The bad part of this I think, is that valuations of long-term cash flows start becoming more and more sensitive to rates. The difference between a 2.75% mortgage and a 3.75% mortgage is bigger, relatively, than the difference between a 3.75% mortgage and a 4.75% mortgage; because people buy the largest, longest mortgage they can afford, small changes in small interest rates result in large changes in the monthly payment. I feel like this ends up making the whole housing market more volatile.
If you can assume long-term stable interest rates and have access to a 30-year fixed mortgage - the difference between a 2% mortgage and a 1% mortgage is the same as the difference between a 12% mortgage and a 6% mortgage.
Every percentage points that central banks artificially reduce interests by exponentially distorts the markets.
A 0% mortgage with a 1% property tax - theoretically - costs you -2% (x 5 for leverage per year). On a million dollar house - you'd get paid $100k per year to live there.
The effects of this policy have been a moral hazard unseen before, and if it ever has to end, we're in for wild times.
How did you calculate that?
The national median figures even lag CPI:
https://dqydj.com/historical-home-prices/
This probably manifests from increasing income/wealth inequality, in conjunction with inequality of how popular some places are relative to others. If your goal is to obtain housing that the top 20% or 10% are competing for, then you will experience prices rising much quicker than housing that the bottom 80% are competing for.
Here is another source showing the variance:
https://www.visualcapitalist.com/20-years-of-home-price-chan...
Maybe in the most popular areas, it would sell for 1.03^30 = $2.4M after 30 years, but in the vast majority of the US, that has not historically been the case.
> On a million dollar house - you'd get paid $100k per year to live there.
Average inflation for the last 60 years is 4.7%/yr.
https://dqydj.com/historical-home-prices/
https://www.visualcapitalist.com/20-years-of-home-price-chan...
>I do not think it is reasonable to assume a random piece of land will appreciate at 3% per year over a period of 30 years.
It seems very reasonable to assume that average real-estate will at least increase with inflation.
Your links show that average home prices have increased 100% in 20 years, which is a little over 3% per year during that period. They also show that prices have increased faster than inflation.
>Maybe in the most popular areas, it would sell for 1.03^30 = $2.4M after 30 years, but in the vast majority of the US, that has not historically been the case.
Your link literally shows that the majority of US homes doubled in price in the last 20 years, (which is even faster than 30).
Sure, This level of overperformance releative to inflation is likely unsustainable. However, it is reasonable and conservative to assume that housing and land will at least increase with inflation on average. Population keeps increasing in the US and land is finite.
are you saying that 3%/yr increase in price is too low, and the real number is likely higher? This is better supported by your data.
[1] https://www.visualcapitalist.com/20-years-of-home-price-chan...
Suppose I'm considering a mortgage of 100K.
If rates go from 1% to 2%, my payment goes from 322 to 370, an increase of ~15%.
If rates go from 6% to 12%, my payment goes from 600 to 1029, an increase of ~71.5%.
Massive difference in terms of affordability.
In the US, I think 90% of home mortgage loans are fixed rate loans, so borrowers do not have changing monthly payments. I cannot find an easy source for it, but I think I read it from an Ellie Mae report.
And ARMs come in 5/7/10 year, but the longest mortgages are fixed rate at 15/20/25/30 years.
This is surprisingly easy to explain: interest rates are a combination of the time factor of money (a dollar in hand is more useful than a dollar tomorrow) and the risk of default. Geopolitical stability and security has increased in the aggregate over the past few centuries, so it follows that interest rates have declined in aggregate.
Makes you wonder what the implications are, now that we've hit zero. ;-)
Same. I live in Wyoming. Our county has "workforce housing." It's exclusively for sale or rent to workers in the local area. (Versus remote workers or holidayers.)
I'm not advocating for this policy, though I think it's brilliant. But it highlights our desire, perhaps need, for non-market demand-side moderation. We presently put all the non-market moderation on the supply side. From the meaningful, like capacity, design and environmental reviews, to the useless: neighborhood bitching sessions and meaningless permits from every politician who needs petitions signed.
Instead, the Teton model points to a hybrid approach. Less regulation on the supply side. But more non-market requirements on the demand side. One approach is ring-fenced supply for groups the community deems desirable, like critical workers, disadvantaged groups, et cetera. We have good reason to be wary of this government-picking-the-winners approach. But if we want to maintain a community feel and keep housing affordable, the solution must be rationing.
Centralized rationing leads to patronage. (See New York City.) De-centralised rationing, where supply is held back for certain groups who have a market to themselves, looks more resilient. The process of choosing who's in the non-market group and how much of the market they get to themselves will be fraught. But it looks more plausible than convincing Atherton to build sky-rises or homeowners to accept rent and price regulation.
I share your wariness of government picking the winners, and posit that this Workforce Homes program appears to be maybe a slightly cleverer version of state-imposed price control, which does not escape the core fact that the in-group (those who qualify for the program) gets below-market price housing at the expense of the out-group (those who don't qualify for whatever reason) who either must bid higher than they would have without this program or are priced out entirely. And if belonging to a "disadvantaged group" is one of the qualification criteria, then I'm afraid that the underlying economic facts may exacerbate tensions along racial lines.
That said, this is only one person's opinion from thousands of miles away; and I can only say that I'm jealous of what must be the view from your window. :-)
It's code for maintaining low density. (Historically, and still in some places, it codes for race, too.)
Combined with supply restrictions, low density requirements mean (a) skyrocketing prices, (b) rationing or (c) more density. A lot of the conversation has been focussed on (c), which I approve of in e.g. Cupertino, where I grew up. (Turning suburbia into a city solely impacts human concerns in a way paving over nature does not.) But (b) might have more angles to it than the traditional public housing model. (I've also been a favor of public housing built to own, where the government e.g. builds housing and sells it to first-time home buyers at a subsidized price. This not only builds wealth and avoids the patronage problem, it also creates mixed-income housing of the type that's less noxious to NIMBY's than solely low-income housing.)
The town doesn't want to be all remote workers, or remote workers and $100 cocktails because that's what it costs to keep a bartender. Remote workers (like me) are welcome. We must simply pay market rate, versus having dedicated supply. This seems fair given, as remote workers, we have more choice with respect to which housing market we descend upon.
There are situations where this doesn't matter. Obviously if you bought with a lot of borrowed money, and home prices drop significantly, and you try to sell while still owing money you may be in trouble.
But if you pay it off (or didn't borrow) you will own the home free and clear. When you own one home free and clear, the price is almost irrelevant. If you measure your net worth in houses as opposed to dollars, you have 1. If you move you'll sell one and buy one at whatever the going rate is - unless you're looking to upsize or downsize the price is not relevant.
What if I held off buying until prices drop?!?! Well, if you borrow nearly the full amount, it makes little difference. Housing as a percent of income has remained unchanged for 50 years (I saw something recently confirming this). In other words, your monthly payments are determined first and then the bank tells you how much house you can buy - which is exactly why prices vary inversely with interest rates.
In the situations above, the biggest problems stem from rate changes during the course of a low equity housing loan that is paid off early. IMHO we need to get back to 10-15 year terms as the norm.
Still, IMHO it is a bad time to buy. Also IMHO interest rates need to be a LOT higher to fix our economic problems, which would mean big drops in home prices still ahead.
What does this look like in a state like California for property taxes? My understanding is, due to prop 13, your property taxes are a function of the initial price you paid and increase slowly (much slower than housing inflation in recent decades).
That suggests paying a lower price later could have long term impact on cost of ownership beyond just mortgage payments.
Apparently there is a prop 8 that allows the property tax to be reduced if the house value goes down. I wonder if this has actually been applied in practice (2008 crisis?), but the process seems to be a lot more bureaucratic (annual revision of home value) so I wonder if it's even feasible to do this in a down market.
EDIT: This [0] seems to be a concise explanation with an example. Essentially, if you pay P, that's the base value for property tax. On year k you will pay property tax as if the house was worth min(assessed_value, P * (1.02 ^ k)).
If housing prices go down, you may temporarily pay lower property taxes, but in the long term, if house prices keep increasing faster than 2% a year, your property tax will be tied to the P you paid initially.
[0] https://www.sccassessor.org/tax-savings/tax-reductions/histo...
This ignores opportunity cost. Moreover, depending on your community's funding model, your quality of life could be impacted by over-leveraged neighbors defaulting on their property taxes and/or being foreclosed on.
Historical evidence points to innumerable recessions and bank failures even after the advent of the Fed, so it's unclear if they add value above and beyond what the market setting rates would do, but I don't believe that I'll ever get to find out in person.
Are you actually? We recently bought a house pre rising rates. We got a great financing. And if we refinance now we immediately cut 10% of the debt. We don’t intent to sell anytime soon. Looking at the market, even with lower prices now, it would still have been more expensive to finance a purchase after interest increases.
From our perspective it looks like recently having bought is the best position you could be in, except of cause for having bought a decade ago or a decade before etc.
While your home might decline from $500k to $450k, when interest rates lower your home value will climb back up as buyers see lower monthly payments. If interest rates are permanently high, then you got to lock in an amazing rate that will effectively make your housing cheaper - even if your purchase price was higher. If/when rates come back down, your property value will go back up and unless you're forced to sell while rates are high, you won't experience anything bad.
Even if you're worried that maybe you could have gotten a better deal with a lower price and higher interest loan, I wouldn't be. Let's say you buy a home at $500,000 at 4% interest. Interest rates hit 6% and your home's value declines to $450,000. The person who buys at $450,000 at 6% will be paying $2,150 vs. your $1,900 ($250/mo more, 13% more). Let's say interest rates go back down to 4% in 2025. They can refinance at 4% and their purchase price was $450,000, but they've already paid $49,700 in interest. They'd have payments around $1,750/mo (assuming they did a 28-year term) which is less than your $1,900. Ultimately, they'd be paying around $641,000 over the life of the loan against your $687,000 so it's not really that different. Of course, that doesn't consider the fact that the other person would also need to pay the loan closing costs a second time and that if they sold the house after 5 or 10 years, they wouldn't have that 4% interest rate for as long. So you're probably still in a significantly better position financially - unless you're quite sure you're going to stay in the home for 30 years. If you're only going to be there for 5 years, you'd rather pay $1,900/mo ($114,000) than $2,150/mo for the first 2 years 4 months and then $1,750 for 2 years 8 months ($116,200).
Plus, because interest gets front-loaded, you end up with more equity with the lower rate. At 6%, you're getting 0.0008% equity per month instead of 0.0012% per month. With the 4% loan, you've paid off $38,210 over the first 5 years (9.5% of the loan principal). With the 6% loan, you'd pay off $25,004 over the first 5 years (6.9% of the loan principal). Even if you assume that the home is really worth $500,000 and not the $450,000 purchase price, the higher rate still means that you only own 26.9% of the home rather than 29.5% of the home (assuming 20% down). They've been paying a higher monthly and they own a lower percentage of their home!
Again, if you're going to stay for 30 years, buying at a lower price and a higher rate might end up better if you can refinance. However, it does mean that you end up with less equity (paying more interest) earlier in the loan.
Basically, you're probably in a way better position than someone buying at 6% while getting the benefit of downward pressure on housing prices.
<6% mortgage interest rates were only available for a short period of time since the 1970s; from 2010-2019 they were kept low because the federal reserve wasn't seeing the inflation it was looking for. We finally found a decade of inflation.
But 6% mortgage rates may be a best case scenario for the long term.
I entered into a 30-year mortgage at slightly above 3% last year, with a reasonable amount of money down, and my mortgage payments plus tax on a bigger and newer house are substantially less than what I used to pay in rent. Plus I deal with less traffic, I encounter more diversity in my day-to-day life, and people, even the less well-to-do, are happier here. The only real downside has been that overall the availability and quality of fine dining is less here.
Naturally, people don't move solely for the ability to buy a cheaper house, but it is something worth considering, depending on your circumstances. I was in a similar boat as yours before I moved, where I could theoretically have afforded a house where I was, but I didn't want to.
I'm having anxiety about moving from downstate New York to Lexington, Kentucky. I've spent time there, I enjoy the city and the surrounding area, but I keep coming back to "If I don't like it I can always move back", instead of "The upsides far outweigh the downsides. You'll like it."
Thanks for this.
Cincinnati is close and has even more amenities like Jungle Jim's (2x giant grocery stores, 100% go here), CAM, theme parks, Union Terminal and niche museums (Sign Museum, VOA, Air Force Museum in Dayton), various pinball arcades, and places like Microcenter.
Can you name the cities?
Either way, you still moved to a city, so the local politics aren’t likely all that different. Though you did make sure to mention it a few times.
2.6% interest rate.
1.2% property tax rate.
Look for deals; some places need work, or don’t have AC, but can be had for cheap. Most buyers in the GBA don’t want a house that needs even a new kitchen, much less some walls knocked down.
Like seriously.. replacing a countertop is not hard!
You can't really take the investment aspect or any of these others out of the analysis if you want to understand what's best for you. Particularly in countries with policies to encourage/subsidize home ownership the answer is often, "buy a place", but not always.
No tax benefits go to renters. That's one of many considerations here other than raw liabilities.
Agree a investment property is a whole other can of worms, but not really relevant on the "should I buy or rent, personally" decision. For that one, you need to compare to other investments, which is in many ways more straightforward.
Example scenario: New >$3000/mo mortgage, $2000/mo to interest and property taxes = $24k. Have a 5% state income tax?, on $60k, that's another $3k deduction.
I can tell you from personal experience that you are wrong.
This is only true if you assume the same housing at the same cost/mo (including everything). And assume timelines. Usually this isn't the case, so there are definitely scenarios where you are better off renting.
In any situation where the rental scenario results in extra cash flow that you then invest, you can end up ahead in total, sometimes significantly so. It's all complicated by the fact that you are rarely comparing rent vs. buy on the actual same property.
Remember also in the "buy" scenario you have to include closing costs etc. which can affect your timeline. Your 1yr is unrealistic, you'll eat 5-10% of sale price on just that, typically, which may be way more than rent.