Mortgage rates skyrocketing !
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
8yOwner occupant rate was 4.75% this past week, so yes those rates are in line. Skyrocketing isna bit of hyperbole with rates still on the very low end historically. In the mid 2000s when the owner occupant rated dipped to 6% most of us felt that was the lowest they would ever go in our lives.
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- Earth · Member since 2017 · 297 posts · 187 votes8yhttps://www.cnbc.com/video/2018/05/22/real-estate-market-is-totally-different-than-stock-market-now-says-robert-shiller.html I agree with Robert Shiller
- Spanaway, WA · Member since 2018 · 17 posts · 5 votes8y
Originally posted by @Jay Hinrichs:
Originally posted by @Russell Brazil:
Originally posted by @Andrey Y.:
Originally posted by @Russell Brazil:
Owner occupant rate was 4.75% this past week, so yes those rates are in line. Skyrocketing isna bit of hyperbole with rates still on the very low end historically. In the mid 2000s when the owner occupant rated dipped to 6% most of us felt that was the lowest they would ever go in our lives.
Hmm.. thats interesting. You thought rates would never go below 6%. Surely they have in the past?
I am a buyer at 6% or below. Above that, seems a tad risky.
Freddie Mac has only tracked rates since 1971, and they are our best source. The first time they tracked a below 6% was in January 2003. They bounced around from 5.5% to 6.5% for a couple years before rising well above 6% in 2005...then it took the housing collapse and operation spin from the fed to push them back below 6% at then end of 2008 where they continued their downward trend to the low 3's.
Even where they are today is historically low. While you may think there is risk in a 6% rate, we will eventually get back to a normalized interest rate enviorment and you will yearn for rates that low in the future.
we just had this conversation with our banker yesterday.. of course those who entered the market in the last 10 years only know HYPER low rates so it seems like rates are high.. those of us who have been doing it for decades and like me in 77 ish bought my first owner occ the rate was 9% and I felt lucky to get it.. rates in the mid 80s went north of 15%..
6 to 8% is basically historic norms for the last 25 years anyway.
and yes if your metric of a good deal is positive cash flow with ONLY 20% down then load up before its gone.. most west coast markets this even cash flow is more like 30 to 50% down so that is the norm.. its not norm to positive cash flow with only 20 to 25% down.
Thanks for validating my thoughts in that last sentence, Jay. I'm in the South Puget Sound area and I'm just about tired of people telling me that you don't need a pile of cash to get into real estate investing. Not without stumbling across a VERY motivated seller willing to sell for pennies on the dollar. For those of us who have a day job and don't yet have a network it's daunting to search Craigslist, FSBO sites, the MLS, etc. and realize we're looking at nearly six figures to buy into a cash-flowing turnkey SFH. I'm starting to get fast at analysis, if nothing else, so there's that.
- Rental Property Investor · Westport, CT · Member since 2017 · 176 posts · 183 votes8y
Originally posted by @Aaron Hunt:
Was offered the following by the lender: 3.5% 5/5 ARM rate (discounted w/ auto-withdrawal from separate acct), no PMI, 5% down (w/ approval of exceptions on previous places); OR 4.5% 30 yr fixed, no PMI, 5% down.
The raising rates are scaring the crap outta me!
I always try a comparison where I see what rate I'd need to get in 5 years time to get an average rate near the 30-year quote.
Meaning this:
You have a 4.5% quote on 30-year deal
If you went for 3.5% on a 5 year ARM, you'd need to get that 3.5% for the first 5 years and then 5.0875% on the remaining 25 years to pay the loan off in the same 30-year time frame using the same exact same monthly payment.
Then you say, what's the likelihood of getting a rate of 5.0875% in 2023? If you expect rates to be higher, take the 30-year. If lower, take the 5 year ARM.
Change the timeframe if you don't expect to be in the property for 30 years.
Right now I'd lock in for the amount of time you expect to keep a mortgage on the property as I think rates are likely to be a few points higher in a few years time.
- Rental Property Investor · Westport, CT · Member since 2017 · 176 posts · 183 votes8y
I don't want to say I rushed to get my last MF purchase started, but I was certainly in a hurry to lock my rate. Since I locked in late March the rate has gone up 60 basis points, not dissimilar from what others are saying above.
There was a second reason I wanted to get another large property purchase in this year which I thought I'd raise in this discussion, that second reason was rising inflation. Expectations are that inflation will begin to climb which I'm hoping will help rents increase as well. While I don't know the short-term correlation, long-term rising inflation should certainly have this positive impact on rents.
The Fed just released it's minutes this afternoon on its last interest rate decision and in it they mentioned they would be allowing inflation to go above the usual 2% target. It's not clear how far above and for how long, but good news for our rental income. Allowing inflation to heat up also means the Fed won't be over-doing interest rate hikes, as rates are hiked in order to slow inflation and an overheating economy. This is not to say they won't be raising rates, they most certainly will, but just that they might be a bit slower at it than expected.
Here's the article:
Originally posted by @Andrey Y.:
Originally posted by @Russell Brazil:
Owner occupant rate was 4.75% this past week, so yes those rates are in line. Skyrocketing isna bit of hyperbole with rates still on the very low end historically. In the mid 2000s when the owner occupant rated dipped to 6% most of us felt that was the lowest they would ever go in our lives.
Hmm.. thats interesting. You thought rates would never go below 6%. Surely they have in the past?
I am a buyer at 6% or below. Above that, seems a tad risky.
Not surely, we're still at historic lows today. Run a quick google search, Freddie shows history since 1971.
- Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes8y
If home builders are in trouble i wonder who is ordering all the large machinery from Caterpiller and other large equipment companies.
CAT is scheduling 8 months out on earth moving equipment with sales up 300% from this time last year.
They are building 1500 homes within a 2 mile radius of my house. Market here seems to be booming
Originally posted by @Krishna Chava:
My operating expenses here in Texas have gone up a lot due to properly tax increases( runaway appraisals). I would any day take a bit higher mortage rate than higher property tax. If it's a loan I can payoff and be done eventually.The way they can increase the property taxes every year in TX is just crazy.
~5k PT on a $200k home :-(Originally posted by @Manish A.:
What will happen to Turnkey + Cashflow model now if rates keep on going up?
Probably nothing good. Unless rents keep up with increased PITI..
Originally posted by @Russell Brazil:
Originally posted by @Jay Hinrichs:
Originally posted by @Russell Brazil:
Originally posted by @Andrey Y.:
Originally posted by @Russell Brazil:
Owner occupant rate was 4.75% this past week, so yes those rates are in line. Skyrocketing isna bit of hyperbole with rates still on the very low end historically. In the mid 2000s when the owner occupant rated dipped to 6% most of us felt that was the lowest they would ever go in our lives.
Hmm.. thats interesting. You thought rates would never go below 6%. Surely they have in the past?
I am a buyer at 6% or below. Above that, seems a tad risky.
Freddie Mac has only tracked rates since 1971, and they are our best source. The first time they tracked a below 6% was in January 2003. They bounced around from 5.5% to 6.5% for a couple years before rising well above 6% in 2005...then it took the housing collapse and operation spin from the fed to push them back below 6% at then end of 2008 where they continued their downward trend to the low 3's.
Even where they are today is historically low. While you may think there is risk in a 6% rate, we will eventually get back to a normalized interest rate enviorment and you will yearn for rates that low in the future.
we just had this conversation with our banker yesterday.. of course those who entered the market in the last 10 years only know HYPER low rates so it seems like rates are high.. those of us who have been doing it for decades and like me in 77 ish bought my first owner occ the rate was 9% and I felt lucky to get it.. rates in the mid 80s went north of 15%..
6 to 8% is basically historic norms for the last 25 years anyway.
and yes if your metric of a good deal is positive cash flow with ONLY 20% down then load up before its gone.. most west coast markets this even cash flow is more like 30 to 50% down so that is the norm.. its not norm to positive cash flow with only 20 to 25% down.
When I was on the podcast, I told people they need to load up on as much mortgage debt as they can at these low rates, and I still stand by that idea. Loading up on debt at 3 to 6% interest is going to make a lot of people rich in the long run. Even better if they do that in DC, San Fran, Boston, NYC, Etc.
This. We are doing the same thing with my clients right now. You have to take a long, portfolio based perspective to financing rentals right now. When you think about mortgages like a combination of a loan and a ton of embedded interest rate options, trading down the yield curve in an historically all time low, flat, and rising interest rate curve is completely irrational. For every dollar of mortgage you borrow, you get a $1 american call option. When you go from a 30 to a 15 year mortgage, you are basically selling 15 years worth of options. The spreads to make that an economically rational decision haven't been there for a long time. When you start adding the fact that rates continue to rise, the most sensible thing to do is to take as long of debt out as you can now. In 5 years, if you are borrowing at 7-8% you will be happy to dedicate the extra cash flow to paying down newer mortgages instead of having it trapped in a 15 year because it saved 50bps. If in 5 years, rates are lower, you can always refi.
Also, not exactly mortgage rates, but just to put things in historical perspective:
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes8y
Originally posted by @Michael Plante:
If home builders are in trouble i wonder who is ordering all the large machinery from Caterpiller and other large equipment companies.
CAT is scheduling 8 months out on earth moving equipment with sales up 300% from this time last year.
They are building 1500 homes within a 2 mile radius of my house. Market here seems to be booming
Homebuilders are not in trouble though due to increased rates...for them it is their cost. Increased cost of materials and increased cost in labor. Inability to find enough skilled labor to complete jobs, extending hold times. At least that was the case with Toll Brothers most recent earnings report.
District Invest Group545 Reviews Originally posted by @Peter Tverdov:
Originally posted by @Russell Brazil:
Originally posted by @Peter Tverdov:
Originally posted by @Russell Brazil:
Originally posted by @Peter Tverdov:
Originally posted by @Russell Brazil:
Originally posted by @Josh Huber:
@Russell Brazil - Your post above stating that investors should load up on properties while interest rates are still low got my brain turning.
As interest rates rise, which do you think is more likely to happen; increased rents or decreased property values?
If all other variables remain equal (cost to purchase a property, tax, insurance, etc...) as interest rates continue to rise, profit margins for new purchases should continue to shrink. So wouldn't something have give somewhere? Otherwise there won't be enough ROI to motivate buyers to purchase properties.
In my opinion, I can see property prices decrease as interest rates continue to increase. If that's the case, then wouldn't it be better to load up when interest rates are high, then refinance when they go back down?
P.S. - I'm new to the REI world, so please don't take any part of this message negatively. I'm simply looking for your opinion/knowledge.
Numerous studies, including those by Nobel laureate Robert Shiller have shown that movements in interest rates have no impact on residential real estate. For most of the general public, this seems counter intuitive...but for loan officers and real estate agents it makes perfect sense. When a buyer goes into the market place, and they are preapproved for say a $400k house...they will buy a $400k house. If rates increase and now they can only afford a $350k house,....that original property they wanted at $400k, the price of that does not drop...but instead the buyer moves down to a cheaper property to coincide with their purchasing power. So as rates go up or down, the buyers simply move up or down in price range with the rates while the property values remain unaffected by rates.
I completely disagree with this. Rates have gone up 75 bps since January and the town I was looking to move to (putting it off 2 years) has sent me nothing but alerts of prices being slashed. Prices on million dollar homes all the way to homes in the 500s. Interest rates up equals housing prices down. It's supply and demand.
Post hoc ergo propter hoc
I guess what I am seeing is magic then.
By your same logic, then prices rising in my market (as well as rising prices across the nation) should be attributable to rising interest rates?
I don't know where your market is. I live in one of the hottest real estate markets in the country, an area that is nearly recession proof. When rents and real estate prices start tightening up on the coasts, it's a sign for the rest of the country. I have seen prices cool in multiple markets as well as landlords slash rents.
Originally posted by @Russell Brazil:
Originally posted by @Peter Tverdov:
Originally posted by @Russell Brazil:
Originally posted by @Peter Tverdov:
Originally posted by @Russell Brazil:
Originally posted by @Peter Tverdov:
Originally posted by @Russell Brazil:
Originally posted by @Josh Huber:
@Russell Brazil - Your post above stating that investors should load up on properties while interest rates are still low got my brain turning.
As interest rates rise, which do you think is more likely to happen; increased rents or decreased property values?
If all other variables remain equal (cost to purchase a property, tax, insurance, etc...) as interest rates continue to rise, profit margins for new purchases should continue to shrink. So wouldn't something have give somewhere? Otherwise there won't be enough ROI to motivate buyers to purchase properties.
In my opinion, I can see property prices decrease as interest rates continue to increase. If that's the case, then wouldn't it be better to load up when interest rates are high, then refinance when they go back down?
P.S. - I'm new to the REI world, so please don't take any part of this message negatively. I'm simply looking for your opinion/knowledge.
Numerous studies, including those by Nobel laureate Robert Shiller have shown that movements in interest rates have no impact on residential real estate. For most of the general public, this seems counter intuitive...but for loan officers and real estate agents it makes perfect sense. When a buyer goes into the market place, and they are preapproved for say a $400k house...they will buy a $400k house. If rates increase and now they can only afford a $350k house,....that original property they wanted at $400k, the price of that does not drop...but instead the buyer moves down to a cheaper property to coincide with their purchasing power. So as rates go up or down, the buyers simply move up or down in price range with the rates while the property values remain unaffected by rates.
I completely disagree with this. Rates have gone up 75 bps since January and the town I was looking to move to (putting it off 2 years) has sent me nothing but alerts of prices being slashed. Prices on million dollar homes all the way to homes in the 500s. Interest rates up equals housing prices down. It's supply and demand.
Post hoc ergo propter hoc
I guess what I am seeing is magic then.
By your same logic, then prices rising in my market (as well as rising prices across the nation) should be attributable to rising interest rates?
I don't know where your market is. I live in one of the hottest real estate markets in the country, an area that is nearly recession proof. When rents and real estate prices start tightening up on the coasts, it's a sign for the rest of the country. I have seen prices cool in multiple markets as well as landlords slash rents.
You further prove the point here. Rising interest rates certainly have no correlation to falling rents, so in whatever anecdotal evidence you have on falling prices, likely is a market condition to the market you are looking at as opposed to an effect of rising interest rates, since you state there are other factors that are not correlated to your thesis. Because what we do see historically is higher interest rates will actually correlate with rising rents.
And if the market you are referring to is Northern Jersey....a much likelier cause of falling prices would be essentially the elimination of the deductibility of property taxes. Most economists have conjectured that Northern Jersey with it having the highest real estate tax rates in the country in some of these cities would be the most susceptible to change in prices due to the new tax structure.
And everyone in the country feels they lived in the hottest market in the country. NYC, DC, San Fran, Boston, Seattle...everyone. It is simply a matter of confirmation bias.
Im not even arguing that prices are falling where you see them....Im acknowledging that as a possibility...but prices are rising nationally, so as @Joe Splitrock said, it is very unlikely to have 1 thing cause two separate outcomes in 2 different areas. The likelier instance is X is causing falling prices in your market while Y is causing rising prices in another market, as opposed to Z causing a rise in one place and a fall in another place. Although if Z were to be something like a major corporation moving from one market to another...that very well could cause opposite outcomes in different markets.
I live in North NJ and nothing has been slowing down so not sure what this post a out NJ slashing prices and rent decreases are coming from. My house just went up about 10% and I bought it in August . My rentals are up another 15% or so YoY....would love to know whic NJ market the poster is looking at.
- Chicago, IL · Member since 2017 · 231 posts · 124 votes8yJust yesterday I closed on an investment property with 20% down on a 30 year -- 5.5%.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
The cost of debt includes two components (1) rate and (2) volume. There are four pages of replies here dedicated to only one of those...rate. We have no clue how sensitive the economy will be to rising rates at high consumer debt levels OR how that makes current rates even comparable to historic rates (without historic debt volumes included).
- Las Vegas, NV · Member since 2014 · 284 posts · 123 votes8y
@Russell Brazil Would you care to cite to academic literature showing that home prices are immune to interest rate fluctuations? Are you saying that if rates move up 2-3 points in a year, there will be no impact on price? Schiller himself has said rising rates could tank the housing market:
https://www.foxbusiness.com/markets/higher-interes...
You're a real estate agent, so I can't say I'm surprised by your viewpoint. However, I completely disagree with it. As Schiller (and anyone who has taken Finance 101) understands, interest rate = time value of money. If I can make risk free money at 3-4% in the bank, then pumping that money into the housing market to make a 4% return makes no sense. Guess what the average cap rate on residential real estate is right now.....sub 4. So if interest rates go to 5-6% on the 30 year, you really believe there will be no change in the price of residential real estate? You think that the same consumer, who could afford a house twice the size a year ago, will now pay the same price for the house that is half the size, since that's all they can afford at higher rates? Effectively, everyone just downgrades their purchasing behavior when interest rates rise? This strikes me as purely delusional.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes8y
Originally posted by @Hal Thompson:
@Russell Brazil Would you care to cite to academic literature showing that home prices are immune to interest rate fluctuations? Are you saying that if rates move up 2-3 points in a year, there will be no impact on price? Schiller himself has said rising rates could tank the housing market:
https://www.foxbusiness.com/markets/higher-interes...
You're a real estate agent, so I can't say I'm surprised by your viewpoint. However, I completely disagree with it. As Schiller (and anyone who has taken Finance 101) understands, interest rate = time value of money. If I can make risk free money at 3-4% in the bank, then pumping that money into the housing market to make a 4% return makes no sense. Guess what the average cap rate on residential real estate is right now.....sub 4. So if interest rates go to 5-6% on the 30 year, you really believe there will be no change in the price of residential real estate? You think that the same consumer, who could afford a house twice the size a year ago, will now pay the same price for the house that is half the size, since that's all they can afford at higher rates? Effectively, everyone just downgrades their purchasing behavior when interest rates rise? This strikes me as purely delusional.
While I currently dont have access to any economic journals subscriptions as Im laying in bed, one merely needs to look at very plainly laid out information historically. Lets take 2002 to 2006, prices rose and rates rose. From 1975 to 1985 rates rose quite dramatically from about 7% to 13% while the median home price rose from about $40k to $100k in the same time.
So if rates do impact prices....why did prices go up 250% while rates doubled for a decade?
Conversely why did prices continue to fall from 2007 through 2011 if rates were also falling?
Without even digging into any data Ive pointed out 3 time periods from recent history that show prices and interest rates do not necessarily correlate.
So for those that contend prices will fall...i say let me buy your real estate now at a discount, before you get hit with a bigger drop. Im sure no one will take me up on the offer though.
Shiller, while reversing his old position, does detail in Irrational Exuberance that the correlation has not existed historically, so you can give that a read. Eugene Fama I believe also has done a study on the very subject.
District Invest Group545 Reviews - Investor · Henderson, NV · Member since 2017 · 37 posts · 39 votes8y
@Hal Thompson, @Russell Brazil
I recall reading some literature on what Russell was saying about no correlation between interest rates and home prices somewhere credible but I can't remember. However, I did encounter something similar in a bigger pockets post in which someone actually took the data and tried to correlate it. That I bookmarked and here for your reading pleasure:
https://www.biggerpockets.com/renewsblog/author/ke...
As far as I'm concerned, there is enough evidence that in US markets, there is no correlation between interest rates and home prices.
- Las Vegas, NV · Member since 2014 · 284 posts · 123 votes8y
@Russell Brazil I'm not arguing that there is a perfect correlation between interest rates and housing prices. The answer to your question about rising rates and rising prices between 2002 and 2006 is that when rates spiked between 2005-2006, this was the setup for the biggest housing crisis in 100 years. Borrowers had locked in short term, low interest rate loans prior to that period, and when the interest rates reset after the inital fixed rate "teaser" period, the whole market imploded.
It is true that there is less subprime borrowing now, and generally loan terms are longer, and so a dramatic crash like last time probably isn't in the cards. But the correlation between interest rates and price still holds.
This time around, you have relatively stagnant wage growth coupled with massive asset price inflation. Why has there been massive asset price inflation? Because interest rates have been effectively zero. You cannot get ahead by saving, so that money has to go into financial assets like stocks, bonds and real estate. However, as interest rates rise (and they have to rise due to inflationary pressure from all the money that has been pumped into the economy), the housing market must fall.http://www.businessinsider.com/us-home-prices-outpacing-inflation-2016-4
- A lot of people are quoting historically low rates even as they keep rising. But I am wondering if that is even valid given we are at all time highs on asset values. So why would it make sense to compare a 10% rate on a home mortgage in 1982 for a home that cost 125k to a 5% rate on the same home that today costs 1.5 million. Granted we have higher income levels but asset prices have gone up a lot. I think people are under estimating the power of high interest rates and the QE roll back on liquidity. I can’t see why that will not put a damper on RE prices or rents once the Fed has tightened further and the impact of those changes start to flow broadly through the economy.
- Just like few of you are saying - I am also of the opinion that high interest rate may have negative impact on the real estate market. It may make even more difficult for the first time home buyers to buy a home, investors to add a property to their portfolio and turnkey providers to sell a cash flow positive properties.
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