Author Topic: Why the housing market should brace for double-digit mortgage rates in 2023  (Read 714 times)

rcjordan

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ergophobe

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I've posted similar numbers before, but...

$2000/month buys you a $273,000 mortage at 8% (30-yr fixed)
$2000/month buys you a $419,000 mortgage at 4%

There should be a slight offset with lower property insurance, so let's say a house that can sell for $400,000 at 4% can sell for $275,000 at 8%

Note, I don't say "worth" because interest rates will take quite some time before they impact costs of materials and labor and a lot of recent construction built at current prices will struggle to get back what the builder has into it.

rcjordan

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When we moved back to this area in 1977 my mortgage was 11% with 10% down.  Mortgages had been at 14% some months earlier. 'Course the new 2500 sqft brick ranch was only $48000.

ergophobe

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Article in The Economist says that

 - hot housing markets will be hit hardest. No surprise there.

 - The US is in a better position than a lot of people because our definition of "fixed" is usually for the term of the loan, but elsewhere "fixed" means more what we would call ARM. So when you look at percentage of "fixed" mortgages by country, there is a completely different definition. In most places "fixed" means 2, 4 or 5 years, then floating. This came up earlier with respect to the UK: https://www.nerdwallet.com/uk/mortgages/fixed-rate-mortgage/

- we probably will not see bank failures like we did in 2008-2009, because increasingly the mortgage market in the US is separate from the large, pillar commercial banks that keep the economy running. So they are, at least in theory, much more insulated than in the past.

- it will hit younger people the hardest - they are more likely to find themselves underwater if their house loses 20% of value and they have more principal left. For older people, they've (uh... we I guess) both had more time to see their property appreciate, so in nominal dollars, a 20% shave is still likely well above the purchase price, and two, if they are the rare person over 65 with a floating mortgage, in most cases the principal is small so changes in interest rates don't hurt them as much.

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Other observation that I haven't really heard talked about. This will crater geographic mobility in the US.

If there is a long-term drop in home prices, it puts a lot of people underwater. It isn't rational to make decisions based on sunk costs, but people do. So many people will have a floor on what they are willing to sell at. Some people will have a true financial constraint, sunk costs aside. If they sell, but still have a mortgage payment for the balance, they may not be able to afford a new house somewhere else.

And finally, for people who see their home as an investment/wealth-building instrument, they will want to hold on until it recovers value, even if it means staying in a shitty job in the interim. So even without the sunk cost problem, if I bought my house for $100,000 and a year ago the same house was selling for $200,000 last year but now is only selling for $150,000, if I keep my crappy job for two more years and the housing market rebounds, I've gotten a $25K/yr bonus. Scale that up 3x to 20x for various real estate markets.

I saw recently that American mobility is the lowest in history. We used to be a people that moved. That is no longer true (it may be true compared to other countries, but not according to our history). The percentage of people currently living in the state they were born in is something like double or triple what it was 100 years ago.

Anyway... this will exacerbate that trend. That has impacts on labor markets and economic recovery. In past times, Americans willingly migrated to where the jobs were. Not so much anymore. I think housing is a huge factor in that.

ergophobe

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Long read, but worth scanning the charts
https://www.jchs.harvard.edu/sites/default/files/harvard_jchs_are_americans_stuck_in_place_frost_2020.pdf

This is a bit older, but shows a key trend in the charts. If you look at people in the bottom economic quartile, they are the most likely to have moved to a new county or state in the previous year. But the prevalence has collapsed. In 1994, 26% of men 25-29 in the lowest income quartile had moved. In 2016, that had dropped to 17%. Less dramatic but similar for women and other age cohorts.

https://www.ssa.gov/policy/docs/ssb/v80n2/v80n2p1.html

That article also has an interesting graph showing the difference in income between movers and non-movers over time, by gender and age cohort.

This article states that in the 1950s, 20% of Americans moved in a given year. By 2017 that was cut in half.
https://www.thirdway.org/report/stuck-in-place-what-lower-geographic-mobility-means-for-economic-opportunity

They point out that unemployment insurance that is state-by-state is an impediment to someone collecting unemployment benefits looking for work in a new state.

I can't find the older data, but my recollection is that the trend carries beyond the 1950s. So geographic mobility is half what it was in the 1950s, but maybe a third what it was in the 1920s.

BoL

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>geographic mobility
I wonder if these people are included (if out of the country, or play a significant role in those charts). 17 million Americans define themselves as a digital Nomad.
2022 Digital Nomads Report Shows 131% Growth Since 2019

rcjordan

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>This will crater geographic mobility in the US

Heh, EG, ask your sister what happened when she told sellers that they'd have to bring cash to closing if they sold at X price.

>over 65

Except they've been financing their lifestyle (ccard debt, mostly) by refinancing and pulling out equity.

Rupert

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slightly oblique, but as you know a favourite listing of mine:
https://www.bbc.co.uk/programmes/p0d70v56

talks simply about the magic banks do in converting a short term cash deposit, into a long term guaranteed loan for a property at a fixed rate.

Quote
The former head of the US Federal Reserve Ben Bernanke is named as one of three winners of the 2022 Nobel Prize in Economic Sciences for his work on how banking collapses were a major factor in the Great Depression of the 1930s. He shares the prize with two fellow US academics, Douglas Diamond and Philip Dybvig. Tim Harford discusses the significance of their work focusing on the role of banks and why their smooth functioning is so important to society.

It is with respect to a part of the recent issue with gilts in the UK after our mini budget fiasco. But of course it is having a huge impact on the mortgage rates, and from the sound of things, its not just a UK problem.
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ergophobe

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>>Heh, EG, ask your sister

She got out when things were still at the peak. She's fully retired now, so she did not have to face that.

Brad

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I'm so glad I and my partners sold our housing development when we did.  Peak time to get out: mortgage rates were low, housing demand and prices high and the only rub was cost and availability of materials.  Now that's somebody elses problem.

All we have left are 5 commercial lots to sell.