My vision of the future of mortgage loans

[Finance Dave]

Tell me if you think this could play out....

Given today's historically low mortgage rates, many people are refinancing and getting new loans. I believe interest rates will rise to a moderately high level again...let's say 7-8%....at some point in the next 10 years. When that happens, people will not be able to afford new mortgages if they want to keep a similarly priced house.

As a result, I think mobility will become an issue...people will tend to stay in their houses, avoid job changes that force a relocation, and so on. The market will become somewhat stagnant.

Then, banks will be staring at the fact that they offer 8% mortgage loans, but no one willing to take on mortgages at those "high" rates given that they have 3.5% mortgages they opened years before (today). As a result, I fear one of two things:

1) A lot of banks (those who make money on mortgages) will go out of business since they cannot generate returns consistent with the then-current rates.

2) The banks will have to find other ways to make money, and this will result in increased fees of some sort.

What do you think? For this exercise...let's all assume rates do rise to 7-8% at some time in the next 10 years....do you think either of my concerns above are valid?

One other thing that may play into this is demographics. Young people coming up will buy a mortgage almost regardless of the rate. Older people who are retired often have their homes paid for. So mostly I'm thinking of the people in between. With the boomers retiring in record numbers...this could play into the whole thing.

I will be unaffected I think...as I won't have any loans outstanding, and will be able to change banks easily if fees become an issue...but I think something's gonna have to give.

 

[Midpack]

FWIW (bold added).

Past housing cycles were heavily influenced by changes in mortgage rates.* The cycles, both up and down, were generally also abrupt.* However, not this time around.* The historically low mortgage rates have not turbocharged home sales.* At best, there has been a slight recovery and only in the most recent few months.

Where people seemed to have confidence in residential real estate as an ever appreciating asset and interest rates were the overriding influence on home sales volume, seems that's no longer clear. People have bought houses at much higher interest rate that the OP is projecting, but it may depend more on people's faith in home price outlook, not a given any more? May take a generation or more to restore the belief in home value appreciation...if ever.

Mortgage Rates and Home Sales Recovery

 

[LOL!]

I think a lot of folks buy a home based on the monthly payment. If interest rates go up, house prices drop. If interest rates go down, house prices go up.

So if interest rates go up to 8% (they've been there before), there are still folks who will buy/sell homes.

Maybe some of your ideas will come to pass, but not in a big way.

 

[GrayHare]

If the mortgage market is allowed to self adjust, rates will rise or decline to meet demand.

 

[clifp]

Tell me if you think this could play out....

Given today's historically low mortgage rates, many people are refinancing and getting new loans. I believe interest rates will rise to a moderately high level again...let's say 7-8%....at some point in the next 10 years. When that happens, people will not be able to afford new mortgages if they want to keep a similarly priced house.

As a result, I think mobility will become an issue...people will tend to stay in their houses, avoid job changes that force a relocation, and so on. The market will become somewhat stagnant.

Then, banks will be staring at the fact that they offer 8% mortgage loans, but no one willing to take on mortgages at those "high" rates given that they have 3.5% mortgages they opened years before (today). As a result, I fear one of two things:

One of the factors contributing to our slow recovery is a lack of mobility. Part of this is where the jobs are, lots of people don't want to move to Texas much less the Dakotas. The other factor of course is people are stuck with underwater houses. So I think we are already seeing the impact of lower mobility.

A couple of things don't add up in your scenario. First if we are seeing 8% mortgages we are almost certainly seeing significantly higher inflation. Higher inflation may or may not because of higher economic activities (e.g. stagflation) however it will mean higher prices on things like real estate. This will encourage people to buy houses.

The drop in prices and low interest rates have made home affordability the highest ever in many parts in the country. So for example taxes, mortgage and insurance on the 4 Bdr 2.5 bath house I bought recently in Vegas for $67K would be $400-450/month. I am going to rent it for $850-$900. Obviously if people can afford to pay rent at the price they can also afford a mortgage. More over a total housing cost of $10K/year is only 20% of average families income. The average price of house in the midwest and south is about $150K with 20% down an 8% mortgage is $880 month still very affordable for a family making average income of $50K.

Finally despite the government many attempts to distort the housing market, we still live in mostly free market system. Mortgages are the biggest source of revenue for many banks. If they offer 8% mortgages and nobody wants them then the prices will be lowered.

 

[Texas Proud]

I think a lot of folks buy a home based on the monthly payment. If interest rates go up, house prices drop. If interest rates go down, house prices go up.

So if interest rates go up to 8% (they've been there before), there are still folks who will buy/sell homes.

Maybe some of your ideas will come to pass, but not in a big way.

+1 on this.... there is always mobility in our country... and there will continue to be...

Hands up here.... how many people had a mortgage with a 10% or higher interest rate I did... and it was not that I thought that the house price was going to rise.... I wanted a house!!!

So, I am in LOL's court that the prices of homes will decline to where they are affordable... OR, people will want to be able to take over your payments and get a second for the remainder of the purchase price...

 

[Midpack]

Hands up here.... how many people had a mortgage with a 10% or higher interest rate I did... and it was not that I thought that the house price was going to rise.... I wanted a house!!!

Bought our first home in the late 80's when rates were astronomical. We had a 9.25% ARM, I don't think anyone was taking out conventional loans at the time. And we moved long before the 5 year adjustment came to pass, though rates had come down by then anyway...

 

[Animorph]

But those higher rates were also in times of higher inflation and automatic wage increases. So the "real" interest rate didn't look much different than now. It will have an impact. I'd certainly be reluctant to change houses and move from a large low-rate mortgage to probably paying cash for the new house.

Rates were in the 8% range and dropping when we built our current house. As the rates dropped we were able to add more stuff to the house and stay within our budget.

 

[Finance Dave]

thanks for all the thoughts everyone, interesting discussion.

 

[meierlde]

On the issue of adjustment. Do modern mortgages ban assumptions? If not folks will do like they did during the last mortgage interest top, assume and take a second. If they ban assumptions (or require approval which in the described interest rate environment would be the smart thing to do) then the issue could arise.

 

[tryan]

The banks are tighter than a bulls @ss ... not enough are getting approved at these rates to have the impact you hypothisize.

As an example I was regected 3 times on a re-fi with a 750 credit score .... no W-2 .... no loan.

 

[Independent]

Tell me if you think this could play out....

Given today's historically low mortgage rates, many people are refinancing and getting new loans. I believe interest rates will rise to a moderately high level again...let's say 7-8%....at some point in the next 10 years. When that happens, people will not be able to afford new mortgages if they want to keep a similarly priced house.

As a result, I think mobility will become an issue...people will tend to stay in their houses, avoid job changes that force a relocation, and so on. The market will become somewhat stagnant.

Then, banks will be staring at the fact that they offer 8% mortgage loans, but no one willing to take on mortgages at those "high" rates given that they have 3.5% mortgages they opened years before (today). As a result, I fear one of two things:

1) A lot of banks (those who make money on mortgages) will go out of business since they cannot generate returns consistent with the then-current rates.

2) The banks will have to find other ways to make money, and this will result in increased fees of some sort.

What do you think? For this exercise...let's all assume rates do rise to 7-8% at some time in the next 10 years....do you think either of my concerns above are valid?

One other thing that may play into this is demographics. Young people coming up will buy a mortgage almost regardless of the rate. Older people who are retired often have their homes paid for. So mostly I'm thinking of the people in between. With the boomers retiring in record numbers...this could play into the whole thing.

I will be unaffected I think...as I won't have any loans outstanding, and will be able to change banks easily if fees become an issue...but I think something's gonna have to give.

I'd say that rates won't go up to 7-8% unless people with money to lend have opportunities to lend at those rates. i.e. if nobody is borrowing, rates will have to fall. So I wouldn't expect this to be a big problem for banks.

I'd agree that people will be less willing to trade houses. (But some still will. We sold a house and bought a new one in 1981, pretty much at the interest rate peak.)

But, you have to think of all the feedbacks. Increasing rates may be correlated with higher inflation. If higher inflation also means higher wages, then home prices will go up. Existing owners will have more equity, meaning that moving is less dependent on mortgage rates.

My personal concern is the likelihood that interest and inflation are correlated. Rising interest rates are much less important to me than inflation. Since my house is paid for, I don't care much about mortgage rates.

 

[haha]

On the issue of adjustment. Do modern mortgages ban assumptions? If not folks will do like they did during the last mortgage interest top, assume and take a second. If they ban assumptions (or require approval which in the described interest rate environment would be the smart thing to do) then the issue could arise.

I don't think there have been any non-commercial mortgages that allow assumptions offered in years.

Ha

 

[Shanky]

I don't think there have been any non-commercial mortgages that allow assumptions offered in years.

Ha

As of late last year VA mortgages were still assumable. With current rates below 4% It could be quite an incentive in a few years if rates step up to the 7% range.

 

[haha]

As of late last year VA mortgages were still assumable. With current rates below 4% It could be quite an incentive in a few years if rates step up to the 7% range.

Thanks for the info. I didn't know these were still assumable.

Ha

 

[Mulligan]

Well the only thing I know is you don't want my prediction. Rates swooned nicely in 2003 and it was just a coincidence at the same time I wanted to buy a house. So I locked in a 4.6% 10 year fixed amortized over 30 years, as I knew I would be moved by 2013. A few years ago I refinanced into a higher 5% 30 year fixed because I knew inflation and budget deficits would cause rates to jump. I just refinanced to 3.75% , 30 year fixed. If I wasn't so smart, I would have waited until now and skipped the previous refi a few years ago. Of course there is still no for sale sign in my yard either.

 

[tightasadrum]

Interest rates have never mattered too much when people want to buy a house and can afford the payment. My first house in 1976 was 8.5% VA loan. In 1981 or 1982 I bought a bigger house at 15%! Short time later I refinanced down to 12%. I thought I had won the lottery. If someone wants to buy a house, they will, assuming they can afford it, no matter what the interest rate is.

The problem right now seems to be, 1) banks will only loan to the uber qualified buyer I've heard and who have a substantial down payment (20%), and 2) home owners can't get what they paid for a house and so they won't sell. Interest rates are ridiculously low, but housing sales are still very slow. The exception of course is sale of foreclosed property. That market is booming, but that also seriously depresses existing house prices which in turn puts a serious drag on new home construction. But to your point, I don't think interest rates will matter. It's simply the cost to play.

 

[ejw93]

Tell me if you think this could play out....

...
As a result, I think mobility will become an issue...people will tend to stay in their houses, avoid job changes that force a relocation, and so on. The market will become somewhat stagnant.
...

.

I think mobility already IS an issue, but it has more to do with Employer-sponsored health care benefits than housing prices/underwater mortgages.

"Jingle Mail" and strategic defaults are commonplace in more states than not. I've already had a co-worker go through one home foreclosure (primary residence) followed by purchase of a new home in less than a 48-month cycle.

 

[skipro3]

I've moved in the past and transferred my loan from the old house to the new house. The only stipulation was escrow needed to close on both places simultaneously.

 

[kumquat]

I don't think there have been any non-commercial mortgages that allow assumptions offered in years.

Ha

Really? (Not doubting, just surprised at the difference an international border makes).

When last I had a mortgage here in the Frozen North (maybe 30 years ago) all mortgages were assumable as long as you could qualify for a similar sized new one, some were assumable without qualification. Similar houses might have a considerably different selling price depending on the terms of the assumable mortgage. AFAIK, nothing has changed except that with falling rates, no one assumes a mortgage unless there is a significant incentive from the seller.