Mortgage rates and the housing market

[MU82]

Interesting piece in the NYT about how so many American homeowners have such low mortgage rates that it is making them unwilling and/or unable to sell their houses. And that, as much as anything, has almost frozen the housing market in many parts of the country.

https://www.nytimes.com/2024/04/15/upshot/mortgage-rates-homes-stuck.html?

These locked-in households haven’t relocated for better jobs or higher pay, and haven’t been able to downsize or acquire more space. They also haven’t opened up homes for first-time buyers. And that’s driven up prices and gummed up the market.

Another way to state how unusual this dynamic is: Between 1998 and 2020, there was never a time when more than 40 percent of American mortgage holders had locked-in rates more than one percentage point below market conditions. By the end of 2023, as the chart below shows, about 70 percent of all mortgage holders had rates more than three percentage points below what the market would offer them if they tried to take out a new loan.

[jesmu84]

There are a zillion things wrong with the US housing market.

Previous low mortgage rates are just a drop in the bucket.

[MU82]

There are a zillion things wrong with the US housing market.

Previous low mortgage rates are just a drop in the bucket.

My OP wasn't about "wrong" or "right." It simply offered a link to a fact-filled article on one of the main reasons the housing market is "gummed up."

This actually is one of the things affecting the housing situation for my daughter and SIL right now. They own a house in a Seattle suburb that they bought before they had their 2 kids. It's too small, and not in a walkable area, and they want to move. But they have a 3% mortgage and aren't wild about the idea of selling that to buy a more expensive house that also would come with a 7%+ mortgage. Also, partially because of this mortgage-rate situation, they are finding inventory to be very low where they want to buy; potential sellers in those areas also don't want to give up their low rates.

[dgies9156]

Mortgage rates are keyed to the 10-year Treasury rate. So long as the Federal Reserve uses higher interest rates to lock down inflation, mortgage interest rates will remain at current levels.

The irony in all of this is that those of us who came of age in the late 1970s and 1980s would have drooled at the current market interest rates. Many of us took out 30-year, fixed rate mortgage loans on our first homes that had an interest rate of between12 percent and 14 percent. We never dreamed that rates would get into the 2 percent to 4 percent range.

The difficulty with wide swings in mortgage interest rates is "consumer reach." When rates dropped to very low levels, homeowners had a couple of choices. The first is refinance downward, get a lower payment or pay off your home more quickly with the same payment on a shorter term loan. The second is to sell your house, buy up and keep your payment relatively flat on a much larger outstanding balance. Much of the country did the latter.

The housing market is locked up because young, first-time homebuyers who can afford homes at 4 percent can't afford the same home at 7 percent. They're either going to have to come up with a lot more down, which delays homebuying, or buy a much smaller property. For existing homeowners, many became aggressive assuming cheap mortgage money would always be out there. It's not and so the numbers don't work on a new home.

Incidentally, if rates do come down dramatically, expect housing prices to skyrocket. We made a fortune in the 1980s when we bought using a 12.75 percent mortgage and sold seven years later when mortgages were in the 6-8 percent range. I'd expect that as rates fall and demand recovers, prices will see double digit increases. My SIL and daughter are starting to look for a home in the Syracuse, NY market and as long as they can make the payment, the house would be a sterling investment.

[Goose]

82

You should cash out of some of your stocks and buy your daughter a home.

[MU82]

82

You should cash out of some of your stocks and buy your daughter a home.

Pot-stirrer

All stocks are worthless now, what with the economy at its worst point since the nation was founded.

[Skatastrophy]

82

You should cash out of some of your stocks and buy your daughter a home.

Kids. Always looking for a handout.

[The Hippie Satan of Hyperbole]

82

You should cash out of some of your stocks and buy your daughter a home.

He's 100% invested in Truth Social. It will pay off soon I'm sure.

[MU82]

Mortgage rates are keyed to the 10-year Treasury rate. So long as the Federal Reserve uses higher interest rates to lock down inflation, mortgage interest rates will remain at current levels.

The irony in all of this is that those of us who came of age in the late 1970s and 1980s would have drooled at the current market interest rates. Many of us took out 30-year, fixed rate mortgage loans on our first homes that had an interest rate of between12 percent and 14 percent. We never dreamed that rates would get into the 2 percent to 4 percent range.

The difficulty with wide swings in mortgage interest rates is "consumer reach." When rates dropped to very low levels, homeowners had a couple of choices. The first is refinance downward, get a lower payment or pay off your home more quickly with the same payment on a shorter term loan. The second is to sell your house, buy up and keep your payment relatively flat on a much larger outstanding balance. Much of the country did the latter.

The housing market is locked up because young, first-time homebuyers who can afford homes at 4 percent can't afford the same home at 7 percent. They're either going to have to come up with a lot more down, which delays homebuying, or buy a much smaller property. For existing homeowners, many became aggressive assuming cheap mortgage money would always be out there. It's not and so the numbers don't work on a new home.

Incidentally, if rates do come down dramatically, expect housing prices to skyrocket. We made a fortune in the 1980s when we bought using a 12.75 percent mortgage and sold seven years later when mortgages were in the 6-8 percent range. I'd expect that as rates fall and demand recovers, prices will see double digit increases. My SIL and daughter are starting to look for a home in the Syracuse, NY market and as long as they can make the payment, the house would be a sterling investment.

Trying to get this topic back on track ...

You make some good points here, dg, and I agree with you that if rates start going back down and get under 5-6% again, it probably would ignite a significant bounce to the housing market.

It's not really an "irony" that us oldsters would have killed to have rates as low as they currently are. It's just the way it is. When we bought our first house in Minneapolis in 1985, rates were 13-14% and we felt fortunate to get a 1-year ARM at 8 7/8%. But we also paid $84K for that very nice house in a great neighborhood - today's buyers would kill for that. What's tough now is the confluence between relatively high house prices and relatively high (compared to the last many years) mortgage rates.

In many markets and time periods, owning a house has been an incredible investment. But for many others, it's not really been that great of an investment. A person can say, "I bought this in 2015 for $250K and now it's worth $425K, so I made a boatload!" But if that person put $75K into the house to update the kitchen and baths, all of a sudden the profit isn't so great. Add in maintenance, taxes, insurance, etc, and maybe it's been a pretty bad investment. That's why I look at a house as a place to live; if it happens to end up being a great investment, that's wonderful.

[dgies9156]

In many markets and time periods, owning a house has been an incredible investment. But for many others, it's not really been that great of an investment. A person can say, "I bought this in 2015 for $250K and now it's worth $425K, so I made a boatload!" But if that person put $75K into the house to update the kitchen and baths, all of a sudden the profit isn't so great. Add in maintenance, taxes, insurance, etc, and maybe it's been a pretty bad investment. That's why I look at a house as a place to live; if it happens to end up being a great investment, that's wonderful.

Welcome to my home in Suburban Chicago. We lived there for almost three decades and, because of our tax and residency circumstance, we had to pay capital gains on the home. Fortunately, my wife was a pack rat who kept every receipt on every cap-ex we made. We went back to our suppliers for the ones we didn't have and acquired them. We paid almost no capital gains on our house, when you figure what we did to it over the life of the ownership.

The problem we had was our home was in a stable region with modest economic growth. The next suburb over was an emerging Chicago suburb that built and built and built more houses. They'd approve anything! The result was far more supply than demand at a time when professional jobs in the area were shrinking. Hence, modest price growth.

You argument is an eloquent reason why we ended up selling Chicago. It was a lovely home in a nice community. We used it a few months a year to escape Florida's summers and I used it to come back during the winter periodically. Similar to the way folks used homes in Northern Wisconsin. The costs of paying taxes, insurance, heating and cooling, repairs and cap-ex were just not worth keeping it. 

[tower912]

House paid for.   No chance I am moving for the foreseeable future.

[MU82]

Welcome to my home in Suburban Chicago. We lived there for almost three decades and, because of our tax and residency circumstance, we had to pay capital gains on the home. Fortunately, my wife was a pack rat who kept every receipt on every cap-ex we made. We went back to our suppliers for the ones we didn't have and acquired them. We paid almost no capital gains on our house, when you figure what we did to it over the life of the ownership.

The problem we had was our home was in a stable region with modest economic growth. The next suburb over was an emerging Chicago suburb that built and built and built more houses. They'd approve anything! The result was far more supply than demand at a time when professional jobs in the area were shrinking. Hence, modest price growth.

You argument is an eloquent reason why we ended up selling Chicago. It was a lovely home in a nice community. We used it a few months a year to escape Florida's summers and I used it to come back during the winter periodically. Similar to the way folks used homes in Northern Wisconsin. The costs of paying taxes, insurance, heating and cooling, repairs and cap-ex were just not worth keeping it.

We have friends in Chicago burbs just like the one you describe; counting everything they've done to their houses, they have seen little if any real profit. But they've still liked living in their houses/neighborhoods close to family and friends, so that's what really matters. We also have friends who live in ritzier burbs or the city who have seen tremendous price appreciation.

We got really lucky with our Chicago house - bought on the North Side in 1994 right when the market was just starting to heat up a little but nothing like it became less than a decade later. Even with the improvements we made, we did extremely well. We've also done well with our current Charlotte home - bought in early 2011 when effects of the recession were still out there. But with our 3 other houses we barely broke even, in part because we didn't live in any of them long enough.

There are buy-or-rent calculators out there, and lots of people would do better financially by renting. But for many folks, homeownership is an emotional decision so it's not all about the dough. We rented for our final 3+ years in Chicago and we actually liked the experience; it was a really well-managed building in a fantastic location and it had a lot of amenities. It was also the recession and house prices were plummeting, so we sure were glad that we sold before then - just dumb luck really. I'd consider renting again in a similar circumstance.

Unlike you, today's sellers benefit from updated tax laws that make the first $500K in home profit tax-free for couples ($250K for individuals). So no need to save every receipt except for those raking in big profits.

[jesmu84]

My OP wasn't about "wrong" or "right." It simply offered a link to a fact-filled article on one of the main reasons the housing market is "gummed up."

This actually is one of the things affecting the housing situation for my daughter and SIL right now. They own a house in a Seattle suburb that they bought before they had their 2 kids. It's too small, and not in a walkable area, and they want to move. But they have a 3% mortgage and aren't wild about the idea of selling that to buy a more expensive house that also would come with a 7%+ mortgage. Also, partially because of this mortgage-rate situation, they are finding inventory to be very low where they want to buy; potential sellers in those areas also don't want to give up their low rates.

For sure. My wife and I are in a similar situation. We could move, but don't NEED to. And we won't even consider it right now with rates being almost double PLUS home prices being super high.

[jesmu84]

Mortgage rates are keyed to the 10-year Treasury rate. So long as the Federal Reserve uses higher interest rates to lock down inflation, mortgage interest rates will remain at current levels.

The irony in all of this is that those of us who came of age in the late 1970s and 1980s would have drooled at the current market interest rates. Many of us took out 30-year, fixed rate mortgage loans on our first homes that had an interest rate of between12 percent and 14 percent. We never dreamed that rates would get into the 2 percent to 4 percent range.

The difficulty with wide swings in mortgage interest rates is "consumer reach." When rates dropped to very low levels, homeowners had a couple of choices. The first is refinance downward, get a lower payment or pay off your home more quickly with the same payment on a shorter term loan. The second is to sell your house, buy up and keep your payment relatively flat on a much larger outstanding balance. Much of the country did the latter.

The housing market is locked up because young, first-time homebuyers who can afford homes at 4 percent can't afford the same home at 7 percent. They're either going to have to come up with a lot more down, which delays homebuying, or buy a much smaller property. For existing homeowners, many became aggressive assuming cheap mortgage money would always be out there. It's not and so the numbers don't work on a new home.

Incidentally, if rates do come down dramatically, expect housing prices to skyrocket. We made a fortune in the 1980s when we bought using a 12.75 percent mortgage and sold seven years later when mortgages were in the 6-8 percent range. I'd expect that as rates fall and demand recovers, prices will see double digit increases. My SIL and daughter are starting to look for a home in the Syracuse, NY market and as long as they can make the payment, the house would be a sterling investment.

Okay. Now compare the prices of homes in the 70s and 80s to the average income at the time.

Further, the housing market is "locked up" because we have a terribly short supply.

We need significantly more public housing options. We need significantly less corporate/private equity ownership of housing. We need people to see housing as NOT an investment vehicle.

[The Hippie Satan of Hyperbole]

But houses are also much larger, and with more bells and whistles than the 70s and 80s though too.

[JWags85]

My OP wasn't about "wrong" or "right." It simply offered a link to a fact-filled article on one of the main reasons the housing market is "gummed up."

This actually is one of the things affecting the housing situation for my daughter and SIL right now. They own a house in a Seattle suburb that they bought before they had their 2 kids. It's too small, and not in a walkable area, and they want to move. But they have a 3% mortgage and aren't wild about the idea of selling that to buy a more expensive house that also would come with a 7%+ mortgage. Also, partially because of this mortgage-rate situation, they are finding inventory to be very low where they want to buy; potential sellers in those areas also don't want to give up their low rates.

Same as one of my close friends.  Bought a few years ago in Roscoe Village in Chicago.  He got a job with a financial firm in Dallas about 18 months ago.  The plan was for him to be remote/fly in regularly for the first year, and then move down.  But they'd be giving up a 2.9% mortgage for one closer to 7%, not to mention it would be a step up in size and value even if mortgage rates were still at 2.9%.  Its made him drag out the move as long as possible and continues to negotiate/bargain to delay it.  I can only imagine it for people who would sell/upgrade out of want/desire and not pressing geographic need.

[dgies9156]

Unlike you, today's sellers benefit from updated tax laws that make the first $500K in home profit tax-free for couples ($250K for individuals). So no need to save every receipt except for those raking in big profits.

That's true for your primary residence. Chicago was NOT our primary residence when we sold it.

Several years ago, we were spending so much time in Florida that we became legal Florida residents. That enabled us to shield all of the income on our original home in Florida, which was an incredibly smart move from a tax standpoint. We had massive appreciation on our first Florida home, which was sold in 2022, largely because of location and Florida's desirability. We used almost all of the $500,000 tax exemption.

We're now in our forever home and, like Brother Tower, it's paid off! We paid off a five-year, 4 percent mortgage because we absolutely hate debt! Especially at our age.

[MU82]

That's true for your primary residence. Chicago was NOT our primary residence when we sold it.

Several years ago, we were spending so much time in Florida that we became legal Florida residents. That enabled us to shield all of the income on our original home in Florida, which was an incredibly smart move from a tax standpoint. We had massive appreciation on our first Florida home, which was sold in 2022, largely because of location and Florida's desirability. We used almost all of the $500,000 tax exemption.

We're now in our forever home and, like Brother Tower, it's paid off! We paid off a five-year, 4 percent mortgage because we absolutely hate debt! Especially at our age.

Yes, thanks for the clarification. Primary residence.

Congrats on the great price appreciation of your previous Fla place and finding your forever home.

Like you and tower, we own our house free and clear. One could argue that all of us made poor financial decisions, because 3-4% mortgages are “good” debt, and $$$ could have been used to invest.

But again, emotions factor in, and it sure is comforting to be debt-free.

[dgies9156]

Okay. Now compare the prices of homes in the 70s and 80s to the average income at the time.

Further, the housing market is "locked up" because we have a terribly short supply.

We need significantly more public housing options. We need significantly less corporate/private equity ownership of housing. We need people to see housing as NOT an investment vehicle.

Brother Jesmu:

You are the first person since my Metropolitan Government professor at Marquette in 1976 to advocate for MORE public housing.

I assume you are speaking of outright public ownership and not rent buydowns with such things as Section 8 or subsidies, such as the VA and FHA. That being the case, you need to closely study the history of public housing in the United States. It isn't good.

The federal government is subsidizing housing every day. From deposit insurance at savings institutions, which came with Reg Q for decades that restricted investor return, to Freddie Mac and Fannie Mae, which set lending standards for single- and multi-family housing and federal infrastructure investment, housing has been government supported since the end of World War II. The last recession was triggered in no small measure because mortgage standards were relaxed on the theory that homeownership is the key to revitalizing neighborhoods.

The problem with public housing is ensuring a steady stream of construction and maintenance capital. If we want to live like my wife and I did in Ukraine, then by all means, push for the public option. But the place we lived was a disaster, because the government did the lowest amount of capital expenditure necessary to keep the building standing. I, for one, want to live better than that.

Case two against the public option is what happens whenever the government wades into the private sector. Back in 2009 to 2012, it took a massive capital infusion by the federal government to keep Fannie and Freddie alive. Both were insolvent. And then there's Amtrak, the worst excuse for a railroad this side of India. Amtrak is a rolling disaster because no one who works there is incented to take risk and break away from a 1950s transportation model. Plus, our Congress won't put capital into it in no small measure because Amtrak is so poorly run.

And we want to apply this model to housing?

I'll admit the private sector sometimes does a crappy job. The Sunrise condo collapse down here in Florida was one example of cheap people doing cheap things that ultimately killed many of them. But, to be candid, Sunrise is the exception rather than the rule.

[tower912]

Brother dgies, I understand your philosophical base.  And I am not in the mood to really go to the mats on this.   Suffice to say, for every example of government inefficiency or error, a corresponding example of corporate misconduct, carelessness, or malfeasance can be cited.

[jesmu84]

 No surprise that public projects like Amtrak and housing fail in the US.

Those things work darn well in western Europe.

The only public projects that succeed at all are the ones that benefit private capital.

NIMBYism also plays a role.

But, regardless, I'd be curious to hear folks' ideas about how to address the housing shortage. Or, if you don't consider housing supply a problem, how can we bring down housing costs?

[tower912]

Jesmu84, not to be morbid, but a decade from now the housing market will be saturated as a generation passes and is replaced by a smaller one.

[Skatastrophy]

No surprise that public projects like Amtrak and housing fail in the US.

Those things work darn well in western Europe.

The only public projects that succeed at all are the ones that benefit private capital.

NIMBYism also plays a role.

But, regardless, I'd be curious to hear folks' ideas about how to address the housing shortage. Or, if you don't consider housing supply a problem, how can we bring down housing costs?

Build dense market-rate housing in city centers, it drives down the cost of existing housing that just cant compete for consumer dollars with new construction. This is a solved problem. Build baby build.

[jesmu84]

Jesmu84, not to be morbid, but a decade from now the housing market will be saturated as a generation passes and is replaced by a smaller one.

That'll probably come to pass.

My fear is who buys those houses

[tower912]

That is a fair point.