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Home Price to Income Ratio

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Re: Home Price to Income Ratio

#601

Post by imtringued »

conductr wrote: post #488
woofie11 wrote: post #434

Earlier quoted context omitted.

Kinda. If I buy a 1M home at 2.5% interest, I have a $4,000 monthly payment. If rates go to 6%: - Housing prices plummet to $600,000, assuming people are willing to spend the same per month. - My monthly payments are identical to had I bought at $600k at 6%. If I stay there, I'm not much worse off. It's harder to pay off the home quickly. - If I move out, and I rent out my home, it covers monthly payments approximate…

> what I expect is actually happening here is people are anticipating high inflation That's why price to income is an interesting metric. High inflation without income rise just means people feel worse off and a correction will occur. Housing, along with many other things, are competing for people's wallet. Interestingly, covid is causing a labor shortage and income to rise at the low ends. I suspect stagnating in th…

At 5% or more interest more than half your money goes to the bank rather than the house. At 0% all your money goes to the house. You can call this inflation if you want but then you are ignoring that you are paying a million dollars for a less than million dollar house because of interest.

The fact that spending and price are decoupled make the inflation idea stupid.

Re: Home Price to Income Ratio

#602

Post by imtringued »

fredestine wrote: post #582
fshbbdssbbgdd wrote: post #458

Earlier quoted context omitted.

I have a ~million dollar fixed rate mortgage. If rates go up, I’ll be sad that the value of my house went down. On the other hand, I’ll be very happy to have a large fixed rate loan. Let’s call my mortgage rate X%, and let us assume that rates go to X+5. Then I can invest money to earn at (X+5)%, which means my loan is essentially a $50k/year annuity. My only wish would be that I could make the loan even bigger. On t…

I don't know why you think home prices will go down if interest rates go up. they might not. especially in cities where everyone wants to go and where offer is low.

One of the things I am wondering about is how I have found housing that is not affordable to a single working adult but once you have two incomes the price is perfectly reasonable.

My hypothesis is that if there is a shortage of housing, then dual income households will bid the price up and this causes the appearance of unaffordable housing when the underlying cause is that there is a shortage. This effect does not happen when there is a housing surplus.

Re: Home Price to Income Ratio

#603

Post by imtringued »

bink wrote: post #418
nostrademons wrote: post #335

Earlier quoted context omitted.

As long as most people in the U.S. buy houses with 30-year fixed mortgages, the total cost of a house will be 30 * 12 * monthly mortgage payment. When interest rates are low but home prices are high, they don't pay any more over the life of the loan. (Someone who buys when rates are high but prices are low does have the option to refinance, though, which is not available to someone who buys when prices are high.) The…

It's true that a homeowner who pays a higher principal and a lower rate isn't really at a disadvantage if they stay in the home for 30 years (with a 30 year loan). But if rates go up a bit as soon as they need to sell they're going to find far fewer buyers. And their neighbors will have already found out they had to sell for lower amounts, resulting in some others walking away instead of bringing money to the table a…

The point is that interest rates don't affect the cost of housing which is determined by monthly payment * 360 months, they affect the resale value of housing. If interest rates go up the resale value of your house goes down.

If people bet on the resale value of housing to go up they also necessarily bet on lower interest rates.

Re: Home Price to Income Ratio

#604

Post by imtringued »

spywaregorilla wrote: post #391
throwdecro wrote: post #304

Earlier quoted context omitted.

> Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. Which is crazy, right? People max out their "borrowing power" at low interest rates and take on huge loans, without considering that the declining interest rates that fueled past appreciation don't have much room left to move down, and that they'll be underwater on that huge loan if interest rates go up* an…

> without considering that the declining interest rates that fueled past appreciation don't have much room left to move down Negative is inevitable, imo If the value of your home rises, you've effectively taken out a hugely profitable leveraged loan, which is historically pretty common. Which is far from guaranteed of course, but broadly speaking it was an amazingly lucrative move for many many people.

There is a reason why they must go negative...

Inflation is going up because of a mix of supply shocks and fiscal stimulus. Not necessarily a bad thing but it's out of the realm of monetary stimulus.

Low interest rates in Japan failed to drive inflation. Ask any Austrian economist and they would tell you that low interest rates are guaranteed lead to malinvestment, an artificial business boom and high inflation. You know, if it was that easy then central banks would have raised interest rates a long time ago. Probably shortly after 2008. Whatever is going on is way beyond what monetary policy can do.

At 0%, monetary policy simply stops. Game over for monetary policy. Central banks do not matter anymore.

Re: Home Price to Income Ratio

#605

Post by sokoloff »

quantumBerry wrote: post #428
bobthepanda wrote: post #398

Earlier quoted context omitted.

the problem is not really that, since you could just move out to the sticks and do that if you really wanted to. heck, some places in the Rust Belt literally give away homes. the problem is that in our desirable cities, where people want to live (as evidenced by high prices per sq ft) we have more or less stopped the natural progression of single family houses into low-rise buildings, low-rise into mid-rise, and mid…

I'm not arguing against the progression of housing. I'm arguing to be able to build a house I can afford on land I own. Building codes serve to lock property owners out of the means to actually live on their own property. And even if these high rises become more legalized, it's a long time from that happening and institutional investors and large construction and architecture firms executing and them finally being so…

> Building codes serve to lock property owners out of the means to actually live on their own property.

Building codes, or zoning requirements? Building codes typically cover things like fire protection, means of egress, ventilation, sanitary plumbing requirements, etc. While the requirement for indoor plumbing adds a small amount of cost to a dwelling, the zoning requirements (min, max square footage, setbacks, parking requirements, etc) are a substantially larger impact I think.

I'm pretty far on the personal liberty scale, but I don't think it's reasonable to allow outhouses or permanent portajohns in a high population density area.

Re: Home Price to Income Ratio

#606

Post by sokoloff »

ncphil wrote: post #569
yurishimo wrote: post #527

Earlier quoted context omitted.

Bankruptcy does eventually disappear I think, or if it doesn't there are legal requirements not to hold it against you after X years without a problem on your end. It's been a while since I've looked into it.

The irony, of course, is that the US Bankruptcy Code provides you can't declare bankruptcy again until 7 years have passed. So creditors theoretically have less risk during the period they generally refuse credit to the newly bankrupt. Of course none of that applies to business bankruptcy, where the old company is often dissolved but you're often looking to the same former principal(s) for personal guarantees of the…

There are a number of lenders who are willing to extend credit to those with a discharged bankruptcy (on terms far worse than someone with an 810 credit score, of course).

Re: Home Price to Income Ratio

#607

Post by JackFr »

game_the0ry wrote: post #284

A more relevant metric to consider - monthly mortgage payment to monthly income ratio. Average interest rates in 2007 were 6.34% vs ~2.80% today. [1] * 6.34% / $2,000 monthly payment / 20% down (~$65k) >> $328,319 price of home * 2.80% / $2,000 monthly payment / 20% down (~$98k) >> $489,794 price of home Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price. When…

One thing to note is that the difference between 65K down and 98K down is significant, and absent ‘affordability’ mortgage products, pushes many people out of the market.

Then low down payment loans introduce distortions if their own.

Re: Home Price to Income Ratio

#608

Post by imtringued »

lottin wrote: post #599
fcsp wrote: post #358

Earlier quoted context omitted.

This is something that has been keeping me wondering for years. Since the financial crisis the European Central Bank has basically fixed base rate at negative (since 2012), leaving the market flooded with desperate investment money (due to all old school investment options becoming a negative) Now also of course since it's "cheap" the real estate prices have almost doubled in that timespan, having previously hovered…

In theory, a fall in nominal interest rates below the real rate of return of capital should spur investment, since entrepreneurs can borrow funds at a low rate to expand production capacity or start new businesses and obtain a higher rate of return. The reality is we don't see much investment going on, and at some point the ECB will have to face up to the fact that the low interest policy doesn't work.

The reality is that people invest abroad. After all, there is no rule that they must invest in their own country.

> at some point the ECB will have to face up to the fact that the low interest policy doesn't work.

And repeal the zero lower bound or what? Face up to what? Interest rates will be low as long as supply of labor outstrips demand for labor.

Re: Home Price to Income Ratio

#609

Post by imtringued »

dpweb wrote: post #118
gp wrote: post #32

While it doesn't directly affect the average person's purchasing power, the same dramatic increase is happening in other asset values as well. [0] One interesting thing to note is that 2019 EV / EBITDA values were already "high," before the coronavirus was spreading. I suspect these two phenomena have different causes overall, but low interest rates are a common factor that cause all asset prices to increase. On the…

When it's all assets going up, it's not the assets cost more, it's the dollar is worth less. So for all the help and assistance. Housing is LESS affordable than ever before. You cannot infuse trillions of extra dollars into the economy without inflation. There's no magic pill - there must be consequences.

This was linked in this submission: https://blog.firstam.com/economics/todays-house-prices-are-o...

Housing has become more affordable.

Re: Home Price to Income Ratio

#610

Post by JackFr »

hapless wrote: post #572
aidenn0 wrote: post #498

Earlier quoted context omitted.

The weird thing is that 5 year adjustable rates are higher then 30yr. fixed. That only makes sense if interest rates will go down over the next 5 years, which seems unlikely to me.

Fixed-rate mortgages are government-subsidized by a range of mechanisms (Fannie, Freddie, FHA, etc) Adjustable-rate mortgages are not.

As a banker I am perfectly indifferent whether I make a fixed rate loan or a an adjustable rate loan to the borrower.

I look my cost of funds, tack on my spread and that is the price you pay.

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