Time Running Out for Mortgages

It's about time interest rates are rising, i'm all for it, it will put pressure on Home prices. If rates go from 5% to 10% on 30Y fix mortgages, home prices will drop 40% and my current 20% downpayment will turn into a 30% downpayment. Bring the fvcker up! Do it!

banks wrote mortgages for decades, and held them on their books. there is no reason a well-underwritten loan for a property appropriately priced would not be attractive to wells, or chase, or citi.

but many of the mortgages being offered, even today, have lax underwriting. and then we, the taxpayer, via fannie and freddie, get to buy the crappy loans.

5% mortgages are NOT normal. they are an aberration of the last decade or so, when almost-free money was thought to be just the ticket to get the economy moving, and then after things exploded, the thing necessary to keep things moving.

This is when private companies are going to step in. Asset managers are gonna be on the hunt for yield. Now that the proper due diligence is being done by the banks, securitization will be back!!

Wages/profits/economic demand are going up so that is why interest rates are going up.
Concerning housing affordability: Wages way more than offset any interest rate increases. That's Economics 101.
Sledgehammer: You'd be better off if there was no interest rate increases b/c that would mean wage deflation/stagnation

The beauty of it is that with rates doubling, i would have a lower monthly.

Take a house selling $1M.
Downpayment: $200K (20%)
With 30Y fix @ 5%, your monthly is $4295

With interest rates @10%, to get approx the same monthly House price drop to $600K (-40%)
so with a 20% downpayment, your monthly is $4212/month.

But if I put $200K down, these $200K represent 30% down so in reality, my monthly would be $3686.

SteveF, read the papers. Only the 1% top earners in this country have benefited a wage increase in the US. The bottom 99% have had flat wages for the last 10Years.

Banks are taking jumbo 30 yr mortgages on their books now but they are extremely difficult to get and they require 30% down no matter how stellar your credit. That by definition shrinks the buyer pool significantly and will spur downward pressure on prices.

if banks were confident we had seen the last of price declines they wouldn't feel the need to require 30%.

the only mortgages that are easy to get are those being sold to fannie, freddie or guaranteed by FHA. without those it would be very interesting to see what would happen to the market, here and elsewhere.

Mortages rates actually went down this week, 4.87% from Wells Fargo (good credit and high DP required.)

I think consensus is interest rates are on their way up, if not sooner then later. So to add to putting pressure on home prices (principal), also for an investor, it looks like it makes less sense now to buy given cap rates are less than 5% and any cash flow positivity is pushed out.

Then again, maybe prices will remain flat to up (reflecting the invisible tax and inflated cash). Still doesn't make RE the smart investment relative to other asset classes aside from cash.

House prices to drop 40% with increasing rates? That seems extreme.

I'd like to add a few things.
Take the money saved on the monthly $4295-$3686= $526. That's $6312/Year. Save it and refinance for a 15Years fix mortgage after 5 years. You'll have this $31560 new downpayment that will help you refinance at a lower rate ( probably around 7/8% if 30Y fix are still in the 10% rates) and you'll be dropping your monthly significantly.

Sledge: If we have long term rates hit 10% then the economy will be taking off like the space shuttle. If that happens then wage growth will be tremendous more than offsetting housing monthly interest costs.

Suppose wage growth doesn't double but goes up only 50% in 3-5 years as interest rates double. So someone making 200k is now making 300k and someone making 50k is now making 75k...etc. That 1M home with a monthly of 5,368 bought by that 200k-300k person now costs @ 10% 8,777 diff of $3,409. This 100% increase in interest rates is now offset by the 50% increase in wages.

fyi:Also with rates that high people will select ARMs and interest rates have not hit 10% in over 20 years.

Wages won't go up Steve. They havn't in the last 10Years when the economy was booming, so they won't now that most americans are still struggling. I mean do you really believe what you're saying? It's idiotic. Not sure if we're stagflating or deflating but most people i now who are lucky to find another job after being unemployed for a year or more have been hired at less or equal to what they made in 2008 and they seem happy about it.

now=know

Sledge: Can you provide any correlation between real estate prices and interest rates over the last 20 years. From my research I just can't see anywhere in NYC where real estate prices have fallen due to interest rate rises.

The economy has not been booming, if it were, then the DOW would be @ 20,000. The stock market/company profits have not gone up in 12 years(the lost decade). The economy is due for another bull market. Wages will grow with prosperity just like they have done for the past 200 years.

steveF, if the economy was not booming in the past 12 years, how do you explain (/justify) the housing boom/bubble in the same period?

bubble for those speculative cities(Florida/So. Cal/Pheonix)without coop boards....it was easy credit.

"Sledge: Can you provide any correlation between real estate prices and interest rates over the last 20 years. From my research I just can't see anywhere in NYC where real estate prices have fallen due to interest rate rises."

The answer is no. Not only for NYC but for the U.S. The correlation does not exist.

"Wages/profits/economic demand are going up so that is why interest rates are going up."

Wages for whom?

Certainly not the middle class.

NYCMatt, once the economy gets rolling and inflation(money supply) sets in.

Wages have remained stagnant for the Middle Class since about 1978.

How many times has the economy gotten "rolling" since then?

Are the middle class really the ones driving the real estate market in nyc? No

When prices in Brooklyn and Queens went up like some of those speculative cities, it did not impact Manhattan prices? The coop force field prevented prices from going UP in Manhattan?

debugoz: "Are the middle class really the ones driving the real estate market in nyc?"

YES

From today's BLS report: The average work week was unchanged at 34.2 hours, and average hourly earnings ticked up 1 cent. Yey. :/

"If we have long term rates hit 10% then the economy will be taking off like the space shuttle. If that happens then wage growth will be tremendous more than offsetting housing monthly interest costs."

I agree and hope we see 10% interest rates. Strong economy, wage growth, asset appreciation, and a fixed rate mortgage at 4.5%. Mmmmmmmmmmm, doesn't that sound delicious?

stevef, you jump around too much in your arguments. it is possible to make a convincing case for something you know to be false, in fact, some people make a good living that way. unfortunately, their wages haven't really gone up so they can't all the insanely priced mediocre to poor quality real estate out there. rich people who don't care about money will always be around, and will always spend their money, and what they buy may seem indiscriminate to civilians, but it isn't. they are simply unable to support the economy of this entire city. you need to stake your claim in the "manhattan is for the rich" camp and defend that, because that's your only reasonably defensible position.

steveF
about 1 hour ago
ignore this person
report abuse The economy has not been booming, if it were, then the DOW would be @ 20,000. The stock market/company profits have not gone up in 12 years(the lost decade).

and throwing in such laughed at and ignored ideas as "the lost decade", which have proven their validity and vindicated their advocates will not win you any arguments either. "the lost decade" would have included the re price escalation, silly billy, so don't say that.

""Sledge: Can you provide any correlation between real estate prices and interest rates over the last 20 years. From my research I just can't see anywhere in NYC where real estate prices have fallen due to interest rate rises."

The answer is no. Not only for NYC but for the U.S. The correlation does not exist."

EXACTLY.

I have never seen a seller show one ounce of concern for a buyer's interest rate. Ever.

I have never seen a seller show one ounce of concern for a buyer's interest rate. Ever.

whao, I like that needsadvice....I luv potent one liners. thanks.

how often have we gone from ZIRP and stagnant wages (for all but the top) to an increase in rates with continuing stagnant wages?

How often, grandma?

sledge, be careful what you wish for. Your example sounds nice in theory, but if you're putting the same amount in as a down payment, it's not an apples-to-apples comparison anymore. While I'm all for more affordable real estate, I'm not sure I'd root for skyrocketing interest rates.

I would take a 10% wage cut for a 40% drop in real estate price any day you want!

Waiting for sledge to provide the data suggesting the housing price decline by 40% if rates go up to 10%

I don't think that the 30 year mortgage is going anywhere anytime soon. Nor do I see 10% interest rates anytime soon. The real estate lobby will make sure that there is always a Fannie and Freddie.

"The real estate lobby will make sure that there is always a Fannie and Freddie."

Too late.

Obama already gave the order ... and Geithner told a House committee yesterday that it's a done deal. Fannie and Freddie gone within 2 years.

Huh? What's your source? That's news to me.

this is from february, but i think it is still relevant, although they may have a tighter schedule for change now.

sorry, forgot the link.

http://www.calculatedriskblog.com/2011/02/options-for-long-term-structure-of.html

@Socialist: read the link I posted

"The plan, which calls for winding down Fannie and Freddie over the next five to seven years, was drafted by the Treasury Department, the Department of Housing and Urban Development and the White House, and was sent to Congress on Feb. 11. "

This is why I provide links on my postings.

Don't know why I think anyone is actually reading them, though. . .

so is it 2 years or 5-7 years?

Face it unless an asteroid hits nyc there is zero chance prices will drop 40%, the demand is simply to strong, if not from Americans then Europeans or South Americans ... etc

Sledge you are going to be waiting an awful long time to see a miraculous 40% drop.

Just because I tell other people to read it doesn't mean I want to read it . . .

LOL.

I think it's undecided, actually. It's in congress. If the Republicans have their way, sooner rather than later.

Anything to get the government out of actually doing something for us. Aside from financing Haliburton, Goldman and Blackwater, I can't figure out what the fed govt actually does . . .

Oh, wait, there is no Blackwater. It's called Xe now.

I feel much better now, don't you?

I wonder how much of our money went into that bit of "brand ideation"?

"Aside from financing Haliburton, Goldman and Blackwater, I can't figure out what the fed govt actually does . . . "

that shouldn't be too hard to clear up

http://www.gao.gov/new.items/d11318sp.pdf

and.....just
http://www.gao.gov/
in general. not that anyone listens to them. fwiw, the few dogooders i know who actually have functioning brains which allow them to understand what they are witnessing, and make conclusions based on reality as is exists and not as it ought to, went to work for the gao.

*SIGH* I guess I have to do everyone's homework here.

TWO years: http://www.businessweek.com/ap/financialnews/D9LM4UGO1.htm

just because he wants does not mean he will get it.

stevf:bubble for those speculative cities(Florida/So. Cal/Pheonix)without coop boards....it was easy credit.

Really. You don't think a 300% rise in 5 yrs in Manhattan was a bubble?

Thank you NYCMatt!

Possibly playing catch up....old research paper goes back 25 years...

http://www.millersamuel.com/research/gallery-view.php?ViewNode=1096034424rIMRe

This report, in its entirety, is now available for download free of charge but Business360 encourages you to contribute to the costs of preparing this work to help ensure further updates. Instructions are available in the report. Miller Samuel has received no direct compensation for participating in this study.

+++++++

Using sales price data provided by Miller Samuel, Business360 has completed an economic review of the Manhattan residential real estate market. This review extends back some 25 years and gives an historical perspective on valuations of both condos and co-ops.

Using economic data on personal income and interest rates, along with real estate prices, Business360 examined the market on a range of core metrics including price to personal income and affordability. The research company concludes that the Manhattan mass-market is not overvalued and that valuations today are at the low end of historical norms

Business360 point out that since the early 1980s, Manhattan real estate prices have lagged personal income gains and that had real estate prices kept pace with personal income increases, real estate prices would be over double current levels. Further, the decline in interest rates over this period now makes real estate much more affordable.

You're welcome, needs.

apt23...what do u think about above 2004 paper?

steveF, are prices generally back to around 1Q2004 - 2Q2004 in the city?

Sunday, are you seriously asking him? He will lie to you just to make his bad housing investment look better.

sledgehammer, if his answer is YES, then it proved his own purchase was way over priced. If his answer is NO, then it proves the 2004 paper he posted is irrelevant.

Raising rates and tighter lending practices spells doom for residential re prices.

where is all the demand going to come from? Inflation has made it's début. They already told you to save up for the summer driving season (gas=$5/gallon). Milk, eggs, produce...it's all going up. The cost of living in Manhattan will out pace the rest of the country. As for jobs...it will improve but, it's never going back to where it was unless a new industry makes the seen. direct correlation of re price and interest rate does not exists. Take the simple example of the evidence above. A 10% fixed rate will kick the ass of home prices right here in town, just like cheap money caused them to go through the roof.$500 per square foot

New York is no stranger to high interest rates, if it didn't effect prices then why would it now? $5 gas is not going to effect a great deal of NYC seeing as it is by a large majority a commuter city and the people that do own cars probably aren't so worried about $5 gas, as in they can comfortably afford it. It's a little early to be claiming inflation is going to be a huge factor seeing as it is still under 2%.

Financial firms in nyc have hardly been wiped into submission most are already post giant profits, as they learn to circumvent any new regulations it will be back to business as usual, the finance industry plays a big role in real estate here.

debugoz, it won't affect the higher end. but we've never had high interest rates without fairly robust income gains. that's the kicker.

interest rates don't affect prices in and of themselves. total monthly costs as compared to income DOES affect prices. people have been squeezing themselves into smaller and smaller spaces at the lower to middle income levels. some people will be able and willing to stay squeezed for a long time. others won't. the question is what happens to those smaller to medium sized units in neighborhoods like midtown east and yorkville? then add that gov't-backed lending seems to be about to decline. if you don't think prices at those margins matter to the manhattan market as a whole, at least for non-trophy properties, you would be quite mistaken.

btw, i mean lower income by manhattan standards, not lower income per se. matt can jump all over this, but i'm talking studios, one beds, jr. 4s and normal two/twos.