Affordability will be just about record lows at 5%. Inflation adjusted home prices have already surpassed the 2000s peak, and are a few std deviations above historical norms.
If inflation doesn't abate, we can expect 6% mortgages in the near future.
This is because of maths and the inverse effects of downward and upward shifts.
- If you borrow $100 at 5% your interest is $5pa, which matches your discretionary repayment ability.
- Rates drop to 3% and you can afford to borrow $167 at 3% for the same $5pa. This is a 2% or 40% of total drop.
- New buyer buys in at cost of $167.
- To make it somewhat realistic lets say inflation comes along and income rises, now you have $6pa repayment ability.
- With a larger $167 loan, your $6 repayment can afford a rate rise to only 3.55%, this is a .55% rise or 18% total increase.
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So while the rates dropped 2%, a rise of more than .5% bankrupts all the new buyers. The government is sensitive to this because many people just bought together at the new prices and low rates, and it becomes untenable when large amount of the population lose their homes at once.
The same dynamic applies to business loans, government balance sheets.
US is an outlier with 30 year fixed loans, the rest of the world basically does loans on variable rates or fixed for maybe 5 years a time.
They are mostly held low right now due to belief that CPI spike is transitory.
You're right that once rates rise sufficiently, it creates recession risk, which then puts downward pressure on rates. But we can likely get to 3% on the 10y and 5% mortgages before hitting that ceiling.
Keep in mind how sharply rates rose in the 70s. Though at the time debt burdens were not very high, for sure. But persistently high inflation will lead to a similar effect.
We are seeing strong signs of a wage price spiral starting to form in the data
Thanks!
But here's home price relative to median income, which is at a record. Then apply logic that mortgage rates are 4.1% now and likely to be 5% soon.
https://www.longtermtrends.net/home-price-median-annual-inco...
2000s affordability was still worse at the peak, but will shift quickly if mortgage rates continue to rise.
Anyway, will edit when I find
^ is the source most in the industry use for the current rate. It tends to be the most up to date
https://www.builderonline.com/money/mortgage-finance/heres-w...
Higher prices are more than offset by lower mortgage costs. Money got cheaper faster than housing got more expensive. Most people who are not rich are buying money with a house kicker in 30 years, so the cost of money is the important factor.
https://ritholtz.com/2021/08/how-expensive-are-houses/