Mortgage interest rates have nearly tripled in the span of just a couple of years amid inflation fears and strong economic growth.
Mortgage interest rates have nearly tripled in the span of just a couple of years amid inflation fears and strong economic growth.
Not that this doesn’t suck for current home buyers, buy it’s worth keeping in mind that this is still fairly low on a historic perspective. Rates through the last part of the 20th century were often in the double digits (https://www.freddiemac.com/pmms). They dropped to around the current level in the late 90’s and started tanking in the early 2000’s. And then fell off a cliff in 2008. The Fed has been trying to get rates back up again ever since, often with negative results. At the same time, raising rates is one of the few tools the Fed has to keep inflation in check, and it needs to be used, lest we end up in the same situation as Turkiye with inflation upwards of 80% officially (https://www.bbc.com/news/world-europe-63120478). Erdogan has very helpfully provided a great case study in lowering interest rates while fighting inflation, he chose poorly.
The difference is that the same house in 1990 at 12% still only cost $150k. Today at 7% it costs $1.2m
Source: the house I grew up in, county sales records.
Right, these people are so quick to “well akshually” they completely ignore the inflated house costs since which layers more unaffordability on top of already unaffordability.
150k at 12% is $1543/mo; in 2023 dollars, that’s $3609/mo. 1.2M at 7% is $7984/mo.
Over the same time period, the S&P500 has gone up by a factor of 13.6x - if you invested $150k in 1990 you’d have $2.04M today.
I’m not trying to make a point - I just thought this was interesting.
That’s also true. Housing prices got really stupid during the run up to 2008 and they’ve never fallen back to Earth. And, after a short dip, they went ludicrous. But, that isn’t a reason to try and keep interest rates down. If anything, low interest rates have been part of the reason for the run up in home prices. Money has been cheap; so, investors have been able to borrow cheaply and use the rising home prices as a short to mid term investment. For example, if I can borrow $350k at 3% APR, buy a a house and sell it again in six months with the price having gone up 5-10%, that’s basically a license to print money.
Even better, let’s say I borrow $500k at 5% and assuming the bank lets me do that with no down payment (crazy these days, but let’s pretend Countrywide is still in business). I’m now paying $2,684 in Principal and Interest (calculated here: https://www.bankrate.com/mortgages/mortgage-calculator/). I then turn around and rent out that same house for $4,000/month. Assuming some costs for maintenance and management, I’m likely still ahead a $1,000/month or so. And that’s basically free money for me. Done on an institutional scale, it’s easy money and easier the lower interest rates are.
Any fix to home prices isn’t going to come from interest rates. We’re going to need changes to the legal framework around home ownership and property investment. And that is going to be a rough road.
There’s only a handful of areas where that level of appreciation happened. There’s about as many places that 150k house is the same or less because it’s a crime ridden neighborhood now, or there’s no economic activity in the area anymore. The average is more like 2-3x increase in the last 30 years.
Home prices were much lower.