Re:Mortgage rates have been rising at a pace not seen in alm...
by ChuckMcM on Friday May 25, 2018 @01:00AM
(#17150742)
Disclaimer: I'm just an enthusiast.
Generally, in most discussions of the cost of housing, people discuss this expense in terms of a fraction of your income. In the US, a number of advisory articles and books consider between 25 and 30% of your gross take home pay as a "reasonable" amount of your income to pay for housing. So if you make $120,000 a year, that is about $3,000/month as 1/3 of your gross take home salary.
According to the FED income growth has been fairly static over the last decade so that 1/3 number has been fairly static as well. [1]
Given those two observations, you can derive the impact of rising interest rates on home sales, which is to say that as the rates rise, the monthly payment will rise, and that will put homes out of the 25 - 30% window for people. Historically that means a slower sales cycle and downward pressure on house prices (which keeps the payments at the lower level).
If there is a commensurate rise in real wage growth it won't slow down the housing market and the banks will make more money. If wages stay stagnant the housing market will cool off and if it does so for long enough prices will come down as people who have to move will feel pressure to lower the price in order to have the sale go through.
Generally, in most discussions of the cost of housing, people discuss this expense in terms of a fraction of your income. In the US, a number of advisory articles and books consider between 25 and 30% of your gross take home pay as a "reasonable" amount of your income to pay for housing. So if you make $120,000 a year, that is about $3,000/month as 1/3 of your gross take home salary.
According to the FED income growth has been fairly static over the last decade so that 1/3 number has been fairly static as well. [1]
Given those two observations, you can derive the impact of rising interest rates on home sales, which is to say that as the rates rise, the monthly payment will rise, and that will put homes out of the 25 - 30% window for people. Historically that means a slower sales cycle and downward pressure on house prices (which keeps the payments at the lower level).
If there is a commensurate rise in real wage growth it won't slow down the housing market and the banks will make more money. If wages stay stagnant the housing market will cool off and if it does so for long enough prices will come down as people who have to move will feel pressure to lower the price in order to have the sale go through.
[0] https://www.google.com/search?q=what+percentage+of+my+salary...
[1] https://fred.stlouisfed.org/series/LES1252881600Q