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Buy when interest rates are high?


By OCmonitor   Follow   Tue, 26 Feb 2013, 9:17pm PST   3,470 views   38 comments   Watch (2)   Share   Quote   Permalink   Like   Dislike  

Anyone still holding for the day when interest rates might go up and could push prices back down? Though manycash buyers are jumping in these days.

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Reality   befriend   ignore   Tue, 26 Feb 2013, 11:49pm PST   Share   Quote   Like (1)   Dislike (1)     Comment 1

When the FED starts to raise rate, it usually lags behind inflation for a few years. That means different price segments of the market will respond differently:

The really low price segment, say around $100k national average rental market (adjust for regional differences), there are enough cash buyers that interest rate won't matter much. In fact due to the increase of renters from the next consumer segment, the price may actually go up despite rising interest (but still negative real interest). Things change at the end of a series of interest raises, if and when real interest rate (nominal minus inflation) comes close to net rental yield.

The $200k-$750k single family house that the government has been subsidizing heavily will be hit hard due to the high percentage of borrowers in this segment. At around 4% interest rate, each 1% of interest increase result in nearly 25% (Edit note: as Roberto mentioned in the next post, should be 11+% here, but still the logic here carries on) in payment increase, there's no way wage increase among the middle class can match that in the time span of 4 FOMC meetings. Also, the brain fart called ownership premium (over rent cost on comparable house) will get squeezed out of the market as owners can no longer count on house appreciation to supplement rent income in this segment, gradually going back to normal market condition where rent is comparable to 30yr PITI, people rent for flexibility and lack of 20% down payment money.

The $million+ single family market has its own dynamics that is not dependent on government subsidized loan interest rates. At the moment, IMHO, it's a matter of how long it will take to burn through the foreign dumb money.

Reality   befriend   ignore   Wed, 27 Feb 2013, 12:28am PST   Share   Quote   Like (1)   Dislike (1)     Comment 2

Roberto,

You are correct on the detailed numbers break-down. It does not however affect the gist of my previous post: what are the chances that the average middle class family income can see 11.7% raise in the time span of 4 FOMC meetings? or 22.3% over 8 FOMC meetings? assuming the FED doesn't raise 1/2 point instead of 1/4 at any of the meetings and doesn't raise between meetings. If the average nominal wages were rising double digits annually, the FOMC would be jacking the interest rate into double digits like Paul Volcker did.

Of course, it's not as simply "as rates rise prices will have to fall." That's why I broke it down into 3 wide segments, each probably have different responses.

However, the house that rents for $1500 a month will probably be worth much less than $200k to the non-occupant owner when mortgage interest rate is back to the historical average of about 7-8% and rapid capital appreciation is distant memory. In fact, I'm dragging my feet on paying anything more than, or even close to, 100x monthly rent. There is a thing called vacancy, and that is bound to happen once every few years for repairs even if one is outstanding at marketing. If you are borrowing, the safety margin for vacancy in this business is usually set at 75% occupancy, which perhaps gives you a couple sigma's margin of safety in most markets.

FortWayne   befriend   ignore   Wed, 27 Feb 2013, 12:44am PST   Share   Quote   Like (2)   Dislike (1)     Comment 3

Buy it not based on interest rates, buy it if it makes financial sense. Patrick has a good calculator for it, so use it. You have all the information in the world to make a proper financial decision for yourself. Sometimes buying makes sense, sometimes doesn't.

I don't like low interest rates, but it's not the only thing in life. Markets can stay unreasonable longer than you can stay solvent.

Reality   befriend   ignore   Wed, 27 Feb 2013, 12:52am PST   Share   Quote   Like   Dislike (2)     Comment 4

Good summary of the last three episode of serial interest raises. The "opposite" phenomenon is due to FED action lagging behind inflation. Nominal interest rise does not mean real interest rise until the later part of a series of nominal interest raises.

CameronCrazy   befriend   ignore   Wed, 27 Feb 2013, 9:55am PST   Share   Quote   Like (1)   Dislike     Comment 5

Historically, housing prices fall when interest rates are increasing. Here's an interesting article posted yesterday on Patrick.net outlining what determines housing prices: http://ochousingnews.com/news/future-housing-markets-will-be-very-interest-rate-sensitive?source=Patrick.net

Even if the US is able to drop the unemployment rate to 6.5%, assuming all or a majority of those people will be entering the housing market is ridiculous. But even if they did, "shadow inventory" has been estimated between 20-30 million homes. Add in the real inventory and we're currently looking at a 10 year supply of homes based on the past two years of monthly sales (http://seekingalpha.com/article/1151771-the-housing-market-recovery-is-a-complete-myth).

Eventually interest rates will go up and, coupled with strict loan qualifications, less people will be able to borrow money for a home causing prices to go down. If the equity firms and hedge funds--which have been buying up large quantities of houses the past few years--see rising interest rates as a sign to start selling off their inventory, prices will drop further. And if certain politicians are successful in getting rid of Freddie Mac and Fannie Mae, prices drop further. Housing prices are still greatly inflated and anyone who tells you differently has other motives. Or is delusional.

Mobi   befriend   ignore   Wed, 27 Feb 2013, 12:44pm PST   Share   Quote   Like (1)   Dislike     Comment 6

SFace says

Chances are if you waiting for interest rate to be high to buy, you will be sorely dissappointed.

You are not really answering the OP's question. I think the question is whether higher rate would push down the price (so you can buy cheap). I guess the answer is no and yes. From the experience of 2004-2007, prices did not go step-by-step with the rates. It crashed after rate gets high enough. So, you should hold out until when the next crash happens if recent history repeats itself.

CameronCrazy   befriend   ignore   Wed, 27 Feb 2013, 10:47pm PST   Share   Quote   Like (1)   Dislike     Comment 7

robertoaribas says

Phoenix homes that are 30/60/90 days late or in foreclosure have fallen from a high of 14%

I guess housing prices are relative because someone would have to pay me to live in Arizona.

Mobi   befriend   ignore   Wed, 27 Feb 2013, 11:44pm PST   Share   Quote   Like (1)   Dislike     Comment 8

robertoaribas says

Mobi says



So, you should hold out until when the next crash happens if recent history repeats itself.


sooo, everyone on this site said don't buy the last several years, because it was still crashing... then it start going up and it's "don't buy, now wait till the next crash..." lather, rinse, repeat?


why not just say "don't buy." it is simpler!

I am just saying, to those people who want to hold out. IMO, should buy now and sell for gain later.

CameronCrazy   befriend   ignore   Thu, 28 Feb 2013, 1:05am PST   Share   Quote   Like (1)   Dislike (1)     Comment 9

robertoaribas says

And, as a college professor

Probably community college. And since you're also a realtor, I don't expect you to think differently. It would be like a butcher telling people to be vegan.

errc   befriend   ignore   Thu, 28 Feb 2013, 1:15am PST   Share   Quote   Like (2)   Dislike     Comment 10

It doesn't matter because rates are never going up. They've been dropping for over thirty years. Rates will have to fall further to keep house prices propped up at their current levels

EInvestor   befriend   ignore   Thu, 28 Feb 2013, 2:22am PST   Share   Quote   Like (1)   Dislike     Comment 11

When interest rates go up borrowers qualify to buy a lower priced home and therefore prices go down or at best do not go up. Interest rates and house prices are always in inverse ratio.
Low rates fuel buying frenzy which result in artifical high prices which end up in bust when rates go up.

david1   befriend   ignore   Thu, 28 Feb 2013, 2:56am PST   Share   Quote   Like (2)   Dislike     Comment 12

Interest rates do not rise in a vacuum. If interest rates increase, it is because inflation has risen.

House prices to not fall in times of high inflation. Ever.

To summarize, increased income = increased inflation = increased interest rates. In that order.

If payments rise 11%, and incomes rise 11%, then house payments maintain affordability as a % of income.

Inflation is rising prices. Without increased demand for goods, inflation goes nowhere. Increased demand for goods in general cannot exist without increased income.

Reality   befriend   ignore   Thu, 28 Feb 2013, 3:11am PST   Share   Quote   Like (2)   Dislike     Comment 13

People need to differentiate between nominal rate vs. real rate. The big price decline took place between 2007 and early 2009 when nominal rate on mortgage was around 6%, whereas inflation was negative! Oil dropping from a high of ~$140 to a low of ~$40. The real interest rate was incredibly high during that time.

After the start of 2009, mortgage rate dropped to 5% range, and inflation came back to the low single digits. That reduced the rate of price decline in nominal terms.

Starting in late 2011, mortgage rate dropped to 4% range or lower, and inflation picked up to upper single digits(Money supply, not numbers from the Bureau of Lying Statistics). The negative real interest rate is the reason behind the rapid recovery / "echo bubble" (depending on your POV) that we have witnessed in the past 18 months or so.

FED action usually lags inflation. That's why we have exaggerated bubbles and busts.

RentingForHalfTheCost   befriend   ignore   Thu, 28 Feb 2013, 3:15am PST   Share   Quote   Like   Dislike     Comment 14

robertoaribas says

So, you get your negative effect of interest rate on housing, at the same time the general economy is doing well, and both rents and house prices have other reasons to climb, thus blunting or in fact completely erasing the effect of the rates...

Good luck with that theory! Hell, I hope you are correct, it will be years from now anyways, and I'll buy a few more.

Also, at the same time that your real investments (you know that kind that make things) go up 2x. You were the one saying that the general economy was better. If they are buying houses, they also buy appliances, cars, electronics, etc.

So, the real question is has your rent gone up faster than your investments. My guess is No, so I'll stick with the investment side is a much better place to be in an improving economy.

david1   befriend   ignore   Thu, 28 Feb 2013, 3:44am PST   Share   Quote   Like   Dislike     Comment 15

Reality says

(Money supply, not numbers from the Bureau of Lying Statistics).

If you want to use money supply for inflation, can you explain the net effect of this graph below on overall inflation please?

http://research.stlouisfed.org/fred2/graph/?g=g28

Reality   befriend   ignore   Thu, 28 Feb 2013, 4:05am PST   Share   Quote   Like   Dislike     Comment 16

david1 says

Reality says

(Money supply, not numbers from the Bureau of Lying Statistics).

If you want to use money supply for inflation, can you explain the net effect of this graph below on overall inflation please?

http://research.stlouisfed.org/fred2/graph/?g=g28

That pair of graphs just shows how "velocity of M2" is derived from M2: Vm2 = nT / M2 "Velocity of M2" is not a measured quantity but derived quantity from GDP(?) and M2

david1   befriend   ignore   Thu, 28 Feb 2013, 4:24am PST   Share   Quote   Like   Dislike     Comment 17

Reality says

GDP(?)

Correct, using the same notation you took from wikipedia, nQ.

But what does it tell you? Does adding $1T to the money supply effect prices if it does not compete for goods and services? What if it sits in a bank account untouched?

Imagine an island where the money supply is $100 in gold coins. If someone finds another $100 in gold coins, but never uses it, what happens to the price of bananas?

If someone finds another $10 in gold coins but uses it, what happens to the price of bananas?

Unless you define inflation as something other than a general rise in prices, how can you use money supply to define inflation without taking into account how often (if at all) that added money supply competes for goods?

If you define inflation in some other way, who the fuck cares about inflation? If all of the goods and services I would ever want to buy do not increase in price - except gold or some other useless material - what do I care about the money supply?

Reality   befriend   ignore   Thu, 28 Feb 2013, 4:30am PST   Share   Quote   Like   Dislike     Comment 18

david1 says

But what does it tell you?

Nothing. Who told you I was using M2 as money supply?

david1 says

If someone finds another $100 in gold coins, but never uses it, what happens to the price of bananas?

Goes to show the defect in defining M2 as money supply

david1 says

Unless you define inflation as something other than a general rise in prices,

"General rise in prices" is very different from what BLS pulls into an arbitrary basket and calls it "general rise in prices."

david1 says

If you define inflation in some other way, who the fuck cares about inflation? If all of the goods and services I would ever want to buy do not increase in prices, except gold or some other useless material, what do I care about the money supply?

Do you go out and buy every item exactly in the same weighting according to what BLS bureaucrats rig the basket? Of course you don't. Then according to your own logic you should not care "the fuck" about BLS basket price either.

HEY YOU   befriend   ignore   Thu, 28 Feb 2013, 4:44am PST   Share   Quote   Like   Dislike     Comment 19

Buy when interest rates are high. I'm not sure.
Never pay more than 50% of asking price. I'm not interested in helping the seller, commissioned sales people or flippers. Let other suckers pay more.

CameronCrazy   befriend   ignore   Thu, 28 Feb 2013, 6:10am PST   Share   Quote   Like (2)   Dislike     Comment 20

robertoaribas says

you are an idiot....

You're clever. How many classes at community college did you have to skip to think of that one?

epitaph   befriend   ignore   Thu, 28 Feb 2013, 6:23am PST   Share   Quote   Like (1)   Dislike     Comment 21

david1 says

Inflation is rising prices. Without increased demand for goods, inflation goes nowhere. Increased demand for goods in general cannot exist without increased income.

That's why we are going through stagflation and not inflation.

Raw   befriend   ignore   Thu, 28 Feb 2013, 6:41am PST   Share   Quote   Like   Dislike     Comment 22

Reality says

People need to differentiate between nominal rate vs. real rate.

True!
Real estate is more concerned with real interest rates (interest rates adjusted for inflation), not nominal rates.

Mark D   befriend   ignore   Thu, 28 Feb 2013, 7:11am PST   Share   Quote   Like   Dislike     Comment 23

OCmonitor says

interest rates might go up and could push prices back down

historically this has not always happened.

Philistine   befriend   ignore   Thu, 28 Feb 2013, 7:59am PST   Share   Quote   Like   Dislike     Comment 24

Mark D says

OCmonitor
says



interest rates might go up and could push prices back down


historically this has not always happened.

Historically, interest rates go up as a result of a booming/improving economy--part of that being higher prices, not lower prices.

OCmonitor   befriend   ignore   Thu, 28 Feb 2013, 8:28am PST   Share   Quote   Like (1)   Dislike     Comment 25

Philistine says

Mark D says

OCmonitor

says

interest rates might go up and could push prices back down

historically this has not always happened.

Historically, interest rates go up as a result of a booming/improving economy--part of that being higher prices, not lower prices.

I agree that in a booming economy interest rates would go up.

During the housing boom a few years ago, I recall interest rates went low and prices skyrocketed. But would that not be part of the bubble since money was loose and there were many stated-loans (no verifications)? So lots of money being passed around which made someone who should not qualify for a large loan, suddenly qualify for a very large loan. Those same loans are not available today for the most part.

I think the basic philosophy could be that if as a regular Joe can afford 1K payment and interest rates go up then maybe I can now only afford an $800 payment. (if salaries don't go up and other things are more or less constant). Of course there are many other factors to consider. But I would think for the general population their buying power is less. So if the general public can't make the payments, the owners would need to drop prices to sell or offer concessions to get people in the door. That is unless investors are buying everything up to keep the market moving (especially with low inventory).

Now maybe that's all skewed with many in California having money in the bank and buying properties. Such as the all-cash investors running around buying up places right and left. Maybe that's skewing things? I know my friend put her house up for sale and she had 20 all cash buyers in 2 days.

Philistine   befriend   ignore   Thu, 28 Feb 2013, 9:45am PST   Share   Quote   Like   Dislike     Comment 26

OCmonitor says

During the housing boom a few years ago, I recall interest rates went low and
prices skyrocketed

Yep, the Roaring 2000's were quite a special time. Time will tell if that permanently screwed the pooch or if we will ever revert to "historical" economics.

OCmonitor says

all-cash investors running around buying up places right and left. Maybe that's
skewing things? I know my friend put her house up for sale and she had 20 all
cash buyers in 2 days.

Well, in markets like LA, I have observed that investors aren't touching a lot of areas because they either don't cash flow as rentals or there are no more rehabs with built-in margin . . . also, foreclosures are drying up.

If I were an owner/occupant home shopper who had all cash (aka, $700-900k in non-ghetto LA), the last thing I would do is buy a house with that cash given how cheap money is right now.

evilmonkeyboy   befriend   ignore   Thu, 28 Feb 2013, 11:24am PST   Share   Quote   Like   Dislike     Comment 27

Philistine says

Well, in markets like LA, I have observed that investors aren't touching a lot of areas because they either don't cash flow as rentals or there are no more rehabs with built-in margin . . . also, foreclosures are drying up.

If I were an owner/occupant home shopper who had all cash (aka, $700-900k in non-ghetto LA), the last thing I would do is buy a house with that cash given how cheap money is right now.

Bingo! Why risk that kind of cash on a house, in fact why risk a 20% down payment in crazy markets like LA or the Bay Area. Unless you think that interest rates will stay at sub 4% rates for the next 10 years it doesn't make since. WHY ARE 20% DOWN BUYERS MISSING FROM THE MARKET????
Interest rates are at historic low they can go up or stay flat. We are in uncharted territory as far interest rates go.

GraooGra   befriend   ignore   Thu, 28 Feb 2013, 12:29pm PST   Share   Quote   Like   Dislike     Comment 28

donjumpsuit says

When interest prices increase, affordability (list price) decreases. So a $2000 a month mortgage payment only buys a $400k house, not a $550k house.

In other words, all the flippers are out on their nuts, because they are buying $400k houses to sell for $600k, because the average dope can afford a monthly payment on $600k at 3.5%, but not at 5%.

I often bitch, but in the end I guess I would rather pay a bank more money to borrow (a credit union mind you), than a flipper who inflates the sale price of a house. Also the taxes will be lower (even if by a little), and I assume insurance is lower on a less expensive house.

Also it is better to have lower principal than lower interest rate. You can always refinance in the future to a lower interest rate or pay more money to effectively pay lower interest rate. Principal, on the other hand, you are basically stuck with.

GraooGra   befriend