Why are mortgage rates such a big deal?

[Koolau]

We bought our first small house in the mid 70s for $8.5k (about $46.5k in today's dollars) at 8.75% when our combined income was $13k (about $73k in today's dollars) while we were just getting started and paying off student loans and a VW beetle loan. The house was an abandoned "fix-er-upper" so there was a lot of sweat and building supplies going into making it habitable. After all the bills, insurance, taxes, building supplies, tool rental, etc. there wasn't much left at the end of the month.
As challenging as it was I don't think it would be possible to accomplish the same today with today's dollars. Where could you find a house for $46.5k or even 3x the price and then afford the materials to make it habitable?

Cheers!

Lots of things have changed since the 70s. Even in the 80s, DW and I rehabbed the Old Home Stead. We used a home-builder's salvage place and bought cabinets, Formica tops, even lumber. It wasn't a tenth of what folks would spend just on materials these days (I mean, who would "intentionally" install Formica?) We still love it and don't mind the "cheaper" stuff we snagged for very little money. Who knew we'd be living here 40+ years later?

 

[athena53]

We also paid cash for our last property and we sold it in an all cash transaction. Most real-estate transactions in high demand locations these days are all cash.

Yes, but there are now financing companies that provide what's basically a bridge loan from closing to when you get a mortgage. They rake off a bit for that, of course, but it does give prospective buyers an edge in a hot market.

ETA: And an example of how young families cope with crazy-high costs: a friend in Bergen County, NJ has two adult sons. The first to marry moved into his parents "starter house", which they'd been renting out to someone else in the many years since they'd moved into a bigger house. No idea if they're paying market rent. Second son and his wife have two small children; both parents work outside the house and child care is a crazy quilt of one day in paid day care, two days with paternal Grandma, and two days with maternal Grandma, who drives up from south NJ so she overnights with the kids and grandkids. I suspect a lot of young couples in HCOL area are dual-income with unpaid child care. Not an option for everyone.

 

[ShokWaveRider]

With all due respect (really), brought on by you and others "insulting" the younger generation.

Where did I refer to the "Younger Generation" specifically? If I did it was a typo, I did not mean to point them out specifically. I thought I wrote "Folks" not mentioning any demographic and not meaning all folks.

 

[Koolau]

Yes, but there are now financing companies that provide what's basically a bridge loan from closing to when you get a mortgage. They rake off a bit for that, of course, but it does give prospective buyers an edge in a hot market.

ETA: And an example of how young families cope with crazy-high costs: a friend in Bergen County, NJ has two adult sons. The first to marry moved into his parents "starter house", which they'd been renting out to someone else in the many years since they'd moved into a bigger house. No idea if they're paying market rent. Second son and his wife have two small children; both parents work outside the house and child care is a crazy quilt of one day in paid day care, two days with paternal Grandma, and two days with maternal Grandma, who drives up from south NJ so she overnights with the kids and grandkids. I suspect a lot of young couples in HCOL area are dual-income with unpaid child care. Not an option for everyone.

Wish that would have been available when we "bridged" from one Hawaii property to another. What a pain to have to get a mortgage for a few months!

 

[pjigar]

The difference between a $300,000 mortgage at 3% vs 13% is $24,000 a year. That makes a huge difference especially to those of us that had combined incomes of $71k.
Even going from 3% to 7.5% is $10,000 a year.
Our first mortgage was 13.75%.

Exactly. The median home prices were much lower when we had high mortgage rate couple of decades back. Part of the reason is that the house sizes (sqft) have gone up too in the mean time. And the inflation adjusted wages have been stagnant or down for large a swath of the society during the same period.

Our first mortgage was at 7.875% and we didn't feel the pinch because the 1300 sqft SFH house price was 'only' $103,000. Our original house budget was $60,000 which could have bought us a "zero lot line" 1100 sqft home at the time.

 

[Slim11]

It matters. I was looking into moving and downsizing. But my curent rate is 2.4 percent. To downsize would almost make no sense as I would be paying almost the same if not more for a new morgage and a smaller home. So, I will stay put and enjoy the larger home and build up equity.

 

[Sunset]

...

DS and DDIL are doing just fine and LBYM on one (good, professional, no college debt) income in Des Moines. I still believe housing is out of range for ordinary folks on the Coasts.

I feel we cannot afford to move to CA, the house prices are crazy high.
Here in Chicagoland , a small 1,000 sq ft home is ~$300K.

20 years ago they were $225K, a very rough inflation rate of 1.6% per year.. Seems I should have bought in CA 20 years ago.

 

[ShokWaveRider]

I feel we cannot afford to move to CA, the house prices are crazy high.
Here in Chicagoland , a small 1,000 sq ft home is ~$300K.

20 years ago they were $225K, a very rough inflation rate of 1.6% per year.. Seems I should have bought in CA 20 years ago.

It is the RE taxes that get you one the most, at least for us they are. If we sold our home here in Florida, we could get a home for around the same price in CA, all be it a little smaller and in not such a good location, but our home taxes would double or triple.

The same goes for Hawaii with the exception that the home we could buy for same price as our would be smaller by 2/3.

That stops us from moving to both locations. Isn't that the same for all desirable locations though.

 

[Time2]

We bought our first small house in the mid 70s for $8.5k (about $46.5k in today's dollars) at 8.75% when our combined income was $13k (about $73k in today's dollars) while we were just getting started and paying off student loans and a VW beetle loan. The house was an abandoned "fix-er-upper" so there was a lot of sweat and building supplies going into making it habitable. After all the bills, insurance, taxes, building supplies, tool rental, etc. there wasn't much left at the end of the month.
As challenging as it was I don't think it would be possible to accomplish the same today with today's dollars. Where could you find a house for $46.5k or even 3x the price and then afford the materials to make it habitable?

Cheers!

My kids bought a HUD repo 6-21 for $240k and put $60k more into it to rehab it. There closing dragged on for months (no fault of there's) then needed a second appraisal, it came in $40k higher then the first appraisal!
They did good, but ya, not $46.5k. They just got it financed with a 15 yr 3.75% mortgage after the first round of increases in Mar of 22.

 

[all4j]

I’m not clear exactly who is saying mortgage rates are a big deal; that might actually be important though, since it is widely known that some of the ‘culture’ of home ownership is generational. Baby boomers, millennials, gen z, et al – will view this differently. There is a long line of government actions that contribute. Think about tax policy – deduction of interest, cap gains on selling, etc -- & you can find several factors that change how housing has been viewed. Much has been written about the 2008 ‘crisis’.

It seems that my whole life I’ve been told that when I bought a house, I should buy more than I could afford at the time. I resisted personally & know we got some criticism for that. At the time, we didn’t have the social media of today in our face pushing us toward a McMansion. Maybe it was easier to resist? But we didn’t want the stress that might come if our jobs went away, disability, etc. We deferred gratification. Others look mainly whether they can make the payment at the time.

I believe I’m right that generally accepted mortgage rules aren’t far different today that early 1980s, which were based on late 1960s. The government looked at what percent of income people spent on housing & created a guideline. Note – what they were spending, not what made sense. However, now people make 401k payments, student loans, etc that comes out of income that wasn’t there then. Meaning, someone might qualify for a loan that would require a larger part of their income than they could really afford.

When the Fed started the policy of ‘free’ money, investors went into stocks & real estate. But rates came down. Investors started buying more houses to increase demand. So if you could find a house, you might be able to make the payment on more house than you needed. So, what happens when you have to move for some reason? Willing to downsize? It’s an attitude that is contrary to the movin’ on up mentality that got them the big house. Will your other values stay they same – is it more important to get the corner office? Or the better school district? Or cars, vacations, etc? or Fire?

Will it work out? When the music stops, will wealth have been created & enable fire? Or will it be time to pay the musicians?

ETA: Forgot to mention that one reason some might think it is a big deal is that housing is not an insignificant part of the US economy, which matters for those of us invested in that economy

 

[Gumby]

30 years ago, we bought a substantially less expensive house than we could have qualified for under the mortgage lending guidelines. It made a big difference in our quality of life not to be house poor.

We also rented out the attached in-law apartment for the first ten years for extra income. When we could afford it, we stopped renting and renovated to add it to our own living space.

Now or then, you do what you have to do to get where you want to be. There were people back then who wouldn't make those compromises and people today who will.

 

[2HOTinPHX]

It is the RE taxes that get you one the most, at least for us they are. If we sold our home here in Florida, we could get a home for around the same price in CA, all be it a little smaller and in not such a good location, but our home taxes would double or triple.

The same goes for Hawaii with the exception that the home we could buy for same price as our would be smaller by 2/3.

That stops us from moving to both locations. Isn't that the same for all desirable locations though.

Yes along with higher interest rates Property Tax at these high prices are a KILLER...

Below example is my parents house in SF Bay Area. They along with some of their good life long neighbors have passed in the last few years. Their 60 year old homes in need of repair were sold for around 1,000,000, remodeled and flipped. Truly the land of the million dollar fixer uppers. Now the low $1,200 a year property taxes have increased to over $16,000........forever....

Assessed Value
2022 $16,273 (+1,115.9%) $1,350,000
sold in 2021 $1,338 (+8.5%) $1,350,000
2020 $1,234 (+1.1%) $65,687

 

[MC Rider]

A surprisingly large number. 36.1% according to this source.
https://www.thestreet.com/housing/a-surprising-number-of-homes-are-bought-for-cash.

As both a rental property owner and hard money lender, I've bought at least 50 homes all for cash since 2010 at prices ranging from $10K to 225K. That said I don't have the money to buy a house in HCOL areas for cash, without a lot of financial shuffling.

Much higher % than I would have guessed. We really benefited from the run up in prices in LA before we cashed in our chips and moved away.

 

[Koolau]

I feel we cannot afford to move to CA, the house prices are crazy high.
Here in Chicagoland , a small 1,000 sq ft home is ~$300K.

20 years ago they were $225K, a very rough inflation rate of 1.6% per year.. Seems I should have bought in CA 20 years ago.

That's sorta the way we did it with a home in the Islands. We bought long before the crazy prices. In '83, we bought in for about $100K. Of course, that was a bunch of money at the time. It's parlayed into at least $700K today. Still a bunch of money.

 

[MC Rider]

Their 60 year old homes in need of repair were sold for around 1,000,000, remodeled and flipped.

I'm surprised they were not scraped to build a 5,000 SF "Farmhouse".

 

[Montecfo]

I bought my first home as a single guy a couple of years out of college. Mortgage rate was 12.5%. My parents were bootstrappers who saved and invested in real estate and I was a believer. This was smallest house in a neighborhood none of my friends would dare to buy in. But great location and I could afford it. I think the down payment was only $2500 or so. This was in Texas.

Now? Everyone seems to agree with my investment proposition. It is a trendy, "historic", close-in neighborhood, housing prices have leaped, my old house has been scraped and replaced with a $1M minimansion.

Things have changed and gotten less affordable. Yet combine that with all the people paying cash. The nation has gotten more wealthy as interest rates declined and they have built equity (and $ from bank of M&D) to afford more house than incomes alone generate.

Housing is just viewed as more desirable and valuable than it once was. People pay more.

Even with much higher rates, I am amazed how quickly houses sell in our current neighborhood at prices down just slightly from the pandemic. Obviously you need lots of existing equity, family money and very good jobs. There is a large pool of folks here in northern Virginia that have those things. Meanwhile my mortgage is at an all-time low of 2.49%.

After that first home, I had some equity and savings so I never needed a 95% mortgage again. In fact to this day our second home we ever bought was our largest mortgage.

Hard to do this today without family money. Even then people buying larger nicer homes did it with M&D supplying down payment.

I assume that is even more true today.

 

[EvrClrx311]

The actual mortgage rate impact to individuals is simply math as many have said, but the rapid change in rates has much deeper and more severe consequences across banking, real estate, and even consumer behavior.

Consumer Behavior - If you bought a house in our neighborhood between 2020-2021 you likely secured a 30 year mortgage between 2.5-3.25. Housing prices have actually gone up since this time. On my street they are up 27.3% between 2020 and today's average listing. Interest rates are up to an average today of 7.31% from 2.75% when I bought. This means if I moved into my neighborhood today, I'd be paying $41,489 more a year in interest on my home - that's $3,457 more a month for the same home. Here is the kicker, my house costs less than the average home in my county. So neighbors coming into our neighborhood now have $3,457 less to spend on other things than people who moved in 2 years ago.

Real Estate - Because of the extreme change in home pricing for those with mortgages, there is suddenly an incredible incentive to stay put if at all possible. This means, unless a job opportunity is offering monumental increases in pay, most people who are in mortgages under 4% are going to stay put until rates come back down... even if this takes 5-10 years. The housing market is going to go through a very chaotic period. Right now prices are elevated, in part because of this. No one wants to sell, because people with mortgages don't want to take on a different loan. Lack of supply, due to no one wanting to sell, is keeping pries elevated. When (if) rates return back to 3% levels... you'll see a massive surge in refinances and people moving, and you'll actually see a huge uptick in selling, bringing prices crashing down. All of this is going to have negative impacts on housing and those who work in that sector.

Banking - Without going too deep into this one, banks are in a very precarious position right now after servicing so much debt and loans during the time of near 0% rates... as the Fed inches higher, things will break.

 

[athena53]

Because of the extreme change in home pricing for those with mortgages, there is suddenly an incredible incentive to stay put if at all possible. This means, unless a job opportunity is offering monumental increases in pay, most people who are in mortgages under 4% are going to stay put until rates come back down... even if this takes 5-10 years.

I'd bet that even if you have a job opportunity elsewhere you may be able to negotiate WFH so you can stay in place. New employer saves on relocation expenses and won't have to offer you extra salary to make up for the pain, suffering and expense of moving.

 

[EvrClrx311]

I just did the math for my house... it is quite bonkers. My wife and I did a lot of work to fix up the property so our properties value reflects quite a bit of investment (around $135,000 on renovations and turning it into a horse property). But we bought our house for $631,000 in 2018 with 10% down and refinanced in 2020 at 2.75% . The county assessment of the property puts our house value at $1.24M now... with the same 10% down at 7.31% (average 30 year today) you're looking at a monthly mortgage of about $11,000 vs the $3,400 or so we pay right now. We wouldn't live here if we were buying today, vs when we moved in just a few years ago. I'm not sure how or why anyone would pay that much for a house in our area, but somehow homes are still selling here for around those prices. I'm guessing mostly all cash offers that aren't using mortgages? Or maybe people are doing ARMs and planning to refinance if/when rates fall. That's a major risk I wouldn't want to take on though...

 

[tulak]

An average house in my neighborhood that sold for 220k in 1998 would sell for ~1.2 million today. Inflation calculator shows that 220k in 1998 is 410k today, so 3x as much.

The house I bought in 1998 for 140k, which needed a lot of work, would cost 261k in 2023 dollars. Today it’d cost about 800k.

I don’t envy my kids or this generation of first time homebuyers. Cost of housing is significantly more expensive and I’m skeptical it’ll get cheaper.

 

[ken830]

If you bought a home when prices were low and interest rates were high and then in the coming decades, home values skyrocketed while rates came down, you basically won the proverbial lottery...

It's much harder the other way around.

I got lucky because the Great Recession caused a layoff which netted me a small chunk of severance and a new job, so I took the money, bought a ring, got married, and bought a house here in the VHCOL SF Peninsula near the local bottom of the market downturn at the end of 2009.

However, I worry how my kids would be able to afford any place of their own around here... and if we'll be able to help them?

 

[Montecfo]

The actual mortgage rate impact to individuals is simply math as many have said, but the rapid change in rates has much deeper and more severe consequences across banking, real estate, and even consumer behavior.

Consumer Behavior - If you bought a house in our neighborhood between 2020-2021 you likely secured a 30 year mortgage between 2.5-3.25. Housing prices have actually gone up since this time. On my street they are up 27.3% between 2020 and today's average listing. Interest rates are up to an average today of 7.31% from 2.75% when I bought. This means if I moved into my neighborhood today, I'd be paying $41,489 more a year in interest on my home - that's $3,457 more a month for the same home. Here is the kicker, my house costs less than the average home in my county. So neighbors coming into our neighborhood now have $3,457 less to spend on other things than people who moved in 2 years ago.

Real Estate - Because of the extreme change in home pricing for those with mortgages, there is suddenly an incredible incentive to stay put if at all possible. This means, unless a job opportunity is offering monumental increases in pay, most people who are in mortgages under 4% are going to stay put until rates come back down... even if this takes 5-10 years. The housing market is going to go through a very chaotic period. Right now prices are elevated, in part because of this. No one wants to sell, because people with mortgages don't want to take on a different loan. Lack of supply, due to no one wanting to sell, is keeping pries elevated. When (if) rates return back to 3% levels... you'll see a massive surge in refinances and people moving, and you'll actually see a huge uptick in selling, bringing prices crashing down. All of this is going to have negative impacts on housing and those who work in that sector.

Banking - Without going too deep into this one, banks are in a very precarious position right now after servicing so much debt and loans during the time of near 0% rates... as the Fed inches higher, things will break.

Yes. And for the reasons you point out, this is not sustainable.

Interest rates are the least problem. They will decline and one can refinance. But COVID changed the math it seems. People value suburban real estate far higher than before.

People only can afford it with equity from prior home, family money or both. And two good jobs helps.

Personally I have no plans to move. Very small 2.49% mortgage. But if I moved I would pay cash. But downsizing does not really make sense in this market.

 

[athena53]

If you bought a home when prices were low and interest rates were high and then in the coming decades, home values skyrocketed while rates came down, you basically won the proverbial lottery...

I had that happen twice with houses in NJ. The second time, we moved to a LCOL area and didn't need all the proceeds for the new house. It was a great help to the retirement savings.

 

[Save23tl]

Because houses are more expensive

If you bought a 4BR house on 70x100 lot in my NJ neighborhood 10 years ago:

$350k purchase
$35k down
3.0% interest
$1,328 per month payment
Annual taxes $8,400

Same house now:

$650k purchase
$65k down
7.5% interest
$4,090 per month
Annual taxes $10,200

If you live someplace like Idaho maybe higher rates don’t make much of a difference but anywhere that has seen significant price appreciation is also seeing people stretch their budget like crazy to stay close to family/job/friends, especially families starting out now who are looking at rental prices over $3k per month as an alternative.

 

[Gumby]

A. If everything just kept up with inflation (CPI change), the price and the taxes would be 35% higher in 2023 than they were in 2013. But so would salaries of the people who are looking at that type of house. https://www.minneapolisfed.org/abou...flation-calculator/consumer-price-index-1913-

B. The 30 year mortgage rate in 2013 was closer to 4%, and the average has been in excess of 7% over the past 40 years or so. 3% mortgages are an anomaly. https://themortgagereports.com/61853/30-year-mortgage-rates-chart#loan-purpose

C. Who starts out with a 4 BR home? And when? I never lived in a house when I was a child, just trailer parks and cheap apartments. And the young wife and I did not buy a home until I was 34, after 9 years of marriage. People need to adjust their expectations.