias, because, I have been bearish/pessimistic/concerned for some time, but your writings contain so many “real world” observations” it is very difficult to discount your conclusions.
    This story adds to the growing, broader, and more disturbing story about the demographic groups that will be locked out of home ownership in perpetuity. I know many young adults, late 20’s-late 30’s, whose employment opportunities and chance for accumulation of savings, thus creating a down payment, are SEVERELY constrained. These are highly educated individuals, couples, small families, across all ethnic groups, and professions. Student loan obligations are a huge factor, aside from rising costs of living, stagnant wages, and the new normal of job retention uncertainty.
    I have been a professional investor for over 35 years, and consider myself to be a good student of the history of the markets, along with embracing a “no-nonsense” approach to fundamentals.
    It is impossible for me to not see how ALL of this does not end badly. We are on the precipice.

    • Terry M
      Dec 19, 2016 at 5:25 pm

      Good point, about the college loan debt.
      Another dangerous factor is the increasing property taxes nearly everywhere due to bonds, and other tax increases. My home taxes doubled in 10 years. I would never buy this house again. There will be many older people who can’t sell homes due to a truly impossible combination of factors. Maybe that’s a good thing….prices will deflate, but at the Boomer’s cost. This can’t last much longer.

      • Richard Clark
        Dec 20, 2016 at 9:55 am

        Terry,
        One more expense item to add to the list when determining affordability is home owner’s associations dues. My wife and I live in a great condo in Chicago, but our HOA dues each month are approaching $1600. Yes, it covers lots of different things, but it is a bitter pill to swallow and does impact the market value of the property.
        RC

    • JB
      Dec 20, 2016 at 9:16 pm

      you are on the ball wolf ! your post regarding the effect
      of mortgage rate increases hit before M. HANSON”S

  3. nhz
    Dec 19, 2016 at 11:34 am

    In Netherlands the rate on a 30-year fixed mortgage is now 2.65%; that’s up a bit from last month but not much. Due to our mortgage tax deduction, the effective rate for most homeowners is just a little below 1.5%. Which is definitely below real inflation (and FAR below home price inflation), so effectively homes are cheaper than free for current buyers ;-)

    Here too the slight rate increase is used to convince buyers that they need to ‘buy now or be priced out forever’. Sales numbers are still strong and price increases are even stronger in hotspots like Amsterdam (up over 25% yoy). Dutch buyers could theoretically pay a LOT more for their homes than the paltry 1.5% they are paying now, which is 2-4x less than the cost of renting in the free market. New buyers currently spend just 10-20% of their income on housing, while many renters spend close to 50% or even more.

    But are buyers going to spend more (= reduce spending on other luxuries) if rates increase and home prices stop going up? I severely doubt it, as almost everyone here buys with zero down payment (maximum leverage), so they are all fully dependent on further price gains. If a down payment of 5-10% were required, probably over 90% of current buyers would disappear.

    My guess is that if Dutch mortgage rates are really going to rise (no sign of that yet due to ECB policy), the market will freeze and the few homes that sell will probably sell for far below their current valuations. As soon as sales volume increases again with lower prices (might take a few years before people accept reality), the government mortgage guarantee will go bankrupt and then all hell will break lose because that will likely kill the 30 year old Dutch housing bubble.

    • Justme
      Dec 19, 2016 at 8:13 pm

      >>With mortgage rates around 1% even a
      million euro property is cheap compared to many rentals, but once
      interest rates revert, almost no one will be able to afford these homes.

      Wait a minute here. On Dec 17, 2016 at 7:25 am, in another thread, you claimedthe above, that Dutch mortgage rates were ** 1% **, and now you say they are 2.65%.

      >>In Netherlands the rate on a 30-year fixed mortgage is now 2.65%; that’s up a bit from last month but not much.

      I think an explanation is warranted if you want to maintain your credibility.

      • nhz
        Dec 20, 2016 at 5:33 am

        10-year rates were around 1% (effectively 0.5%), not 30-year rates.

        Mowadays 10-year fixed mortgages and variable rate loans tied to euribor (even cheaper) are the most popular; 30-year fixed was the norm 20 or 30 years ago.

  4. william
    Dec 19, 2016 at 12:23 pm

    Not a tipping point moment, but more of a pause in the upward price momentum. The U.S. housing market is still a much smaller share of the overall economy than it has been in the past. There’s alot of pent up demand for homes among younger generations, who are more cautious when entering the real estate market. And frankly, the younger generations are moving up in the earnings brackets as the boomers enter retirement. Young people are more likely to experience jumps in pay that older generations.

    • Meme Imfurst
      Dec 19, 2016 at 12:35 pm

      I would love to see your data, all of it.

      There is no chart or data or ‘professional economist’, that I have seen that supports this view, not in the USA anyway.

      • william
        Dec 20, 2016 at 8:20 am

        I didn’t google it, but it’s often noted people in their 40’s and 50’s have their income level off, while those in their 20′ and 30’s will experience a climb in their income. Regarding boomers: 10,000 a day hitting 69, 70, 71. It’s a different lifestyle change then when they began hitting 65 a few years back.

        I am a real estate investor, but in Austin, where we have a healthy and I’d say diverse real estate market.

    • nhz
      Dec 19, 2016 at 12:37 pm

      “the only way is up!!”

      are you an RE investor or a realtor?

      • spock
        Dec 19, 2016 at 7:35 pm

        :) I agree. William is on the RE payroll one way or another. This tells me that he is seeing something out there.
        BTW today a friend of mine told me that his girl paid 750k for a home that was listed for 850k.
        This is news to my ears! Has it started in the GTA? (Greater Toronto Area).
        For the last 2 years, homes were sold as much as 20% over asking. Maybe, just maybe, things have started to unravel. I will keep you posted.

        • Dec 23, 2016 at 10:26 pm

          Only in the non-Chinese areas of the GTA near the core of Toronto. The daft millennials are still bidding up cities like Barrie and London Ontario through the roof. Both cities are about a 2 hour drive to work and about a 2 and a half hour drive back home each day. People on average are now paying about $750,000 for a detached home in Barrie. In America a comparable house in the middle of nowhere would be around $100,000.

    • Mark
      Dec 19, 2016 at 1:19 pm

      First time homeshopper here. Early 30s, excellent income, excellent FICO, no debt. Average SFH here in Seattle is $666,500 and that buys you a 1,500 sq ft ranch from the 1960s. For $667k, you’d expect much nicer. We have the down payment and could afford the median home here – but we aren’t buying and many of the couples we hang out with aren’t either.

      Lots of reasonable people saw 2008, know this is a bubble, and are waiting it out.

      • Tim
        Dec 19, 2016 at 2:50 pm

        Same here Mark, in the Bay Area though. The dilemma I have is, I don’t want to buy a house, but neither want to invest in stock market, which seems to be another bubble. But then how are we going to save our savings from inflation? The CPI is a misleading indicator, the real inflation is somewhere between 5-10%, especially on things like housing, health care, education, child care, transportation etc. So, if you have a $150K saving for your future house, inflation will eat up ~10K of it every year. Is there any safe place where you can park your money nowadays? Not all of these high house prices are due to the bubble, part of it is inflation.

        • nhz
          Dec 19, 2016 at 3:36 pm

          I see the same problem here in Netherlands, we also have real inflation in the 5-10% range due to very similar reasons.

          You either have to buy some severely overpriced asset like RE or stocks/bonds – with the risk of severe losses at some point – or accept losing a bit of your capital every year due to inflation. And still this investment will not protect you against continuing inflation, at best it will keep your capital mostly intact.

          In my country savings accounts are hit with a wealth tax (despite ZIRP policy) while RE isn’t taxed except for very low property taxes and any gains on RE are tax-free. Home-debtors are heavily subsidized by the government while renters outside the social sector receive nothing and government does everything they can to jack up rents.

          I have been renting for many years now because even 15 years ago home prices here were already ridiculous, and it only got worse. I hindsight I should have purchased a basic home when I sold my previous (huge) home. Instead of paying over 100K on rent I would have pocketed 100K appreciation tax-free. But that’s hindsight ;-(

          On the other side, the prices of the more attractive homes in my area (stuff that I would like to own for the long term) are going up so fast that what you spend on rent in a year is irrelevant – and the same could happen to the downside. Once our bubble bursts the more attractive homes could drop by many times 100K euro in a few years. But who knows, maybe we get hyperinflation first …

          I have a little bit of my savings in gold and am planning to move a bit more to gold (physical, in custody) in the near future.

          A famous Dutch saying is “Alles van waarde is weerloos” which could be translated as “everything of value is defenseless/helpless” ;-(

        • Smingles
          Dec 19, 2016 at 4:28 pm

          You can get between 1.6-2.0% in 3 year CDs if you can find a good credit union.

          It’s not going to replace all your losses but will cover some, at least.

        • roddy6667
          Dec 19, 2016 at 7:35 pm

          It’s not always possible to protect yourself from inflation. That’s bullshit that the Wall Street Casino feeds people to get them to buy high-risk garbage. Just save and save. You will end up better off than 99% of all people. Putting 10% or more into physical gold will protect against inflation, but the market is rigged. The price may be down when you need the money. Long term, it is a viable plan.

        • Gordon Moat
          Dec 19, 2016 at 8:05 pm

          Corporate bonds. Stick to AA or better rating. Way better than banks will give you on CDs. You can also sell before maturity. Any brokerage company (TD Ameritrade, et al) can get you information on corporate bonds. You could also look at US Treasuries, though be aware of minimum investment requirements. This is also a different approach than buying bond funds (like ETFs or Mutual Funds).

        • marty
          Dec 20, 2016 at 3:38 am

          Best defense against inflation is a fixed rate mortgage. Do not buy in the bubble cities. Buy rental properties in the stable markets that cash flow. You will get good income on your down payment, your mortgage will whittle away with inflation, you’l l have tax breaks and you can’t be bailed in. It’s getting a little late in the cycle, you might be able to buy for only a few more months. So then save and buy when prices go down.

          Go to Daniel Amerman’s web page.

        • catomoose
          Dec 26, 2016 at 10:13 pm

          physical gold and silver

      • Smingles
        Dec 19, 2016 at 3:32 pm

        “Lots of reasonable people saw 2008, know this is a bubble, and are waiting it out.”

        This statement suggests, almost by definition, that it’s not a bubble yet.

        That being said, I agree with you… even if it’s not a 2007 style national bubble, the price to value propositions out there in cities like Seattle, Boston, and NYC are not simply not good.

        • shaba
          Dec 19, 2016 at 11:10 pm

          As opposed to somewhere like Sydney, where most people are incredulous if you think the RE market is a worry.

          Last few months, from my circle of average couples, I’ve heard things like “it will never fall here”, “there is just so much population growth and overseas investment”, “rates are low” and “the government will never let it go down” more than a few times each.

          Median price in Sydney is over $1 million, clearance rates are sky high. Thing is, I also can’t see it slowing down despite it being an almost 25 year expansion (Sydney anyway – WA and NT are in the gutter already)

          Where is the catalyst going to come from? Maybe when oversupply and record prices coincide one has to give? Or an external shock (more likely).

        • william
          Dec 20, 2016 at 8:26 am

          I interviewed in Seattle and Boston earlier this year and calculated the cost of owning vs renting in each city. Seattle is still a city to buy in, surprisingly, if you can put 20-25% down. Not so for Boston. I couldn’t make numbers work for Boston and would recommend renting there unless you can put down more than half on a home, or you’re a bit of a gambler.

        • MarkinSF
          Dec 20, 2016 at 3:29 pm

          This statement suggests, almost by definition, that it’s not a bubble yet.
          Not at all. All it implies is that the bubble hasn’t burst. The logic of your statement only supports the surprise & shock that people experience when it does pop

        • andy
          Dec 24, 2016 at 5:54 pm

          I came across an article by Prof Shiller I believe, where comments span across few years starting at around 2006. Well, many claimed that just because everyone already sees the housing bubble the bubble cannot be. Guess what..

      • spock
        Dec 19, 2016 at 7:29 pm

        Brilliant!
        When the tide turns, and it will, you will be able to command what you want for your monies.

        • Lee
          Dec 20, 2016 at 4:29 am

          Shaba,

          The boom in Sydney will end when most of you have moved to Melbourne!!!

          https://au.finance.yahoo.com/news/why-migrants-are-flocking-to-this-aussie-city-040019803.html

        • nhz
          Dec 20, 2016 at 5:39 am

          @Lee:
          nothing that some more government intervention can’t fix …

          in my country the government subsidizes new migrants so they can also live (not all of them of course, some lucky ones) in the most expensive locations like the center of Amsterdam. After all, everybody irrespective of income is entitled to the very best homes, isn’t it? (except native taxpayers, of course but our government couldn’t care less about those as long as they can still draw blood from them).

      • KitKat
        Dec 20, 2016 at 11:47 am

        I can affirm your anecdote with mine. We’re late 20s/early 30s couple both in tech and we want 2 kids. Nothing really looks reasonable despite our high salaries unless we decide to do the Tacoma commute.

        The 1460 sq ft townhome across the way from us is 800k. Meanwhile, our rent for a 2 bedroom in an older but good enough place is 1500/mo and even has a dedicated parking spot (the townhome does not). We’re either going to wait out the Seattle market or just move closer to family in 5 years.

    • S
      Dec 19, 2016 at 1:41 pm

      As a young, highly paid professional I can tell you there is no way i am getttinf into this market until prices drop by half. Inflation is eating all of the great income leaps you talk about.

      • Realist
        Dec 19, 2016 at 4:31 pm

        It seems like pure demographics will bring prices down with time. As all the baby boomers downsize out of their mcmansions, someone will need to buy them. Most millennials today may not be in a position to buy given many have too much debt, and also want/need to stay mobile in the current job environment where job changing is frequent. This will cause a glut on the market, pulling prices down. We no longer live in a world where one stays in the same house and job for thirty years and it seems prices will have to reflect that.

        • nhz
          Dec 20, 2016 at 5:52 am

          In my country this problem has been ‘solved’ by allowing wealthy boomers to pass 100K euro per year to their offspring (under 40) on the condition that the money is used to buy a Dutch home. With some clever arrangements 1 million euro homes can be passed to the next generation almost tax free.

          But apart from the fact that this favors the wealthy at the cost of the rest by keeping prices up, it doesn’t seem to work because many owners of big expensive properties have no young offspring and these homes are too expensive for the average buyer despite all the easy money.

          This is very obvious where I live, there are many very old citizens (formerly families, most now singles or just two people) living in huge, very expensive homes like 17/18th century canal houses that are really not suitable for old people. Many of them will not accept a lower price because they feel entitled to win the lottery, and some cannot accept a lower price because they have spent all the money from 25 years of appreciation on living the good life …

          10-15 years ago some of these homes were purchased by speculators who split them up in e.g. 4-5 luxury apartments but this no longer works, there are too many expensive apartments on the market already. Something has to give but it isn’t clear yet what is going to happen.

    • CA NV Br commuter
      Dec 19, 2016 at 3:33 pm

      william, what are you smoking? The high paying jobs and particularly to middle paying jobs are not there with the same abundance.

      What makes you think the housing market is a much smaller share. The prices are about where they were before, and there are many more residences. As a % of disposable income, housing — whether renting or buying — is higher than it has ever been before. While less percentage owns their own home, those home were bought by large companies that now lease to renters who can’t afford to buy, and they are jacking up the rental prices. Since interst rates are lower than they have been for 50 years, the value of the real estate is higher than it has ever been. The “pent up demand” is not demand when people have to pay for it. I have “pent up demand” for a 10,000 square foot home, but I can’t afford one so that isn’t real demand.

    • interesting
      Dec 19, 2016 at 6:19 pm

      “There’s alot of pent up demand for homes among younger generations”

      and a mountain of boomers that are going to have to start selling….I know a few that have more than one house. One guy has 5, he’s starting to think it’s time to cash out.

      • Churns accounts
        Dec 20, 2016 at 6:38 am

        He better sell now. He is already probably at the peak or past. He needs to get moving. Its not going to be this GREAT AGAIN for sometime. The next FED move will really bring reality in….

  5. Meme Imfurst
    Dec 19, 2016 at 12:29 pm

    You still have what looks like 28% and more (depending on how the data was gathered using the same person for each answer) that are not bothered or little bothered by higher rates. That is still a lot of cash money floating around to keep the more “choice” markets greased for a while, especially if you consider property ‘collectors’ which some places like Florida still seem to have. A little pull back, completely normal, a 20% pull back in prices is not unheard of either, and one is well over due.

    What will kill home buying for those who need a mortgage are those unseen costs for ownership…insurance, taxes, utilities, etc. Don’t forget that many lenders now require wind, flood, and fire on a mortgage policy. Wind and flood can equal the mortgage payment and not just in Florida anymore. When you consider many cities and counties are forced to cover unfunded civil pensions with up to a 100% tax rate hike, there is more to consider than just the interest rate moving an 1/8 or so.

    Last, a ‘futures table’ for interest on a home loan at a theoretical zero rate would mean the house would have the same value in 30 years as now. These low rates, accelerated by near zero down payments and a flood of cheap money, have turned the markets up side down and sent the prices to the moon contrary to the last 100 years of sound normalized RE data. This is the FED and this governments meddling in markets, that have distorted everything and now present a danger when the ship tries to right itself.

    • nhz
      Dec 19, 2016 at 12:52 pm

      What if those cash buyers are mostly speculators, and people who are ‘upgrading’ as long as the market is rising (the more expensive the home, the more leverage and that is what they are all after) – and not people who are planning to live there for a long time?

      In my country most of the cash buyers definitely are speculators, including those who park their money in RE because it is taxed less than a savings account and the gains on RE are tax free. This will stop as soon as people realize that home prices cannot keep climbing relative to incomes forever, especially if rates start going up.

      I think it is a bit similar to the suggestion that although almost the whole Dutch housing market is subprime by US standards, this isn’t a problem because Dutchies are very faithful in paying the mortgage. Of course they are, when ‘owning’ is much cheaper than renting and everyone is expecting to get rich by owning the maximum home they can afford (our last housing crash was in 1981). I bet that delinquencies will start to surge within 1-2 years after the market tops. Why pay the mortgage if there is no equity in the home, or the little equity will quickly evaporate? Worst case they will be evicted after a long time and get subsidized housing from the government (and many owners will bet they can stay in their homes even if they don’t pay the mortgage, because ‘everybody has the same problem’).

  6. Greatful again
    Dec 19, 2016 at 12:47 pm

    Where I am currently selling my houses, the mortgage rate would have to get to about 7% before PITI would be equal to the cost of renting the house instead of buying it. Although prices are very high in areas of the country that have seen stronger than normal economic “recovery” , the rest of the country is very reasonably priced in comparison.
    The biggest concern I hear from the first-time buyer is more about their feelings of job insecurity rather than cost or mortgage rates. A 30 year mortgage sounds like a huge responsibility to people that have not worked in one place for more than a year or two.

    • nhz
      Dec 19, 2016 at 12:59 pm

      a 30 year mortgage sounds out of place to me in general, given that in most of the West one can no longer count on keeping a job, let alone a career or increasing income over the years. It may be great for older government employees who cannot be fired, but the reality for most of the younger buyers is very different. Even more so because nowadays many mortgages are based on double incomes (in my country until this year the second income only counted for 50%, from next year it will be fully counted – buyers only see the benefit of this but not the risk).

      But yes, it’s very important if alternatives are available like renting or buying in a cheaper area. However, I think you should not look just at rates, if rates go up a lot I would expect that required down payment or other mortgage requirements go up too, which would also restrict what the average buyer can pay.

      • Greatful again
        Dec 19, 2016 at 1:16 pm

        In the US we have the FHA loans available at 3% down, as long as the price doesn’t go above a certain amount. All incomes on the loan are counted 100%. Also, the 30 year mortgage is a fixed rate mortgage…which may be attractive to those that think rates will rise. But, if rates should start to decend, one can refinance to the Lower rate…as long as one still qualifies and the house appraises ok.

    • Ethan in Northern VA
      Dec 19, 2016 at 3:09 pm

      Here in Northern Virignia I’m pretty sure the PITI with 5% down on houses equals a monthly payment that is quite a bit higher than rent. Asking rents are higher, but I notice the negotiated rents actually achieved are lower.

  7. cookie
    Dec 19, 2016 at 1:06 pm

    I tried to buy a house in LA twice this summer, but I was overbid. The first one, I got outbid by 100 K while the second by 40 K. I was disappointed but now I realized that it may be a blessing in disguise. I feel that RE already peaked last summer and I could have bought something at top of the market price. I feel that RE prices are going to correct sometime next year. The high interest rate does not really bother me as I can always refinance in the future.

    • Frederick
      Dec 19, 2016 at 1:31 pm

      They are going to correct and big You did the right thing by not overpaying in a bidding war Patience will pay off cookie

      • Paulo
        Dec 19, 2016 at 2:09 pm

        I have a nephew in the mortgage business (private funds) in the Pacific nw. He is working like a one-armed paper hanger trying to keep up to demand. I suspect it is the fear of rising rates that might be sparking this surge in business. This would indicate a big slowing at a particular interest rate/psychological tipping point.

        When I bought my first house, 7% mortgage was considered a steal of a deal.

        My kids think I am a broken record with, “Live below your means”. “Have reasonable expectations”. And, “Success takes a few decades”.

  8. Ehawk
    Dec 19, 2016 at 1:28 pm

    Well well, Look at rents in Mountain View, CA. home of the Google, and close to Facebook, yahoo, LinkedIn, and whatever else.

    https://sfbay.craigslist.org/sby/apa/5910903229.html

    There’s still tons of buildings under construction around here.

  9. michael
    Dec 19, 2016 at 1:38 pm

    Cookie,

    While a change in the direction of appreciation/depreciation may be anticipated in 2017, a correction would play out over years so you likely will be waiting for an entry point. Prices are sticky on the way down.

    • nhz
      Dec 19, 2016 at 3:50 pm

      prices are not always sticky on the way down.

      The last housing crash in Netherlands was in 1981. In the preceding five years prices increased by about 100% while real incomes were stagnant at best. Rates were 10-12% then and down payments of 20-30% were normal. There was feverish ‘flipping’ by a small group of citizens (often government employees …) when suddenly, without any obvious cause, the bottom fell out of the market.

      Within 1.5 years the AVERAGE home price in the Netherlands cratered by 40-50%. A friend of mine purchased a newly finished spec home for over 60% below its official price – the original client went bankrupt and there were simply no buyers (no people who dared to buy). I have heard many similar stories from others. For the next 5-10 years, home prices went nowhere while inflation was rampant. The crash and the inflation in the next years wiped out all the gains prior to 1981 and then some …

      Our current bubble has been running for over 25 years now and the price gains are 1000-1500% depending on area. I have no idea how sticky prices are going to be when this one bursts, but my guess is that when this bubble bursts everything goes with it (including the Dutch banks and the government) and I cannot imagine a slow decline lasting many years. At some day, the bottom is going to fall out again because all the filthy tricks to keep home prices elevated will have been exhausted. But who knows, maybe they can keep this ponzi running for a few more years, with the help of Mario and his gangsters.

      • nhz
        Dec 19, 2016 at 3:55 pm

        P.S.: I should note that my friend, who is a savvy investor, sold that home 10 years later at a small loss because the neighborhood was going down and he thought home prices were never going to recover. If he had held on just a bit longer he could have pocketed at last half a million euro on that home over the next ten years …

        very difficult to predict the madness of crowds and politicians …

  10. Sound of the Suburbs
    Dec 19, 2016 at 1:55 pm

    Wealth – real and imaginary.

    Central Banks and the wealth effect.

    Real wealth comes from the real economy where real products and services are traded. This involves hard work which is something the financial sector is not interested in.

    The financial sector is interested in imaginary wealth – the wealth effect.

    They look for some existing asset they can inflate the price of, like the national housing stock. They then pour money into this asset to create imaginary wealth, the bubble bursts and all the imaginary wealth disappears.

    1929 – US (margin lending into US stocks)
    1989 – Japan (real estate)
    2008 – US (real estate bubble leveraged up with derivatives for global contagion)
    2010 – Ireland (real estate)
    2012 – Spain (real estate)
    2015 – China (margin lending into Chinese stocks)

    Central Banks have now got in on the act with QE and have gone for an “inflate all financial asset prices” strategy to generate a wealth effect (imaginary wealth). The bubble bursts and all the imaginary wealth disappears.

    The wealth effect – it’s like real wealth but it’s only temporary.

    The markets are high but there is a lot of imaginary wealth there after all that QE. Get ready for when the imaginary wealth starts to evaporate, its only temporary. Refer to the “fundamentals” to gauge the imaginary wealth in the markets; it’s what “fundamentals” are for.

    Canadian, Australian, Swedish and Norwegian housing markets are full of imaginary wealth. Get ready for when the imaginary wealth starts to evaporate, its only temporary. Refer to the “fundamentals” to gauge the imaginary wealth in these housing markets; it’s what “fundamentals” are for.

  11. Mick
    Dec 19, 2016 at 2:55 pm

    This is about much more than mortgage rates. The entire US economy is propped up on low rates and loose credit.
    Everything from bonds to auto sales. One gigantic debt bubble. So those thinking they’ll just wait for the correction are in for a surprise, as this “correction” turns into a catastrophe.
    Won’t matter what industry you’re in. Won’t matter if you have 20 million in the bank, or the safest job in the nation. The entire ship is going down, and all who are on the ship will go with it.

    • Dec 19, 2016 at 3:16 pm

      When the ship goes down, maybe this might be a safe spot to reside :

      Being in a place that is debt-free; where you own your home outright; where you have a year or even three of total expenses in cash saved; and where you have some saleable skills; and a place where you can store six months of non-perishable food and some bottled water . . . . ( perhaps a few more similar ideas )

      I would add some close relatives that can double up with you in your house when TSHTF — to share expenses and help each other during the storm.

      Personally I would also add a few hundred ounces of junk silver, and perhaps a dozen ounces of gold bullion, preferably American gold eagles.

      https://en.wikipedia.org/wiki/Junk_silver

      I am trying to achieve that — I do have some savings and am debt-free aside from a large-ish mortgage, given my age. The mortgage was/is a predictable result of a divorce after a decades-long marriage.

      SnowieGeorgie

      • number1gi
        Dec 19, 2016 at 7:32 pm

        Whether or not you have a firearm, you might consider ammunition of various calibers as an investment. It may prove more valuable than gold or silver.

      • PrototypeGirl1
        Dec 19, 2016 at 11:16 pm

        In the event of shtf it would be nice to have in home skills to make products for sale or trade like liquid silver, battery charging capabilities, food preservation, water distilling, radio knowledge. I’m putting in a little solar so I can do those things. Even if there isn’t rough times it’s still amazing to be so self sufficient.

      • josap
        Dec 20, 2016 at 2:27 am

        If the ship goes down that hard, no bank will even think of foreclosing on a mortgage for many years. They won’t be able to take on the loss.

        • nhz
          Dec 20, 2016 at 5:54 am

          and the banks may not be allowed to take the loss and foreclose because the politicians keep the banks afloat (with taxpayer money) and want a favor in return.

          That happened in Netherlands in 2008, they will certainly try again with the next downturn.

    • nhz
      Dec 19, 2016 at 3:58 pm

      the whole West (anglo-saxon universe) is propped up on low rates and loose credit …

      I’m not sure it will go down in one BIG catastrophe though, more likely markets will oscillate wildly while bankers and politicians ‘extend and pretend’. RE markets especially can be very ‘local’.

  12. Uncle Frank
    Dec 19, 2016 at 3:15 pm

    I purchased a home in 2004 with a 30-year rate of 5%. Paid it off in 2009 after the financial crisis. Even though homes are overpriced now people still want way more than they can afford. Either rent or move to an affordable area and purchase a smaller home. The ‘American Dream’ is on a binge drunk and needs to sober up.

  13. Edward E
    Dec 19, 2016 at 3:57 pm

    I’m thinking about building another and make a guest house out of one or the other. Planning to do something like these…
    http://www.steelmasterusa.com/blog/ http://www.steelmasterusa.com
    Very low maintenance, easy to build, virtually indestructible, easy to insulate, no debt, makes a lot of sense at 2,200+ ft altitude up on a ridge in the Ozarks. Easy landing for the reindeer. Complete mystery to me why anyone would want to live in a concrete jungle!

  14. Maximus Minimus
    Dec 19, 2016 at 4:16 pm

    “lenders quoted conventional 30-year fixed-rate mortgages between 4.375% and 4.5% for prime borrowers.”
    I always wondered how do lenders finance such mortgages?
    1. By issuing short term bonds, and keep rolling them over. What happens when the market freezes and you cannot roll over; a scheme that blew up so spectacularly in 2008. However, this time is different: everybody is ensured by FED.
    2. Issue a 30-year bond, and sell it to the FED as QE. This scheme that entered a temporary respite.
    I am missing something?

  15. economicminor
    Dec 19, 2016 at 4:31 pm

    All the numbers and charts I look at suggest that the consumer has run out of options and should not be able to go further in debt but then I see a newer set of numbers and charts that have shown that they did.

    I have given up trying to even guess where things are going. I know what I think and I know what the numbers mean to me but the world is more a fantasy and magical thinking seems to rule much more than my poor old fashioned logic.

    What I think should be next is that both extremely high prices and raising interest rates should force many if not most buyers from the markets and should cause prices to stop rising. This should happen across the board. Not only in real estate but in health care and food and vehicle sales. The Christmas season should be a bust and we should start down the other side into deflation before spring 2017.

    I have been fooled so many times before that this is neither a prediction or even a guess. What should be and what is seems to be entirely different animals these days. Good luck to all of us.

    Stay out and inflation actually comes and we get killed by being behind.. Invest in anything and deflation shows it ugly head and we get killed the other way. Just seems that there is no way for me to win because I haven’t a good grasp on what is actually going to happen next.. as I have no beliefs left.

    • Bob
      Dec 20, 2016 at 12:00 am

      I know what you mean. I thought the market was overpriced back in 2011. Who would have expected the Fed to conduct a massive wealth transfer from savers to debtors. It’s plain irresponsible and full of moral hazard. When our leaders can’t be relied on to make reasonable thoughtful decisions, anything can happen, and it won’t be good for the country.

      If you make any money, the Fed taketh away. This system of ours won’t allow people to save. It’s forcing people to work till they die – all so the Fed can line the pockets of a few corrupt Fat Cats and bankers on top end of the financial pyramid, as well as wreckless short-term speculators.

      If I take out debt and spend wrecklessly like the Fed wants, will the government be there if I fail?????? Will the Fed take responsibility for sending my kids to college, or pay for my health care? If not, the Fed has no business telling me to spend and not save.

      • nhz
        Dec 20, 2016 at 6:05 am

        I though the markets were way overpriced in 2000 already ;-)

        I was right about the stock market (in my country despite years of strong gains the index is still way below its 2001 peak), but very wrong about the RE market.

        As to your last comment: yes, that is the big question. All the ‘speculators’ (those who buy a home with zero down and a full taxpayer guarantee against any losses; many of them also have goldplated government pensions …) count on the government to bail them out if something goes wrong. They spend more money than they make every year and expect this to continue forever; living in debt is heavily subsidized over here, and saving is heavily punished with wealth taxes etc.

        But some day this whole Ponzi economy will prove TBTS (Too Big To Save). Still, it would not surprise me if in such a situation the government will steal all private savings (except those from the elite, that are safe in foreign jurisdictions or legal constructions) to hand it out to debtors, after all debtors are a huge voting majority :-(

  16. Chicken
    Dec 19, 2016 at 5:08 pm

    Just wait for those adjustable rate mortgages to begin countdown to liftoff. It’s doubtful the FED can make good on their bluff, IMO.

  17. Dec 19, 2016 at 5:23 pm

    Houston saw a nice bump in November sales, but that was echoed by other U.S. markets that also saw a spike in activity as buyers hedged an uncertain 2017. What concerns me is that we could be looking at a nice air pocket to start the new year. This spike in rates is going to cause some indigestion.

  18. Dec 19, 2016 at 6:09 pm

    I agree with ” economic minor.” I stopped thinking on August 18, 1999. On that day I pulled everything we owned and put it into money market funds- at the time paying upwards of 6%. A month later the markets started to go bonkers. We never lost a cent. Money markets started going down as well- to bupkis today. Still never lost a cent. Now, I haven’t made much in those 17+ years but we sleep every night. Lowered our expenses by selling our home of 20 years, moving to a smaller place in South Carolina, sold one of our 3 cars paid off bills etc etc. We live on 2 small pensions, 2 SocSec checks and travel regularly. Sleep every night fitfully and not think. As we have told friends, ” we have enough to live nicely the rest of our lives, but not enough to worry about.”

  19. interesting
    Dec 19, 2016 at 6:13 pm

    I couldn’t care less what the rate is, the price of the home is so out of reach the rate is meaningless.

    just my particular place in hell.

    • andy
      Dec 24, 2016 at 6:34 pm

      Hell? I think we’re seeing “as good as it gets” :)

  20. Patrick
    Dec 19, 2016 at 7:28 pm

    Great to know that the housing bubble implosion is continuing to head in the ‘right’ direction. I plan on looking for a nicer home in a few years, once the Fed’s gone into full panic mode and rolled out NIRP and/or incentives, to drive 30 yr fixed rates under 1.5%. Once they do that though – the speed with which housing bubble 3.0 (and inflation) takes off might make our collective heads spin.

    Meanwhile I’m buying up every undervalued commodity miner, ETF and leverage out there to catch the popping of the Dollar bubble, once Janet realizes that a simultaneous bond & housing collapse due to soaring yields, isn’t going to be very ‘appropriate’ for Fed rate hikes.

    • interesting
      Dec 19, 2016 at 8:58 pm

      I’ve been reading about this dollar collapse for 16+ years……any day now.

      • shaba
        Dec 19, 2016 at 11:22 pm

        how is the dollar going to collapse when every other currency is being belted in a currency war and capital is flowing into US dollar assets? Wouldn’t a collapse in eg emerging market currencies occur first, coinciding with a melt up in the dollar and then perhaps a dollar implosion?

        • Dec 20, 2016 at 8:30 am

          Tough question. Since all other currencies of any importance are in the same boat, they can’t all collapse, one against the other.

          So the collapse ( If ? When ? If ? ) has to be against something other than paper currencies.

          REAL THINGS !

          Houses and farmland. Factories. Real ownership of other real things — by which I do not mean a baseball signed by George Herman Ruth.

          Productive assets, which will be useful if you have the skills mentioned by PGirl1 . . .

          Not thinking collectible wine, or cars, or high-end art such as the beautiful but mis-priced Koons balloon dog. Or even rare coins — who would want them ?

          And always, paper currencies will collapse against Gold and Silver — as they always do in the end. Historically.

          The only universally-recognized “money” through the millennia.

          For those who say you can’t eat gold — I always say this, “you can’t eat FRNs, or stocks or bonds or anything else that ain’t food”. G & S will lubricate trade or barter should the dollar actually collapse.

          I do not know anything with any certainty except that all of the large currencies cannot collapse, together, against each other. Not possible.

          SnowieGeorgie

      • GSX
        Dec 20, 2016 at 7:16 am

        +1 show me the road map that continues to point to this dollar collapse. Its great to read the news just read factual news to begin with and one might make a rational choice.

        Thanks Trump LOL!

        The Supreme Leader has a deal for all of you LOL :)

        • nhz
          Dec 20, 2016 at 5:17 pm

          look at the price of all major currencies against gold over the last 50 or 100 years and there is no denying the collapse. The dollar is down 98% or so within 100 years and yes, many currencies are even worse or have hyperinflated entirely during that period (and yes, some currencies did better than the greenback).

          It’s a slow-motion train wreck, a race to the bottom but because of the ‘slow’ most people fail to see it.

    • nhz
      Dec 20, 2016 at 6:14 am

      driving rates down will only make the bubble worse, just look at Europe where in many countries the bubbles were already mature by 2000, and ZIRP/NIRP made things even worse.

      The right time to buy is when rates are sky-high and the main requirement is a significant down payment. Unfortunately, that’s not in sight anywhere in the West.

      In my country for the last 10-15 years housing was only ‘affordable’ if you don’t have any capital and buy a home using government subsidies and guarantees (that don’t apply or are less effective when you have your own money). When 10-year mortgage rates are close to 1% and zero down payment is required like here, basically only crooks and idiots are buying. People who buy with some skin in the game should be aware that in such conditions there is a huge risk of capital loss – which may not be important if you plan to live there for the reset of your live, but most people who are looking to buy a home don’t have that certainty.

  21. david
    Dec 20, 2016 at 7:29 pm

    The government owns about 75% of all residential mortgages. No housing down turn any time soon.

    • jimbo
      Dec 21, 2016 at 10:26 pm

      Governments collapse too. Whats going to prop up the us government? The 99% are tapped out. Student loans and sub prime auto loans going bad, median income when indexed to inflation has declined, property tax pensions underfunded, etc. Manufacturing continuing to decline, unfavorable demographics, declining resources, etc. Stocks only have been going up due to stock buybacks using debt, etc. I could go on and on.

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