Rising mortgage interest rate effect on home values

[brewer12345]

For the first time since 1999, I have received only 1 phone call for a $600 2 bedroom townhouse apartment with a range, fridge, washer and dryer in a low-middle working class neighborhood. The caller wanted to know if I took Section 8, I do not. There are few ads in local paper, and this unit was rented for the past 7 years by the same tenant for $550.

According to Zillow, my 2 bedroom SFH rental that I paid $85,000 in 8/2012 is now worth $122,000. However, the suggested rent is $800 and I have been receiving $1000/month for 2.5 years.

My adjustable rate mortgage on another rental building went from 4.25% to 5%, and it's adjusted to the 1 year treasury rate.

So, are interest rates affecting my real estate market?

Interest rates are definitely affecting your local market. So are inflation, unemployment levels, wage increase rate, consumer confidence, how may squirrels are in the neighborhood, etc. Interest rates affect real estate, but so do a lot of other things and they all happen at the same time.

 

[Another Reader]

Why would landlords buy more rentals in a rising interest rate market? They will look to pick up rentals from the folks that are on the margin and move towards foreclosure. News flash increased supply of apartments have already hit the market because investors locked in low rates building new places. They are willing to overbuild let vacancy rates creep up because they know in 10-15 yrs they will have them full and can sell them based on cash flow valuations. That is what we are seeing in Colorado.

They may have locked in low rates on construction loans, but now they have to sell (their plan) or refinance in a rising rate and declining rent and occupancy market. Overbuilding is part of the cycle. It always ends badly for those late to the party.

The only question is how many of these loans will end up on life support through loan work out agreements and how much pain the lender will tolerate.

 

[mrWinter]

12.25% fixed for my first purchase (co-op) in 1983.

I remember when I bought my first home in '83. I was lucky to get a mortgage subsidized by a state bond issue for 1st time homeowners at ~12% Everybody said mortgage rates would never drop below 10%. It was a LCOL area which makes a huge difference. There was a lot of owner financing going on at the time.

I guess that makes me OLD.

We paid 11% interest on our initial home loan in 1989. Basically we bought the payment we could afford, the house was secondary.

Those of you who owned house back when rates were so high, did you get 30-year term mortgages? I can't imagine wanting to take a loan at that rate for that long, but understand there may have been other variables at the time. Were 15-year terms more common? If I did have a 30-year loan I'd think I'd be pouring all my retirement savings into the house rather than equities.

 

[Winemaker]

Interest rates are definitely affecting your local market. So are inflation, unemployment levels, wage increase rate, consumer confidence, how may squirrels are in the neighborhood, etc. Interest rates affect real estate, but so do a lot of other things and they all happen at the same time.

My personal opinion right now is that my market is affected by the holidays and the weather more than interest rates. My tenants are not ever likely to buy a house, although one of my tenants owns a horse farm in a nearby state, and stays here to avoid a long commute. We have had an early winter, after an extremely wet fall, which I think makes people hunker down. Unemployment rates are 4.6% for our area. And I don't think people like moving around the holidays. All of my tenants stay long term, that meaning 5+ years, to me. My newest tenant has been with me for three years.

 

[ExFlyBoy5]

I am a little curious as to what may happen since so many houses (that are rentals) have been bought up by institutional investors? In 2012-13, these investors bought hundreds of thousands of houses...the idea was/is buy low and eventually sell high but rent them out until then. So, will they continue to hold them over the long term and just increase the rents? Or, will many of them sit vacant like many commercial spaces do when there is a severe downturn.

My poor DW (who w*rks in the residential leasing world) is dealing with a lot of pissed off investors right now because the rents they were "guaranteed" by some of these new R/E investment/silicon valley/start ups are no where near what the market(s) can command. Many of these folks have sunk a substantial amount of money expecting $2,000 a month returns, but are lucky to get $1,600 (after having the houses sit empty for 60-90 days).

I also have noticed an uptick in "investment opportunities" with some of the flipping companies. I have been getting emails from "Fund this Flip" for about a year. 6 months ago, there might be one or two investments available, but were almost always fully vested within a couple of days. Now, I am getting 5 or more a day and most of them are "STILL AVAILABLE!! ACT NOW!!"

 

[braumeister]

I am a little curious as to what may happen since so many houses (that are rentals) have been bought up by institutional investors?

Not only here. I was just reading the other day that something like 25% of the houses in China are vacant. They were built as investments, but everyone else was doing that too. Oops!

 

[Dtail]

Those of you who owned house back when rates were so high, did you get 30-year term mortgages? I can't imagine wanting to take a loan at that rate for that long, but understand there may have been other variables at the time. Were 15-year terms more common? If I did have a 30-year loan I'd think I'd be pouring all my retirement savings into the house rather than equities.

Since it was my first purchase at age 23 and I was confident that I could move up shortly from my 1 bedroom co-op, I took the 30 year to minimize my payments.
Sold the co-op 2 years later.

 

[ERD50]

Those of you who owned house back when rates were so high, did you get 30-year term mortgages? I can't imagine wanting to take a loan at that rate for that long, but understand there may have been other variables at the time. Were 15-year terms more common? If I did have a 30-year loan I'd think I'd be pouring all my retirement savings into the house rather than equities.

I got a new-fangled adjustable rate mortgage (end of 1981). Rate was tied to some interest rate, like prime or something, and maintained a delta from that. Started out ~ 17% (!), went up one year a bit, then down, down, down, down, down. After a few years, I think the bank had to pay me each month!

I recall thinking at the time (though I didn't know much, well, even less than now!) that these rates can't continue. I was right ( a little smart, and a lot lucky?).

I should see if I have actual records, would be 'fun' to get that stored on the computer.


-ERD50

 

[jazz4cash]

Those of you who owned house back when rates were so high, did you get 30-year term mortgages? I can't imagine wanting to take a loan at that rate for that long, but understand there may have been other variables at the time. Were 15-year terms more common? If I did have a 30-year loan I'd think I'd be pouring all my retirement savings into the house rather than equities.

Yes, the ~12% subsidized loan I got had a 30 yr term. High rates create demand for longer terms, variable rates, seller financing and anything to make the payment manageable. The big deal at that time was ‘no prepayment penalty’ so you could refi if rates ever went down. Assumable clauses were being removed from new mortgages. High rates and high prices can be stimulative if you believe rates/prices are headed higher. At the time, I had a money market account that paid 10%. After 5 yrs, I moved and my new home mortgage was about 6.5%.

 

[calmloki]

In Oregon I'm looking at Portland leading the way toward rent control as there is a severe housing shortage. The towns are liable to adopt Portland's strictures as the language is handy to copy and Portlands lawyers have already done the grunt work. I expect housing prices to dip - that said, some flippers in Salem just paid off a loan and are asking what we are charging currently. Kind of in a quandary, as we are strong in cash right now, but making about 2.5%. Should resist loaning and look toward buying cheaper housing for resale or maybe buying the stock market on sale. But I tend to look short term, and if I can make 6-7% in six months that is awfully tempting. OTOH, we still have a big loan out that I'm starting to be concerned about - I don't want to foreclose on a 4000+ foot new construction if our loan goes bad, and if housing values drop much we may end up upside down on the place. Yuck. don't want to think about it.
Housing loan rates are diddly squat, but people are used to 4% or less, so the normal 8% seems like robbery and the seller takes it in the shorts. Or so I guess.

 

[jazz4cash]

I thought rent control was bad for RE investors, e.g. investors would be less inclined to expand available housing.

 

[Sunset]

Those of you who owned house back when rates were so high, did you get 30-year term mortgages? I can't imagine wanting to take a loan at that rate for that long, but understand there may have been other variables at the time. Were 15-year terms more common? If I did have a 30-year loan I'd think I'd be pouring all my retirement savings into the house rather than equities.

I got a 5 year mortgage at 14% back then, and it was so low as it was from family (actual legal mortgage documented). Banks at the time were offering a mortgage for 18%

 

[Walt34]

Those of you who owned house back when rates were so high, did you get 30-year term mortgages? I can't imagine wanting to take a loan at that rate for that long, but understand there may have been other variables at the time.

Yes, both times, once when the rates were heading up (then at 11.875%) and after the divorce five years later, at 11.5% when rates were headed back down. In both instances housing prices were heading up primarily because in the Washington, D.C. area the easily developed land had already been developed and the population was still increasing, thus placing upward pressure on housing prices. The object both times was to "get in the door" and lock in the cost of housing at a time when prices were increasing. I did refinance the second one twice (NOT pulling out equity) to get lower rates and at a 15-year term as interest rates fell further.

At that time in that place it was a good decision. Five years after the second purchase the rent on a one-bedroom apartment was more than my house payment and utilities combined.

 

[haha]

Those of you who owned house back when rates were so high, did you get 30-year term mortgages? I can't imagine wanting to take a loan at that rate for that long, but understand there may have been other variables at the time.

The American mortgage is a very flexible beast for the mortgagor. In a falling market one can always refinance. At the same time, you just keep it if rates are increasing.

Ha

 

[BeachOrCity]

The American mortgage is a very flexible beast for the mortgagor. In a falling market one can always refinance. At the same time, you just keep it if rates are increasing.

Ha

+1 Our mortgage system is one of the best consumer deals around. Slightly weakened with the fact that most won't deduct interest anymore, but still great.

Also, rates on 30 year mtgs have gone down now 3 weeks in a row. With both housing and stocks we had so many years of no volatility, people seem like they are getting more shocked at what is really just a blip this quarter. It doesn't help that the media is on such a tight news cycle these days as well.

 

[knucklehead 61]

I sure hope the bottom falls out of the housing market in Oregon.
I would LOVE to buy up a bunch more cheap rentals like i did between 2013 & 2016.
There is a huge housing shortage in Oregon & has been for a long time.
I have been raising rents every chance I get & there seems to be no end in sight of people willing to pay. My vacancy rate for the last couple years for my 29 units averaged just under 1%.
2019 net rental income should be over $17,000 higher than 2018 was. That's like owning another duplex free & clear! thank you tenants!

 

[Winemaker]

Thanks for jinxing me last week! Got several calls this week and showings scheduled!

 

[tb001]

I am a little curious as to what may happen since so many houses (that are rentals) have been bought up by institutional investors? In 2012-13, these investors bought hundreds of thousands of houses...the idea was/is buy low and eventually sell high but rent them out until then. So, will they continue to hold them over the long term and just increase the rents? Or, will many of them sit vacant like many commercial spaces do when there is a severe downturn.

My poor DW (who w*rks in the residential leasing world) is dealing with a lot of pissed off investors right now because the rents they were "guaranteed" by some of these new R/E investment/silicon valley/start ups are no where near what the market(s) can command. Many of these folks have sunk a substantial amount of money expecting $2,000 a month returns, but are lucky to get $1,600 (after having the houses sit empty for 60-90 days).

I also have noticed an uptick in "investment opportunities" with some of the flipping companies. I have been getting emails from "Fund this Flip" for about a year. 6 months ago, there might be one or two investments available, but were almost always fully vested within a couple of days. Now, I am getting 5 or more a day and most of them are "STILL AVAILABLE!! ACT NOW!!"

I wonder about this as well. In 2011-2013 I was seeing reports that up to 30% of properties sold in our old location were being purchased by PE companies. It works until it doesn’t and who knows what happens to the market when they start unloading them...

And in Silicon Valley I’ve heard similar numbers being bought by Chinese investor and sitting mostly empty.

 

[Teacher Terry]

Knucklehead, when we had a rental we only raised the rent when people moved. People keep paying the higher rent because they have no choice. We have such a housing shortage and people have to live somewhere. They will have to cut back on food, medical care, etc.

 

[BeachOrCity]

Most of that money was private equity, the homes themselves are cash flow machines because they were buying deals they thought were easy wins. Sell for capital gain, or just take current income. The PE may have terms that start forcing them to cash out, and yes that will effect prices, but I would not expect a crash....rather a multi year softening of prices if the PE leaves the neighborhood.

 

[calmloki]

Knucklehead, when we had a rental we only raised the rent when people moved. People keep paying the higher rent because they have no choice. We have such a housing shortage and people have to live somewhere. They will have to cut back on food, medical care, etc.

Understand your view. But. In Oregon it was decided that the rent could only be raised a certain percentage. This meant that people who had held off raising the rent for years were suddenly unable to raise rents to keep in range of market rent. Meanwhile, since landlords were presumably raking in the ducats, fees and costs took a big jump. Soft hearted landlords ended up with barely profitable places. I raised rents, though not as much as the law allowed, and currently have five one bedroom units renting for $585 while identical units next to them are renting to new tenants for $725/mo. To no great surprise, the folks in the $585 apartments have no intention of moving. Soft heart and head is costing me $700/month in that one building.

 

[clifp]

Understand your view. But. In Oregon it was decided that the rent could only be raised a certain percentage. This meant that people who had held off raising the rent for years were suddenly unable to raise rents to keep in range of market rent. Meanwhile, since landlords were presumably raking in the ducats, fees and costs took a big jump. Soft hearted landlords ended up with barely profitable places. I raised rents, though not as much as the law allowed, and currently have five one bedroom units renting for $585 while identical units next to them are renting to new tenants for $725/mo. To no great surprise, the folks in the $585 apartments have no intention of moving. Soft heart and head is costing me $700/month in that one building.

You shared this story a while ago and gave me advice to make annual rent increases. I've followed it, so I pretty much always raise rents $20-$25/month each year. My properties are pretty much at or below market, but they aren't so far below that I'm losing a ton of money.

 

[Teacher Terry]

Calm, that’s really nice of you. Here the average family only make 45k yet a one bedroom is 1100-1300. 2 bedrooms are between 1600-1900. We are really having a affordable housing crisis.