At what point in the rate cycle would you pass on home buying?

sgip

Well-known member
With rates still marching towards 5%, and ARM loans qualifying in the mid 4's, at what point in the rate cycle do you say "hmmm.... I'm gonna rent for now".

Sure, when doing the math, some buyers may pass at 5% because the benefits don't outweigh the cost. For others a 5% mortgage rate with 10% appreciation rate makes the loan factor a non issue. Some buyers when facing a rate in the 5's scrunch their face as if you've said something about how ugly their children are. A buyer may decide "I don't deserve a rate in the 5's...." and pass on a home purchase.

As a buyer, what would be the red line in rates for you?

My .02c
 
Eyephone - We may be on the same page in regards to your post.

My guess is that come February 2019 when W-2's finally come in and people earnestly begin working on their tax returns, there will be a seizure in the RE market. Assuming a low 5% rate and people not able to deduct as they thought they could, the general market will be "talked down" by those impacted by the tax law.

Sure, there will be plenty of people with minimal impact due to the changes in the tax law, but enough homeowners with loud enough voices to influence others will roll the real estate market around as never seen before. This RE environment change is 10 months away, more or less, so it's hard to really tell what's going to happen. My best guess is that it will be negative for sellers as they try to convince buyers to move forward.

FNMA and a few other economists of note are saying 2018 will be good, but 2019 might see a slow down. That's chatter to me. Actions speak louder than words. FNMA has been pushing an extension of HARP, and expanding ways to allow "No Appraisal" refinance loans similar what went on after the 2007-2008 crash. One needs to ask "Why?" Do they see something we might not?

My .02c
 
Interest rates were well into the 6% range in 2005-06.

But ultimately, the only thing that's going to slow down the real estate market is a recession and interest rates will go back down if we enter a recession.

It's hard to predict the next recession. A lot are predicting 2019. I think it will be 2021 at the earliest.
 
I get it that as rates rise you could be looking at downward price pressure, but there's no way to know when and if that effect kicks in, and there's no way to know where rates will be, so I wouldn't pay it too much mind when deciding whether to rent or buy. That's not to say that rates are not important, just that I would not draw a bright red line at a specific rate. For me the rate question is mostly about the monthly payment that comes out of those rates, to a lesser degree the spread between rates and home appreciation expectations, and maybe to a small degree the spread between the financing cost and expectations about rent increases.

Concerning that FNMA HARP extension: I think they looked at their portfolio, saw that they still had quite a few loans in that high-LTV and higher-than-current interest rate (or with ARMs) box, and pushed for the expansion accordingly. It seems strange since we're in a market that recovered long ago, but much of the FNMA portfolio is in areas where the recovery never completed.
 
For me, I?m a ?I want to pay x a month? type of borrower and adjust my loan amount and program accordingly.  So if rates crept up to 5%, I would just put more down.  But I would also take a serious look at the rent versus buy scenarios and see what makes sense.
 
For me it all comes down to supply and demand - in every single walk of life - I have used this rationale to price out  optionality of various life decisions and is a good heuristic  , atleast so far

On demand side - you still have incomes rising , and more importantly the largest demographic cohort now entering prime home buying years .  Contrary to what we were led to believe turns out millennials are not that different from other generations in wanting to own a home .  there is this pent up demand that will continue supporting the first home buyer market for some time to come

The upper end has already slowed down in Manhattan .  This was well  before tax cuts impact or the recent rise in rates.  Why ? Simply put, way way too much construction of similar product .  Unique products still command a premium and will be in demand.  And here is where due diligence and patience pays off in spades as opposed to fine tuning monthly outlays or rent vs buy calculator. 

Supply side -- we are awash in a flood of new homes in Irvine so this proximity bias colors our thinking .  All over the state , and the country , this is not the case.  People who should sell and downsize are not doing in similar numbers .  People are retiring in place.  I dont see supply going up meaningfully

Forced Supply ?  Forced sellers ?  this is where the lessons of 2007-8 are still fresh and bank lending standard are nowhere near as loose as they need to be to make this a factor.  FCBs selling en masse ? Nah  - where will they put the cash after selling ? Bitcoin ?  Remember the goal is to get cash out of China

I personally think even 5% is not enough to make a dent here.  But here giving examples of 7-10% rates in the past is actually quite misleading .  Homes back then were much cheaper and inflation was rampant .  We now live in a low inflation world

And if rates go much higher than 5%  -- what is happening to borrowing rates for companies ? auto loans. ?  governments. ?  the global  economy is too indebted to survive a whole sale and quick rise  in rates (whats happened so far this year may seem a lot but it is still peanuts in the grand scheme of things).

Central banks (including our Federal Reserve) keep saying they want to pull back support but they will be the ones to blink first and jump back in at the first sign of trouble. 

Remember if you believed people in 2011 who were panicking about inflation and its impact on everything including home prices , you missed out on some great opportunities to buy.  Same is happening now -- everyone is prepared for rates to go up and more the panic on CNBC , the more the results get priced in fully way before it happens.
 
Let's talk about the effect of 5%+ rates when we actually get them again.  For now, the 10-year bond can't even get above 3%.  We'll been at a range of 3.50% to 4.50% 30-year rates for a LONGGGGGGGG time.
 
Burn That Belly said:
In 2012, I remember someone said the slogan was ?always bet on Irvine.?

Its 2018, I believe the slogan has become ?always bet on FCBs.?

Buy and live where FCBs live. It is my professional opinion that a good majority of FCBs are immune to recession. This is because their businesses outside of China are unscrupulous enough to keep their stucco boxes here afloat.

Thus, don?t need to worry about buyers not being able to qualify for your neighbor?s home which results in stagnating your Home appreciation.

Is that why you continued to have the words spreads for veteran cemetery to be built at the Great Park original location so that it will shied away FCB from purchasing GP neighborhoods for your own protections?

At the end of of the day, the determined location is spoken for.
 
Staying on the topic, 5 % rate I think will make people continue to buy, because the one that looking to buy now or in the near future, they buy with personal reasons. Perhaps they?ve been renting and decided that it?s time to have a place of their own. And rate will continue to march upward and it will cost even more. That?s why 3 and 4 story makes sense to them because you get more squares footage, vertical living and have a smaller mortgage.
 
For me personally, higher interest rate is less of a deterring factor than higher home prices.

I rather buy a home at 10% interest rate but with a 50% lower home prices than other way around. 

 
lnc said:
For me personally, higher interest rate is less of a deterring factor than higher home prices.

I rather buy a home at 10% interest rate but with a 50% lower home prices than other way around.

Yes of course that is the best scenario. But what if you have a continuing higher rate and continually higher price?
 
We may see a +3% 10 year sooner than later. Then again a few more -200 stock days should postpone higher rates as investors in stocks get wobbly. People will begin to weigh in the balance if it's wise to buy more FANG stock or a big bundle of 3% government debt.

(Facebook Apple Netflix Google)
 
My personal needs dictate when I buy. If rates are much higher, I will still buy but I?ll have to buy a cheaper home than if rates were <4%.
 
Multiple story duplexes are actually very common in West LA . But again , those are dense neighborhoods , much more so than great park , so not apples to apples comparison . But there is proof it works under the right circumstances .
 
Back
Top