Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
9y
Hi @Adam Jaken. People don't buy houses based on the cost of the house, they buy based on the cost of the payment.
If interest rates go up and house prices go down, the payment (and therefore demand) will likely stay the same. Realistically, it's a wash for buyers and a bit of a loss for sellers. Interest rates alone have little to do with rent rates.
Rental Property Investor · Orlando, FL · Member since 2016 · 463 posts · 220 votes
9y
It Is interesting that you take it as a given that home prices will fall as interest rates rise. I am not so sure there will be the direct effect that you assume, because many other things change along with interest rates. More to the point, though- except in a few markets (the usual suspects, New York and California, as well as Texas, Boston, Phoenix- the big metropolitan areas generally), even with the economic recovery home prices did not jump all that much. There is not a whole lot of room for the prices to fall when interest rates rise, so buyer demand for homes may not change much around the country. It may also not rise all that much (assuming your premise is correct, that a rise in interest rates leads to falling home prices) because wages need to rise for people to jump into homeownership. Bottom line- those who are qualified to buy and who would buy anyway, will buy but smaller houses.
Your question was about rents (which is directly related to the level of homeownership). Truth is, unless wages rise significantly, rents can only rise so much before plateauing. So it is possible to likely that rents will rise in the short term because more people continue to rent instead of buying, resulting in lower vacancies; but they can only rise so much.
Investor · Woodland Hills, CA · Member since 2016 · 51 posts · 12 votes
9y
Patsy Waldron Hi Patsy, first off i think your mistaken about home prices not jumping. Currently the home prices across the nation are at, close too or above recession prices.
Secondly when the interest rate goes up it will cost people more money monthly to buy the same home.
Right now with great credit and a good down payment you get 3.2% APR for a 30 year loan, when that needle moves to 4% (let's not even mention 5% or 6%) it will cost potential home buyers more money to make their monthly payment at which point they will be forced to settle for a smaller home (less expensive) or continue to rent, thus flooding the rental market with renters because they can't afford a home anymore and the home they can afford is to small.
So i personally think history repeats its self, and as history has proven time and time again when interest rates go up, house prices will come down. (again i'm not saying to they will crash, but they will come down until they see some traction and that is where they will stabilize)
Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
9y
Hi @Adam Jaken. People don't buy houses based on the cost of the house, they buy based on the cost of the payment.
If interest rates go up and house prices go down, the payment (and therefore demand) will likely stay the same. Realistically, it's a wash for buyers and a bit of a loss for sellers. Interest rates alone have little to do with rent rates.
Rents should continue to rise as demand for rental units stays strong. As long as the cost of living rises annually so will rental rates.
As for home prices, in Canada I see a major decline in home values coming especially in larger cities.
Young people generally live at what ever level they can afford to make payments on. Most do not save any money for tomorrow. In Canada the debt to income ratio is presently 1.7%. Most in North America live pay check to pay check. When rates rise back to their normal median level of 6-7% the majority of young home owners will no longer be able to afford their mortgages at renewal. Many will be forced to sell the oversized homes they have bought and prices will drop over a 5 year period. There will be more homes for sale than buyers. Those selling will mostly go back to renting as they will have no savings (no equity) to buy a less expensive home and there will be a shortage of smaller homes available to buy. This new stock of older renters should have income to pay premium rental rates, there may be more renters than units available and this could/should push up rents.
As landlords and investors this is our dream scenario. If home prices should crash this is even better for investors with cash.
Now don't go spilling all the beans to these youngin's who have never seen a down market (basically anyone under 30 - 25). I want there to be lots of surprise and little competition when I go shopping ;-)