Mortgage Rates Jump to Highest Level Since 2002

I'm not even going to attempt to try and convince you numbskull's how significant this is.
https://www.nytimes.com/2023/08/17/business/mortgage-rates-housing-market.html

I understand what they're trying to do but it's anguish when you don't know when/how fast they'll come down.

What “they” are you referring to?

Sorry, I meant the Fed. I know mortgage rates don't go up in lockstep with the fed funds rate but it puts pressure on them

Projections now are the Fed STARTS cutting MAYBE next summer.

We basically got the soft landing, we don't get to have stimulative rate cuts at the same time!

I know - it all makes perfect sense but I don't have to like it :D

What is not to like? This is going to do great things for real estate prices for high down payment and cash buyers. Who says rates are coming down? Sub 4% on 30-years was a mistake and a gift from the Fed which is blowing a national real estate bubble.

I suppose there are winners and losers but there are probably more losers than winners

>> Sorry, I meant the Fed. I know mortgage rates don't go up in lockstep with the fed funds rate but it puts pressure on them

You have the wrong “they” mind. They’re just reacting to the real “they”, which are people. If/when “they” start meaningfully spending less and/or producing more at current rates, the Fed will be in a position to cut rates. The reality is that the Fed’s guess as to if/when that will happen is about as uncertain as your’s.

Yes, no I see what they are trying to do, totally get it and even support it. It seems to be working. An opportunity to exercize patience, I guess that's one way to look at it

ugh exercise

The loser is whoever holds my 2.25% mortgage. The winner is me.

You and everyone who initiated during ZIRP, yes. Still kicking myself

George, what are you holding these days with the money? I recall you using the funds for munis ~2 years ago. Did you get out before rates shot up? Also interested in hearing your outlook on prices in Nowhere, particularly at the horizon of however long your 2.25% lasts and whether you foresee selling earlier because trajectory of prices is worse than monetizing the 2.25%.

I'm heavy in credit right now. I buy individual bonds and hold to maturity, so rate rises don't produce a loss. Not a financial advisor, but that's what I'm doing.

The Nowhere house is cash flowing nicely. We did a big renovation which has proven popular with renters. Market has slowed but is still transacting at reasonable prices, especially properties with recent renovation. Inventory is about half of pre-covid still. Problem with selling is that I lose the mortgage and get a giant tax bill. Might be able to 1031 the taxes but not the mortgage. So for now I'm staying put.

Sounds like you’re a hold to maturity type of person, on both gains and losses. For me, everything needs to constantly prove themselves with a sufficiently high expected after-tax RoR on a mark-to-market basis. I’m also always looking to take advantage of asymmetric optionality in the tax code — avoid taxes on capital gains but never let a capital loss go to waste!

Why don’t you sell the bond losers and replace them with something similar, or else just buy them back in a month — are capital losses of no value to you?

I’d noticed the decreasing discount jumbos had been receiving too, as discussed in this article:

https://www.wsj.com/articles/mortgage-jumbo-loan-interest-rates-wealthy-a84e87d3

Bullard contemplating the possibility that Fed rates go above 6%:

https://www.wsj.com/articles/recession-fears-have-been-blown-out-of-the-water-long-serving-fed-president-says-da0b5461

What do people here think — a real possibility, or not in the cards?

I would think Fed wants to wait at least more meeting to see the impact of student loan repayments, auto sector slowdown etc before even doing a quarter point. The long rates going up in the long-end are already doing fed's job.

One year and half ago, I never imagined that Fed interest rate can increase from 0% to 5.25% with such a fast speed.

5.25% to above 6% (probably through the course of six meetings, one with a pause, one with a 0.25% increase) seems a much smaller potato.

Even going above 7% is still much smaller shock than the fast interest increase of last year and a half.

On the other flip side of the coin, if the Fed has to increase the interest rate to above 6%, or above 7%, the the inflation must be still stubbornly high. As an apartment owner, I will not never have to worry about the rent increase anymore . The apartment price will go down for sure, which does not affect me as this apartment is my forever home.

https://youtu.be/vWa9iYYPYF4

LOL, 30yrs.

Woodsidenyc, 10yr inflation expectations are right where they were 2 years ago — around 2.3%. But real 10yr yields have gone from -1% to +2%. If short-term inflation remains stubbornly high (i.e., not sufficiently reacting to 5.25%), it won’t mean that long-term inflation will go up. It’ll mean that long-term real rates will go up, to +3% (say), because that’s what it takes to maintain long-term inflation expectations at a reasonable ~2.3% level.

I’ve heard this association of higher interest rates with runaway inflation for quite some time on this board. I don’t think that’s the way it works.

Watching the debate and missing those minds on here that make sense to me, while continuing to be fascinated by the perspective of others. I will be very interested to see whether Vikram can steal the base; I actually hope he does because I like a fair fight based on principles.

Beyond the base, the best blend of the base and GOP is proving to be Nikki Haley. Too bad she won't get the nomination.

Is nobody else watching this? I am actually pleased to see such a substantive debate.

I’ve heard this association of higher interest rates with runaway inflation for quite some time on this board. I don’t think that’s the way it works.

@inonada I'd be curious to hear your perpective on how it does work. I truly nonada when it comes to economics so welcome an education.

My personal views on not getting runaway inflation:
GFC we had a balance sheet recession, so everyone was squirreling away money to fix their balance sheets, personal and corporate. Sort of like Japan post peak, but we managed to speed run it 2x fast, probably because we actually maintain a growing population.

Further, in the COVID era, the US maintains an exorbitant privilege as they say..
Sure we are printing money and have inflation, but you compare our fiat currency to who else?
China is completely screwed and is actually cutting rates as they destroyed their economy (rumors of 20%+ youth unemployment, and they are now discontinuing numerous economic stats, which tells you which direction they were going). EU is essentially in recession. UK is worse. Japan is muddling along. Etc.

So relative to everyone else, we remain the cleanest dirty shirt. Owning the entire high tech sector certainly helps.

> 10yr inflation expectations are right where they were 2 years ago — around 2.3%.

We have seen much higher than 2.3% inflation for the past two years. One of the 10 yr inflation expectations of 2.3% must be wrong, LOL.

As a matter of fact, the 10 yr inflation expectation derived from the market is never right, it's just the instantaneous price discovery determined by the market participants. A lot of times, this price discovery is too much focused on betting process dominated by the short term memory.

Going to the future, do we expect the inflation for the next 10 year is going to be around 2.3%?

Maybe 2.3% inflation can be achieved with an actual deep recession.

>But real 10yr yields have gone from -1% to +2%

For the next ten years, are we going to be living in an era where people's money in the bank or treasury can actually earn some interest after adjusting the inflation?

I guess this scenario will reduce people's appetite for the Stocks or other assets.

>> I'd be curious to hear your perpective on how it does work. I truly nonada when it comes to economics so welcome an education.

I’m no expert on this, but the standard economics story is this. With fiat currencies, you target a stable rate of inflation, because it helps maximize long term growth. If inflation goes all over the place, people and companies have a hard time planning and investing, which curtails economic activity long term.

You set this stable expected inflation number at a small positive value for various reasons. This number has been set to ~2% for the US dollar and most major currencies. It could have been set to ~3%, but it wasn’t, and changing it after-the-fact is bad, especially when inflation is running high, because it screws with the economy’s notion of planning based on stable inflation. If you increase the target from 2% to 3% when things are not going your way, what’s gonna keep you from increasing it from 3% to 4%?

Now if the economy is running hot, meaning spending outweighs supply, you raise interest rates to curtail spending. If it’s running cold, you decrease rates to promote spending. The game is to push spending to match supply by changing rates and maintaining stable inflation.

Now if the entire country is not spending, you might have a decade where matching spending & supply involves 0% rates with 2% inflation. If that shifts in the next decade, matching spending & supply might mean 4% rates with 2% inflation. Short-term, there may be more extreme fluctuations.

But the name of the game is to keep inflation stable by moving interest rates. It’s not to allow inflation to move around and have rates shadow it.

Woodsidenyc,
We'll just change the basket again to things which haven't gone up and make hedonic adjustments.

Woodsidenyc, market expectations are never right. That’s what makes it a market. If there was no uncertainty about it, there wouldn’t be a market. 10-year inflation expectations were also ~2.3% a decade ago. Unsurprisingly, they were wrong. At first, inflation spent several years under it. Then, it burst for a couple of years. Despite the generations-high records hit by CPI over the past couple of years, the 10-year inflation over the past 10 years came out at 2.7%. That means CPI and prices are just 4% higher than where the market expected them to be a decade ago.

Wrong? Yes. Big-picture, who cares?

"Owning the entire high tech sector certainly helps."

Do we really?

>> For the next ten years, are we going to be living in an era where people's money in the bank or treasury can actually earn some interest after adjusting the inflation?

We’re already in that world. 10yr TIPS will pay CPI + 2%. 1yr TIPS will pay CPI + 3%. If you buy those now, they will pay that regardless of how CPI prints.

> We’re already in that world. 10yr TIPS will pay CPI + 2%. 1yr TIPS will pay CPI + 3%. If you buy those now, they will pay that regardless of how CPI prints.

Yes, CPI + 2% is the instantaneous price available as of now. If desired, one can lock in this interest rate fro 10 years or for 30 years.

Not sure this CPI+2% will be available long term, say in two years, in five years, in eight years from now.

As probably you discussed earlier, the inflation rate somehow is positively linked to the real interest rate.

If the inflation rate does come down to 2% (probably by recessions induced by Fed's high interest for longer), my guess is that the real interest rate will also come down as well.

Nada, when did Fed start to set the inflation rate target of 2%? I checked the inflation rate for the last 40 years, the annual CPI rate is about 4%. The only time we had about 2% inflation was only after the 2008.

https://fred.stlouisfed.org/graph/?g=184Um

> We'll just change the basket again to things which haven't gone up and make hedonic adjustments.

I thought it was the other way around, by change the basket to the things that HAVE gone up a lot.

If we believe the conspiracy theory, this change of the weighting will get the goal to have a lower CPI for the future months due to the high base effect.

>> Nada, when did Fed start to set the inflation rate target of 2%? I checked the inflation rate for the last 40 years, the annual CPI rate is about 4%. The only time we had about 2% inflation was only after the 2008.

They adopted it officially about 10 years ago, meaning they went on the record with it as an explicit target. Unofficially, they started adopting it about 30 years ago. Their preferred gauge is PCE, not CPI. That has come in at annualized rates of 1.8%, 2.1%, and 2.3% in each of the past 3 decades. The prior decades had been 3.4% and 7.3%, which is rather uniformly viewed as the result of ill-fated lax monetary policies of the 70’s which caused stagflation.

The decade prior to that (63-73) was 3.2%. Like 83-93, I don’t think this was failed / lax policy. Rather, they were probably just targeting something closer to 3% rather than 2%. The shift to 2% was probably a reaction for establishing bona fides after the 70’s shitshow.

Thanks Nada for the information and explanation. I always learned something from you.

+1 Thanks, Nada - that makes sense!

You’re both welcome. Strangely polite and non-dysfunctional discourse — am I on the right forum here?

>> If the inflation rate does come down to 2% (probably by recessions induced by Fed's high interest for longer), my guess is that the real interest rate will also come down as well.

So I have been thinking about this, and I am in partial agreement. One path back to 2% is that we get there soon without further rate increases and without a recession. If this happens, then the notion that long-term rates at 4% is the new economy’s magic supply/demand balance point weakens. So long-term rates will fall as you say. If the path back is slower, then 4% sounds like the balance point — I’m not sure why a slow path back would indicate a lower neutral rate. And if the path back stalls or reverses, then watch out — rates will need to crank up further, even more so than they would have had the Fed not started taking it easy at 5% — because the neutral rate is even higher.

Which of the scenarios we’re in, nobody knows. Including the Fed.

https://www.bankrate.com/banking/federal-reserve/how-much-will-fed-raise-rates-in-2023/

Intereting pov but I don't see them making fixed rate mortgages more difficult there'd be an uproar:

https://www.nytimes.com/2023/08/25/opinion/fixed-rate-mortgages-inflation.html

Thanks for the link, MTH.

Fixed 30yr mortgages are indeed a one-sided problem for the Fed. I think I’ve commented on this before. You can goose spending by pushing the rates down, but that goosing of spending is broad and long-lasting. Every mortgage debtor gets goosed for decades. On the flip side, the tightening only affects potential new debtors (10% as many people?) for — in their minds, despite market indicators, right or wrong — just a few years.

Does this mean we should get rid of 30yr fixed mortgages? Meh. It won’t matter for this cycle. But perhaps it’ll serve as a lesson to the Fed and lenders about how the “long and variable lags” work, which is (I think) often considered symmetric and being a year-ish in length.

For this component, on the way down the effects take hold immediately and last for a decade. On the way up, they take hold slowly and only for as long as you don’t drop rates.

30y mortgage is really driven by FNMA/FRE/FHA. Many other countries don't have 30 year mortgages. It would be very hard to change (along with pre-payment option) as homebuyers are used to 30y amortization and fixed payments. Nothing the Fed can do buy Congress can.

Fed can have an effect if they stop buying long-dated bonds once 10y+rates fall to a certain level or even better don't buy at all. That is well within Fed's control. But when the growth is slow, they want to incentivize home-building as much as possible and no level is too low. And they want people to re-finance to stimulate more during slow growth.

I am guessing next 3 months are critical from an inflation data ponit of view as far as Fed's next move is concerned. Sun-belt getting a lot of new multi-family supply in the next 12 months. So that should help rent inflation there.

https://www.yardimatrix.com/publications/download/file/4200-MatrixBulletin-MultifamilySupplyForecastNotes-Q32023?signup=false&utm_source=WhatCountsEmail&utm_medium=Matrix%20Media%20-%20Multifamily&utm_campaign=072623_PR_Bulletin_MF_July_SupplyForecast_20873

>> Fed can have an effect if they stop buying long-dated bonds once 10y+rates fall to a certain level or even better don't buy at all. That is well within Fed's control. But when the growth is slow, they want to incentivize home-building as much as possible and no level is too low. And they want people to re-finance to stimulate more during slow growth.

I think the Fed got caught in group-think that permeated, and still permeates, a lot of capital. Rates will never need to be high again, so we all need to lever up. Banks (including the Fed) were eager to borrow overnight at 0% to lend at long-term rates of 1-2%. Mortgage buyers (including banks and the Fed) were eager to borrow juice another 1% by lending to mortgagers. And mortgagers were eager to borrow at 2-3% to leverage lending to risky borrowers (remember the excitement over George's 4% munis here?) or leverage into more speculative assets.

Tbills pay 5.5% risk-free, 10yr treasuries 4.25%, and agency debt ~6%. But people hang onto their more speculative assets and keep spending.

>> I am guessing next 3 months are critical from an inflation data ponit of view as far as Fed's next move is concerned. Sun-belt getting a lot of new multi-family supply in the next 12 months. So that should help rent inflation there.

I compared the 3-year increase in CPI's shelter costs vs. Zillow's ZORI index. The former lags the latter because it reflects currently-paid rents rather than current new rents. There's still a 10% increase in ZORI that has not yet made it into CPI. So even if rents per ZORI (which is currently ~4% YoY and falling) fall to 0% for the next 3 years, the pent-up ZORI increases will produce 3.3%/yr in shelter CPI.

Will that happen the way things are currently going? On the one hand, you have the effects of the 5.25% Fed rates trickling in. And, as you point out, construction in both multifamily and single-family is strong. Both will help rents, even if single-family homes are for sale. On the other hand, demand for housing remains elevated. Why? Maybe because workers exhibit post-pandemic shift to WFH, maybe because 40yo+ people are flush from a decade of ZIRP-stoked asset fattening, maybe 3.5% unemployment with 2 openings for every unemployed means fat wages, maybe pandemic increased YOLO mentality.

How has 5.25% Fed rates changed any of that meaningfully yet?

>> Tbills pay 5.5% risk-free, 10yr treasuries 4.25%, and agency debt ~6%.

So when do equities reflect this? One could make the case for 3000 spx based on increased yields using 2023 earnings.

I dunno. The Vanguard estimates of 10-year outlooks seem generally reasonable to me. They put total annual returns in SPX at 4.7% +/- 17.0%. Take out 1.5% from dividend yield, that becomes 3.2% +/- 17.0% on the SPX level.

Turn some cranks, that very roughly puts probability of SPX being 3000 or less sometime over the next year at a few percent. Sometime over the next few years, at ~15%. Sometime over the next decade, maybe ~30%.

Maybe the Vanguard estimates are wrong, maybe my crank is faulty, but mostly it all points to “Don’t hold your breath” on it. All one can do is apply their own risk/reward assessment on it.

Vanguard puts cash at 3.8% +/- 1.5%. For my risk dollars, the incremental 0.9% expected reward is not worth the incremental 15.5% risk. I’d rather be positioned to collect 3.8% risk-free with risk deployed toward other opportunities. Holders of SPX presumably have a different outlook on risk, reward, and/or how much they’re willing to risk for each increment of reward. They can keep SPX above 3000 indefinitely, even if that’s the number that makes sense to you or me.

>>> Holders of SPX presumably have a different outlook on risk, reward, and/or how much they’re willing to risk for each increment of reward

Or they aren’t permitted to buy anything more exciting, or don’t have access (not accredited investors), or not enough knowledge to evaluate alternatives.

Nada,

Is this the Vanguard source? Is there another more detailed forecast?

https://corporate.vanguard.com/content/corporatesite/us/en/corp/vemo/midyear-vemo-2023-asset-class-returns.html

300, that is an older version:

>> Our current forecasts are derived from a May 31, 2023, running of the VCMM, compared with the model’s output from December 31, 2021, and December 31, 2022.

They update it quarterly and release it with a lag. This is the most recent one:

https://advisors.vanguard.com/insights/article/series/market-perspectives#projected-returns

>> Is there another more detailed forecast?

What do you mean by “more detailed forecast”? They have had various white papers explaining their methodology over the years, but they don’t put anything like that out regularly.

Thank you. The link you posted is what I was looking for. I suppose they don't publish the history of their return forecast and sensitivities of their current return forecast to their model input economic forecasts. That would be very interesting.

>> Or they aren’t permitted to buy anything more exciting, or don’t have access (not accredited investors), or not enough knowledge to evaluate alternatives.

The 0.01% of the population that aren’t permitted to “buy anything more exciting” can only exert so much influence on price, so I figure price is being set by other participants. Even then, aren’t people like you allowed a broader menu of choices than simply SPX? E.g., growth vs value, US vs other developed markets vs emerging markets, stocks vs govt bonds vs corporates vs high yield vs REITS. Or even single-sector vs single-country?

I agree on absence of knowledge to evaluate alternatives, but that could just as well be said about SPX.

On accredited investor status, I think something like 5-10% of the population is accredited. These people, plus accredited institutions such as pensions, make up the vast bulk of SPX owners. Of course, accredited status is necessary but not sufficient for any given alternative investment.

And even if SPX is truly the only possibility, there can always be a consideration of risk/reward relative to cash in deciding an allocation.

>> I suppose they don't publish the history of their return forecast and sensitivities of their current return forecast to their model input economic forecasts. That would be very interesting.

If you scrape the web for white papers, they do show forecast histories and sensitivities. Of course, this is different than their “live” forecasts at any point in time because they weren’t yet producing “live” forecasts, or else perhaps they tweaked the model since the “live” one and are publishing a revision, subject to model changes made afterwards having seen what actually occurred.

I'd love to see you guys make the argument that if Jumbos cross 8% it won't necessarily be a total f*cking disaster for the market.

To Fix Broken Mortgage Markets Look to Denmark

https://www.economist.com/leaders/2023/08/31/to-fix-broken-mortgage-markets-look-to-denmark

Fortunately there is a proven middle ground between the distorted American system and a floating-rate free-for-all. In Denmark homebuyers can borrow at 30-year fixed rates, and mortgages are prepayable. About half of borrowers fix for three decades. Yet there is no problem of “locked in” homeowners because a seller can end a mortgage by buying it back at its market value, which falls when rates rise, thereby cashing out the value of their interest-rate fix. Alternatively they can transfer their mortgage to the home’s new owners. The result is greater dynamism: in the first quarter of 2023 housing transactions were down by only 6% on a year earlier, compared with 22% for existing homes in America.

The government provides no guarantees. The role that Fannie and Freddie play in America is fulfilled in Denmark by highly capitalised mortgage banks. Their thick safety buffers meant that, unlike Fannie and Freddie, they did not require a full-scale government rescue in 2007-09. And unlike America’s agencies, they originate the loans whose payments to investors they guarantee, which encourages prudent lending.

There are catches: mortgage banks are protected from losses by creditor-friendly rules, including swift foreclosure procedures and barriers to declaring bankruptcy. But the flexibility and protection the Danish system offers is enviable when many mortgage markets are either distorting economies or causing hardship. Other countries would do well to try it.

From The Economist

Did they mention that the market usually charges for options?

If you thought inflation disappearing was going to save you.
https://www.nytimes.com/2023/08/31/business/economy/fed-inflation-july.html

> Yet there is no problem of “locked in” homeowners because a seller can end a mortgage by buying it back at its market value, which falls when rates rise, thereby cashing out the value of their interest-rate fix. Alternatively they can transfer their mortgage to the home’s new owners.

This is too good for the seller. The seller have the repayment option while he can buy the old low interest rate mortgage back at its now lower market value (or transfer their old low rate mortgage to the new owner).

Yes, it makes housing market more dynamic as there is no lock-in effects for the sellers, but it will make the FED's job of controlling inflation much more difficult.

"repayment option"

should be

"prepayment option"

@woodsidenyc 'too good for the seller'...at whose expense? Not sure I understand

Anyway, I'm not considering buying property in Denmark it just seemed like an interesting alternative to our complex system

Is creditworthiness of borrowers a factor in Denmark? Or are loans based solely on property values?

@Krolik It sounds like risk is compartmentalized and yes, creditworthiness is taken into consideration:

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

This is mainly for foreigners but it gives an idea of how things work. Similar to NY in that there are more coops (~andels) than condos (~ejer). From

https://marioscian.medium.com/buying-an-apartment-in-denmark-as-a-foreigner-all-you-need-to-know-b66a9876a13

The Other Rules You Should Know
To Buy and Sell:

Down Payment Requirements. You need minimum 5% of the purchase price to buy a property. That’s by law. For foreigners, the banks can and often will ask for more.
Loan Multiplier. Banks won’t loan you more than 4x times your yearly gross (pre-tax) salary. If you want to buy something that costs more than 4x times your income, you need to put in a very big downpayment. Banks used to be more generous, but the government has since made this more constrained.
Capital Gains. Let’s say you bought your apartment for 3m. If you would sell it for 5m, you’ll have a capital gain of 2m. In Denmark, this gain is not taxed. Hard to believe, considering that Denmark is the highest-taxed country in the world and basically everything else is taxed (and very highly so). There’s a catch, though — you don’t pay capital gains if you’ve been living in the property you’re selling. If you bought, rented it out, and then sold, you’ll need to pay 35% of the gain or more to Skat.
Living-Needed Apartments. In Denmark, there’s something called bopælspligt. If you’re apartment has this — and 99% of them do — it means that the apartment can’t be empty for more than six months. You’re thus obliged by law to rent out your apartment if it’s empty.
The 5-Year Rule for Foreigners. If you’re not a EU/EEA citizen, you need to get permission from the Danish Ministry of Justice to buy a property (your lawyer will usually handle this). Then, even if you’re a EU/EEA citizen (and of course, for all other non-Danes), you’re still bound to the 5-Year Rule. This is: if you buy a property before living in DK for five full years, and you then you move out (for whatever reason) out of the country, you’ll then be obliged to sell the property within six months. You can’t keep it. If the market had just crashed at that time — tough luck, but you need to sell anyway. (If you bought after three years in Denmark, but have now lived in the country for more than five, this requirement is waived. You’re good.)

The Denmark mortgage system is interesting. On the one hand, it’s not terribly different than the American system. Rates go down, banks lose because debtors prepay and refinance. Rates go up, banks lose because people don’t refinance and take advantage of the lower rates.

The difference is that Danes have the option to immediately stick the bank with loses, but Americans must force the bank to take its losses slowly. So the Danish system is destabilizing to banks, who don’t necessarily get time to otherwise earn their way out of the losses, and therefore presumably requires higher capitalization. And Danish banks have to pay their losses no matter what, whereas American banks can hope the homeowners tire of their golden handcuffs. In both cases, it presumably means Danish banks need to charge a larger premium.

>> Yes, it makes housing market more dynamic as there is no lock-in effects for the sellers, but it will make the FED's job of controlling inflation much more difficult.

I agree. In for-purchase housing, the only real supply comes from new dev. In the US, the increased rates have sapped demand from anyone with an existing mortgage via the locked-in effect. With the Danish system, demand from these participants would be present because the mortgage is effectively transferable. Not literally, but you get an upfront payment with which you can pay higher interest going forward. Or worse (for the Fed), you can cash out and spend it now. Woohoo!

Undoubtedly a bad idea to 'unstick' the housing market now. Inflation is bad for everyone and a priority. But the idea of allowing people to transfer their mortgages to approved borrowers would be appealing if they ever get back to their target rate of 2% inflation.

https://www.cnbc.com/2023/10/18/30-year-fixed-mortgage-rate-just-hit-8percent-for-the-first-time-since-2000.html

Remember when mortgage rates hit 6% and certain people were saying "just by now and refinance when the rates drop"?

There are buydown programs. I have several wholesale lenders who reduce the mortgage rate by 3% for the first year, 2% for the second year and 1% for the third year, for loan amounts up to $1,089,300,
For Fannie Mae, FHA. FHA loan limits increase according to number of units, a 4 unit house has an FHA loan limit of $2,095,200, 3 units, $1,685,850, 2 units, $1, 394,775. 3% down. FHA also provides additional renovation loans.
E.S. Mortgage Broker, NMLS#60631

What could possibly go wrong?

I find the lack of discussion in this thread telling. The permabulls really don't like it. We are currently on a pace to have about 760 contracts signed this month, whereas the expected number based on historical sales is well over 900 for October. So these rates really are affecting the market.

And any agent who denies the market is palpably slow right now is lying.

Least existing home sales nationally since 2010 - BBG

>>Remember when mortgage rates hit 6% and certain people were saying "just by now and refinance when the rates drop"?

6% looks like a dream now.

>>And any agent who denies the market is palpably slow right now is lying.

or any board

10 yr near 5%. Deal vol well below trend. Resale price action doesn't show the decline due to lagging effects and nature of this cycle, ie buyers bidding for larger, turnkey renovated properties

Our upcoming ai powered price index tells us we are down 7% since April, I kind of agree with isolated locally higher discounts. You'll have to wait for Feb March to see this info though

If we are to believe this guy, inflationary pressures (and therefore higher rates) are here to stay:

https://www.businessinsider.com/bidding-war-apartment-new-york-city-auction-rent-landlord-housing-2023-10

Fed fund futures show the first rate cut I think around June of next year so they have a potential hike before your end and then we stay at that level for a good 6 months. It seems like the FED is hell bent on breaking something

I’ve heard that narrative a lot. I don’t think the Fed has any interest in breaking anything, they just want to bring inflation under control. At the moment, the market (via Fed funds futures and treasury yields) thinks it’ll take 5% rates as far as the eyes can see. Perhaps a bit lower the farther out you go out on the yield curve, because it bakes in some sort of term premium.

The market & Fed have been wrong about what rates it would take to bring inflation under control for over two years now, undershooting consistently. The “normal” person even more so, it has felt. Two years ago, few could fathom current rates as even a remote possibility.

Bloomberg website is talking about a first rate cut at the end of 2024.

agree not openly ofc, but when I say break something I am indirectly referring to inflation, one way that cycle gets broken and thats rising UE, lower asset prices. Fed dot plot has been completely off last few years, because they are data dependent. not that they dont see whats happening, just that they follow lagging data no?

we have become a boom/bust economy over the past 25 years or so, and that regime is over as the Fed wont be able to be accomodative when things do at some point get tough. I think their eyes are on limiting credit events should tough times come. Higher rates for longer will do the trick as it squeezes everyone over time. I think everyone is going to be wrong when slowdown comes, the fed will lower rates but i dont see them going down too much. The fed will utilize other facilities, outside of rates, to contain any banking or credit stresses in the system, and stay the focus on rates, much like they did in March. I recall many expecting cuts after that, but we got 2 more hikes - instead, they just added liqiudity to the credit markets to contain credit stress from spreading

>>If we are to believe this guy, inflationary pressures (and therefore higher rates) are here to stay:
https://www.businessinsider.com/bidding-war-apartment-new-york-city-auction-rent-landlord-housing-2023-10

Interesting story. I read half way and don’t have the patience to finish the whole story.

It seems that rent inflation will be difficult to control. The housing shortage becomes more severe post pandemic due to 1. Many people are working from home so more space is demanded 2. There are waste use of space as many owners are stuck with the their current home with the sub 3% interest rate

Yep, very expensive to sell these days so few sellers, generally speaking. Interesting times

Mortgage rates took a hard bounce off the top and are down over 100 basis points.

rates are staying high forever, nothing will ever sell again.

Rates peaked around October of last year, floated downward close to 100 basis points, then stabilized and are claiming.

@30: end of October, actually, but you're right:

https://fred.stlouisfed.org/series/MORTGAGE30US

(What's going to happen when we have a period of generally > 10% (~1978-1990)?)

It is interesting to see how high (for the last 15 years) rates have essentially killed the RE market.
We had decades of a functioning RE market at similar (or higher) interest rates, but because we sat at ultra low rates so long.. the vast majority of owners were able to re-fi at those low rates.

So because everyone has ultra low fixed borrowing costs, the only sellers are forced due to lifestyle changes.. And an increasing percent of buyers are cash.

I don't know what rate level brings life back to the housing market when current holders are all at 3% rates. Certainly not 6%. Maybe 5%..?

Also don't forget that pre-2018 holders can deduct interest on up to $1M of mortgage vs $750K now.

I was thinking last night this is almost like the mirror scenario to Richard Koo's "balance sheet recession" where cutting rates doesn't cause inflation because corps&households use the low rates to repair their balance sheets by saving more as their borrowing costs decrease.

Now we just went thru a fed hiking cycle (and maybe 1 more this year who knows) where inflation has remained fairly persistent because so many corps&people termed out their debt and therefore have fixed their low rate. You have homes&autos markets frozen because that requires taking on new high interest debt, but it leaves a lot of money left to spend on everything else..

I wouldn't be shocked to see 2024 have 0 rate cuts and maybe even 1 more hike as a result..
Higher for longer is the new mantra, but I think few are prepared for "longer" to be 3-5 years.

What's been interesting as well as frustrating to participate in is what I'm calling a micro bull market in the Brooklyn real estate. In the last 10 days we've bid on 295 St. Johns place, 135 Eastern parkway, 292 Hoyt Street, 220 Congress. All wound up going above ask with anywhere from 3 to 7 competing bids.

We've bid on six properties in Chappaqua, that market is absolutely crazy! Anyone looking there, will know exactly what I'm talking about. Not sure what's driving that market specifically, but it seems like people moving out of Manhattan, and very very tight inventory.

That said, there's a slew of property on the market that's getting very little love. In Brooklyn it seems like there's a small amount of buyers chasing an even smaller pool of the best properties. Sort of like musical chairs, everybody's sitting down at once.

But if you don't own one of these golden properties, you can be in for a very long slog.

Keith Burkhardt
The Burkhardt Group

I don’t know if “killed the RE market” is quite the right term. Plenty of transactions still seem to happen. Perhaps not at the price sellers hoped they’d get, but whatever.

It is curious how people came to expect ZIRP as a god-given right. And a lot still do, given all the talk of “when rates come down….” The *lowest* point on the yield curve is the 10yr at 4.6%, but they’re sure rates are coming down.

The cost of borrowing money has gone up, but the cost of borrowing-NYC RE remains dirt cheap. I’ll happily continue borrowing the latter, and for those who feel compelled to borrow money for RE at 7%, I’ll happily float overnight funds to intermediaries at 5.25%.

@nada - nationally we're at multi-decade lows for existing home sales so it seems pretty dead

Aren’t we at something like 4m existing home sales per year, same-ish as 2009-ish, with 5m being a longer-run average? I know that’s a low in the cycle — and maybe thing head lower — but I like to reserve words like “dead” and “killed” for more interesting situations.

>> So because everyone has ultra low fixed borrowing costs, the only sellers are forced due to lifestyle changes.. And an increasing percent of buyers are cash.

At the high end, it kinda seems the cash buyers are not stepping in. For example, Larry Robbins is moving to FL:

https://www.bnnbloomberg.ca/hedge-fund-manager-larry-robbins-fears-hit-to-nyc-as-he-joins-wealth-migration-1.2057378.amp.html

He had embarked on a $38m purchase of 12k sq ft of raw space in 2015, finishing in 2020, at a total cost of ~$50m:

https://www.wsj.com/articles/billionaire-hedge-funder-larry-robbins-asks-55-million-for-new-york-penthouse-bdc9b519

Asking price has now been chopped from $55m to $35m:

https://streeteasy.com/building/the-charles/ph?showcase=1

I’m guessing a bid at $30m would get the job done but no one seems to be bidding. I doubt Robbins would care about the $20m hit beyond perhaps his ego. If I were him, I’d care more about the 5 years of life and brain damage wasted on a buildout I never enjoyed.

But isn’t this value at $30m, and where are the buyers that went gaga over paying $50m in the 2010’s?

Or else Rupert Murdoch’s old apt:

https://streeteasy.com/building/one-madison/ph?showcase=1

He bought for $43m in 2014 as a white box, probably $50m all-in. Ask started at $62m, now down to $38m. I’m again guessing $30m will get the job done. I don’t think the 2014 price was overpaid — that’s very comparable cost per floor to the floors below. There just doesn’t seem to be the buyer pool anymore.

Will no one rid these billionaires of the albatrosses around their necks?

Or Adam Neumann’s complex purchased in 2017 for $35m, which then got reno-ed / comboed for $40m all-in (?) now asking $36m:

https://streeteasy.com/building/78-irving-place-new_york/carriageph

Listing dates back to 2019, when the “whisper“ campaign started:

https://therealdeal.com/new-york/2019/12/10/adam-neumann-looks-to-sell-gramercy-penthouse/

Again, I’m pretty confident $30m would get the job done.

I could go on….

Nada,

Both of these hit the peak of the ultra-luxury in 2015 which is just oversupplied. That market is down anywhere from 20-40% except perhaps 220CPS. I get the Murdock purchase but Larry Robbins 1st ave and 73rd for ultra-luxury purchase? Beats me. Prime Location is an essential part of ultra-luxury and very few people will consider 73rd and 1st ave suitable location.

BTW, the finishes and material and Larry Robbins apartments are impeccable especially the generous use of book machted statuario marble. Lowest floor is probably better sold as a separate apartment by merging the bedroom next to the living room into living room.