Rising interest rates vs. RE price drops

3

-32-_IHB

New member
I hear a lot of folks chant, wait for the price of RE to drop further. If your buying to stay for 15 - whenever years, I say it?s time to buy now.



When I bought my property in the early 80's, the interest rate was ~19%. Started with an adjustable then Bite the bullet after a refinance and went with a 15 year fixed @ 12%. Refused to refinance after that so my property tax would not increase any further. Now my rent is the low property taxes.



Here?s a run with progressing rate hikes up to 15% (looks like it?s heading that way), 15 vs. 30 year loans, price drop from $600,000 to $300,000 (assuming the county assessor drops the accessed value to the price drop). Sometimes, you have to bite the bullet on monthly costs to get ahead in the future.



However, you can take a chance, wait for the price drop, pay the higher fixed rate, and then refinance later at a lower fixed rate, but higher property taxes.



$600,000.00 --- Property cost

20% --- Down payment %

$480,000.00 --- Principal

6.00% --- Interest

15 --- Year loan

$4,050.51 --- monthly payment

$400.00 --- Property Tax 0.083% (month)

$4,450.51 --- Total monthly payment

$801,092.30 --- Cost at Payoff

33.52% --- % over property cost @payoff

---

$600,000.00 --- Property cost

20% --- Down payment %

$480,000.00 --- Principal

6.00% --- Interest

30 --- Year loan

$2,877.84 --- monthly payment

$400.00 --- Property Tax 0.083% (month)

$3,277.84 --- Total monthly payment

$1,180,023.31 --- Cost at Payoff

96.67% --- % over property cost @payoff

---

$500,000.00 --- Property cost

20% --- Down payment %

$400,000.00 --- Principal

9.00% --- Interest

15 --- Years loan

$4,057.07 --- monthly payment

$333.33 --- Property Tax 0.083% (month)

$4,390.40 --- Total monthly payment

$790,271.94 --- Cost at Payoff

58.05% --- % over property cost @payoff

---

$500,000.00 --- Property cost

20% --- Down payment %

$400,000.00 --- Principal

9.00% --- Interest

30 --- Years loan

$3,218.49 --- monthly payment

$333.33 --- Property Tax 0.083% (month)

$3,551.82 --- Total monthly payment

$1,278,656.57 --- Cost at Payoff

155.73% --- % over property cost @payoff

---

$400,000.00 --- Property cost

20% --- Down payment %

$320,000.00 --- Principal

12.00% --- Interest

15 --- Years loan

$3,840.54 --- monthly payment

$266.67 --- Property Tax 0.083% (month)

$4,107.20 --- Total monthly payment

$739,296.80 --- Cost at Payoff

84.82% --- % over property cost @payoff

---

$400,000.00 --- Property cost

20% --- Down payment %

$320,000.00 --- Principal

12.00% --- Interest

30 --- Years loan

$3,291.56 --- monthly payment

$266.67 --- Property Tax 0.083% (month)

$3,558.23 --- Total monthly payment

$1,280,961.71 --- Cost at Payoff

220.24% --- % over property cost @payoff

---

$300,000.00 --- Property cost

20% --- Down payment %

$240,000.00 --- Principal

15.00% --- Interest

15 --- Years loan

$3,359.01 --- monthly payment

$200.00 --- Property Tax 0.083% (month)

$3,559.01 --- Total monthly payment

$640,621.64 --- Cost at Payoff

113.54% --- % over property cost @payoff

---

$300,000.00 --- Property cost

20% --- Down payment %

$240,000.00 --- Principal

15.00% --- Interest

30 --- Years loan

$3,034.67 --- monthly payment

$200.00 --- Property Tax 0.083% (month)

$3,234.67 --- Total monthly payment

$1,164,479.63 --- Cost at Payoff

288.16% --- % over property cost @payoff
 
If I can reasonablly afford $2500 for housing a month, what do I care what interest rates are?



What's wrong with your chart is you should figure out what somebody can reasonably pay, and then figure how much it borrows. That lets folks like you who own property figure out how much they are going to lose when they get ready to sell, because I can't (well, I can, but I'm not going to) pay $5K, but you certainly will lower your price if you want an order.



If interest rates go up (they will) that's exactly what's going to happen. I'm paying $2500 a month, no matter if interest is 5% of 25%. The interest rate is independent of my ability to pay, but it is certainly not independent to what somebody holding property will be able to sell for.
 
[quote author="-32-" date=1243498463]



When I bought my property in the early 80's, the interest rate was ~19%. Started with an adjustable then Bite the bullet after a refinance and went with a 15 year fixed @ 12%. Refused to refinance after that so my property tax would not increase any further. Now my rent is the low property taxes.





However, you can take a chance, wait for the price drop, pay the higher fixed rate, and then refinance later at a lower fixed rate, but higher property taxes.

</blockquote>
In California, refinancing has no effect on your property taxes.
 
It's an exaggerated exercise, but if your currently in the market for a long term buy, with the fancy loans going away, and discounting FHA, the data shows the 600K (theoretical today) will cost a lot less than waiting for the property to drop half the price but with a high interest rate. Not everyone is in it for a killing. If they can afford the payment in the exaggerated example, more power to them.
 
[quote author="awgee" date=1243502782]

In California, refinancing has no effect on your property taxes.</blockquote>


In LA county, they reassessed me for an incrase ~10%.
 
I suggest you read <a href="http://www.irvinehousingblog.com/blog/comments/4.5-mortgage-interest-rates/">4.5% Mortgage Interest Rates?</a> and <a href="http://www.irvinehousingblog.com/blog/temporary-affordability-and-the-third-foreclosure-wave/">Temporary Affordability and the Third Foreclosure Wave</a>.



Low interest rates are not the panacea you seem to think they are.
 
[quote author="Mcdonna1980" date=1243504640]I'll take the $300,000 price scenario and pay all cash. I hope interest rates go to the mooooon........</blockquote>


It's the exact opposite case with me, and anyone else doing the standard 20/80 mortgage I beleive. Let's say I have 100K and want to buy a SFR in Irvine for 500K. If I were to buy a house last month for 500K at 4.5%, and interest rates go up to 6.5% in the next year (everyone on these forums are saying give it another year for the wave of foreclusures to hit), then I would need that house to drop by at least 20% to be comparable, no?



I highly doubt SFRs in Irvine will drop 20% in one year, especially with all this gov't intervention, put it is highly probable that interest rates will go to 6.5% within a year.
 
[quote author="financeguy" date=1243505945][quote author="Mcdonna1980" date=1243504640]I'll take the $300,000 price scenario and pay all cash. I hope interest rates go to the mooooon........</blockquote>


It's the exact opposite case with me, and anyone else doing the standard 20/80 mortgage I beleive. Let's say I have 100K and want to buy a SFR in Irvine for 500K. If I were to buy a house last month for 500K at 4.5%, and interest rates go up to 6.5% in the next year (everyone on these forums are saying give it another year for the wave of foreclusures to hit), then I would need that house to drop by at least 20% to be comparable, no?



I highly doubt SFRs in Irvine will drop 20% in one year, especially with all this gov't intervention, put it is highly probable that interest rates will go to 6.5% within a year.</blockquote>
Then unless incomes rise, how the hell will people qualify for those larger monthly loan payments if the home prices don't drop more? Why the hell won't SFR home prices in Irvine drop 20%+ if rates rise by a significant amount? I'd argue that Irvine prices have stayed so high partially due to the loan mortgage rates as I don't see a lot of all cash buyers.
 
[quote author="usctrojanman29" date=1243506547][quote author="financeguy" date=1243505945][quote author="Mcdonna1980" date=1243504640]I'll take the $300,000 price scenario and pay all cash. I hope interest rates go to the mooooon........</blockquote>


It's the exact opposite case with me, and anyone else doing the standard 20/80 mortgage I beleive. Let's say I have 100K and want to buy a SFR in Irvine for 500K. If I were to buy a house last month for 500K at 4.5%, and interest rates go up to 6.5% in the next year (everyone on these forums are saying give it another year for the wave of foreclusures to hit), then I would need that house to drop by at least 20% to be comparable, no?



I highly doubt SFRs in Irvine will drop 20% in one year, especially with all this gov't intervention, put it is highly probable that interest rates will go to 6.5% within a year.</blockquote>
Then unless incomes rise, how the hell will people qualify for those larger monthly loan payments if the home prices don't drop more? Why the hell won't SFR home prices in Irvine drop 20%+ if rates rise by a significant amount? </blockquote>


Because I beleive that there are a lot of people in Irvine that are not doing the standard 20/80 mortgage, and can put a lot more down, like Mcdonna1980, who apparently has 300K cash.



Rising interest rates benefit those putting a lot down, but not those who are putting 20%.
 
[quote author="-32-" date=1243503295][quote author="awgee" date=1243502782]

In California, refinancing has no effect on your property taxes.</blockquote>


In LA county, they reassessed me for an incrase ~10%.</blockquote>


Bullshit.
 
Does anybody have a chart that shows the historical relationship between interest rates and avg. home prices? It seems to me that interest rates in the 6-7% range wouldn't have a significant downward impact on home prices. Many people are using FHA-backed loans and putting 3.5% down, and so they could have more $ on hand to buy down the rate. I'm wondering if there is a threshold % where home prices start to plummet, significantly.
 
[quote author="financeguy" date=1243507326][quote author="usctrojanman29" date=1243506547][quote author="financeguy" date=1243505945][quote author="Mcdonna1980" date=1243504640]I'll take the $300,000 price scenario and pay all cash. I hope interest rates go to the mooooon........</blockquote>


It's the exact opposite case with me, and anyone else doing the standard 20/80 mortgage I beleive. Let's say I have 100K and want to buy a SFR in Irvine for 500K. If I were to buy a house last month for 500K at 4.5%, and interest rates go up to 6.5% in the next year (everyone on these forums are saying give it another year for the wave of foreclusures to hit), then I would need that house to drop by at least 20% to be comparable, no?



I highly doubt SFRs in Irvine will drop 20% in one year, especially with all this gov't intervention, put it is highly probable that interest rates will go to 6.5% within a year.</blockquote>
Then unless incomes rise, how the hell will people qualify for those larger monthly loan payments if the home prices don't drop more? Why the hell won't SFR home prices in Irvine drop 20%+ if rates rise by a significant amount? </blockquote>


Because I beleive that there are a lot of people in Irvine that are not doing the standard 20/80 mortgage, and can put a lot more down, like Mcdonna1980, who apparently has 300K cash.



Rising interest rates benefit those putting a lot down, but not those who are putting 20%.</blockquote>


I seriously doubt there are many people in Irvine with that much cash. People are not borrowing out of choice, it is out of need.
 
[quote author="financeguy" date=1243507326][quote author="usctrojanman29" date=1243506547][quote author="financeguy" date=1243505945][quote author="Mcdonna1980" date=1243504640]I'll take the $300,000 price scenario and pay all cash. I hope interest rates go to the mooooon........</blockquote>


It's the exact opposite case with me, and anyone else doing the standard 20/80 mortgage I beleive. Let's say I have 100K and want to buy a SFR in Irvine for 500K. If I were to buy a house last month for 500K at 4.5%, and interest rates go up to 6.5% in the next year (everyone on these forums are saying give it another year for the wave of foreclusures to hit), then I would need that house to drop by at least 20% to be comparable, no?



I highly doubt SFRs in Irvine will drop 20% in one year, especially with all this gov't intervention, put it is highly probable that interest rates will go to 6.5% within a year.</blockquote>
Then unless incomes rise, how the hell will people qualify for those larger monthly loan payments if the home prices don't drop more? Why the hell won't SFR home prices in Irvine drop 20%+ if rates rise by a significant amount? </blockquote>


Because I beleive that there are a lot of people in Irvine that are not doing the standard 20/80 mortgage, and can put a lot more down, like Mcdonna1980, who apparently has 300K cash.



Rising interest rates benefit those putting a lot down, but not those who are putting 20%.</blockquote>
Maybe on the margin, but I doubt that there are truck loads of people with hundreds and thousands of dollars for their downpayment. Last time I check there was no gold or oil underneath Irvine so Irvine prices will come down eventually (it probably won't get down to rental parity due to the high desire wanting to live there). Why don't you do a rental parity analysis of a property that you would be interested in buying and see where it stands. I'd bet it's still 30-40% cheaper to rent than it is to own, including the tax deductions (that doesn't really take into effect that rental prices are heading down). Hell, I'm tempted to buy a home out in Riverside or Corona because I can buy 10-20% below rental parity (I'd be paying about $500 a month in owning an 1,700/sf home than I would be in renting a 700sf 1-bedroom apartment in Irvine). Step back, stop being emotional, and use some objective analytical calculations in determining whether it makes financial sense to buy (go ahead an include a 10-20% premium on owning vs. renting if you really want to).



Btw, didn't you see IPO's graph that has showed that downpayments as a percent of purchase prices are down 5%+ over the past 6+ months from over 30% to just over 25%?
 
[quote author="Sunshine" date=1243508564]Does anybody have a chart that shows the historical relationship between interest rates and avg. home prices? It seems to me that interest rates in the 6-7% range wouldn't have a significant downward impact on home prices. Many people are using FHA-backed loans and putting 3.5% down, and so they could have more $ on hand to buy down the rate. I'm wondering if there is a threshold % where home prices start to plummet, significantly.</blockquote>
Watch those shaky FHA borrower default on their recent loans if real estate prices dump another 20%+ and/or they get laidoff. Like I said....recent FHA loans with 3.5-5% downpayments = Subprime 2.0
 
[quote author="usctrojanman29" date=1243508899][quote author="Sunshine" date=1243508564]Does anybody have a chart that shows the historical relationship between interest rates and avg. home prices? It seems to me that interest rates in the 6-7% range wouldn't have a significant downward impact on home prices. Many people are using FHA-backed loans and putting 3.5% down, and so they could have more $ on hand to buy down the rate. I'm wondering if there is a threshold % where home prices start to plummet, significantly.</blockquote>
Watch those shaky FHA borrower default on their recent loans if real estate prices dump another 20%+ and/or they get laidoff. Like I said....recent FHA loans with 3.5-5% downpayments = Subprime 2.0</blockquote>


I don't disagree with you that FHA defaults will be a problem. Recent reports have confirmed it. However, whereas FHA was historically used by people with less than favorable credit scores (subprime), there are many buyers with very good to excellent credit who are pursuing FHA loans today. I'm an FHA borrower who chose not to put a lot of my $ towards my downpayment. I like having quite a cushion in the bank. Recently, didn't you say that if FHA or a similar program was available when you buy again, that you would consider it?
 
[quote author="Sunshine" date=1243510804][quote author="usctrojanman29" date=1243508899][quote author="Sunshine" date=1243508564]Does anybody have a chart that shows the historical relationship between interest rates and avg. home prices? It seems to me that interest rates in the 6-7% range wouldn't have a significant downward impact on home prices. Many people are using FHA-backed loans and putting 3.5% down, and so they could have more $ on hand to buy down the rate. I'm wondering if there is a threshold % where home prices start to plummet, significantly.</blockquote>
Watch those shaky FHA borrower default on their recent loans if real estate prices dump another 20%+ and/or they get laidoff. Like I said....recent FHA loans with 3.5-5% downpayments = Subprime 2.0</blockquote>


I don't disagree with you that FHA defaults will be a problem. Recent reports have confirmed it. However, whereas FHA was historically used by people with less than favorable credit scores (subprime), there are many buyers with very good to excellent credit who are pursuing FHA loans today. I'm an FHA borrower who chose not to put a lot of my $ towards my downpayment. I like having quite a cushion in the bank. Recently, didn't you say that if FHA or a similar program was available when you buy again, that you would consider it?</blockquote>
I did say that and you make a valid point because I would be one of those FHA buyers when the time is right because I wouldn't want to blow my the majority of my savings on a 20%-30% downpayment. The statement that I made above was more of a general statement knowing full well that there are a fair number of folks and you and I who have good credit and savings for conforming level downpayments but we will choose to put a low amount down that will take advantage of the FHA loan program. I also made that general statement based upon the second offer that I had on my condo...it was from a couple who had a pre-approved FHA loan and had low credit scores, minimal cash savings, and barely qualified for the DITI requirements with their offer (hence me going after the first offer from the strong buyer with over 30% of the purchase price as savings).
 
[quote author="-32-" date=1243503295][quote author="awgee" date=1243502782]

In California, refinancing has no effect on your property taxes.</blockquote>


In LA county, they reassessed me for an incrase ~10%.</blockquote>
Not for refinancing. Possibly for improvements done with funds from a refinance, but not refinancing. Property is reassessed when it is improved no matter where the funds come from.
 
[quote author="no_vaseline" date=1243508175][quote author="-32-" date=1243503295][quote author="awgee" date=1243502782]

In California, refinancing has no effect on your property taxes.</blockquote>


In LA county, they reassessed me for an incrase ~10%.</blockquote>


Bullshit.</blockquote>


Total bullshit. Prop 13, end of story. I smell a troll. Especially when increase is misspelled.
 
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