rising mortgage rates good for me?

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Submitted by alarmclock on November 4, 2007 - 8:33am

Long time lurker, first time poster. I don't think it matters but I'm in central Florida, not southern California. My housing situation: Early 30's, never owned a home, have rented my entire adult life. Financially: selling all of my securities would enable me to buy a house a the low end of my range outright (no mortgage), but I would never do this as I don't expect a house to appreciate faster than my securities, nor is it as liquid, etc.

My question: Wouldn't high mortgage rates benefit people capable of putting 20% down? The reasons I think this are
1) further reduce the pool of available buyers
2) more fairly value the cost of money
3) it seems intuitive that sellers would have to price the cost of financing into their asking prices

Obviously there are a lot of other side effects from high mortgage rates, such as an economic downturn, which might outweigh the above benefits, but that's not really what I'm considering. Thanks for any feedback, apologies if you have already covered this before.

Submitted by SD Realtor on November 4, 2007 - 10:06am.

Hi Alarmclock -

I will try to give you some answers... I mean opinions that may serve to be helpful... but again are only opinions...

First off, if you have to sell all of your securities to buy a home I would rethink that strategy. Draining all of your investments to afford a home is not something I would recommend. So you are wise to not follow that path.

Wouldn't high mortgage rates benefit people capable of putting 20% down?

In theory yes but it will take time and like just about every other answer I give, this one entails the same description. You need to run the numbers. Even having 20% down may not be enough money if the rates go high enough. To me it will be a rubber band. That is rates will go high, and pricing will not compensate initially to offset the rate gain. Then over time the prices will come down enough to offset the the rate hikes.

You are on the right track. It would seem intuitive that rate hikes are inevitable in order to start building some value into our currency. At least in my small brain it seems this should have happened a long time ago but what do I know?

Anyways, you are correct, the buyers pool may be reduced due to harsher conditions but then again, astute buyers who are on the sidelines and pooling up cash will start coming in especially if prices go low enough to cash flow for rental properties. That is not likely to happen for awhile though.

SD Realtor

Submitted by patientlywaiting on November 4, 2007 - 11:07am.

People who have savings should root for high interest rates. Those who live on cheap credit (companies and inviduals) will be affected. Most companies are credit financed so that will mean a lot of unemployment.

Unemployement and high rates will tank the real estate market allowing you to buy more.

If you are independently wealthy, own your own solid business or have a very secure job then you'll do well. You can buy some properties and refinance your low cost basis when interest rate eventually cycle down.

High interest rates means high inflation so you will need to cut down your consumption to the bare essentials in order to avoid the penalty.

Overall, it will be pretty bad for the economy because it will encourage passive rather than productive investments.

Submitted by eyePod on November 4, 2007 - 2:40pm.

Kind of a vague question. You have to run the numbers. It depends a lot on your assumptions AND your long term personal goals.

Submitted by ucodegen on November 4, 2007 - 8:16pm.

@alarmclock

quick one on the questions, more detail needed for specifics.. so here goes:
1) further reduce the pool of available buyers Correct, as rates go up, fewer people are able to make the monthly. It increases price, reducing demand(realizable demand, not wishful demand) at that price point against a near constant supply(actually increasing supply in SD's case w/ unsold inventory, REOs etc) This will drive the price down. In general, with liquid markets, price will move in opposite direction to interest rates.. much like a bond will. A house is a yielding asset. The yield is the value of the rent it displaces minus any appreciation in value over the time period - allowing for any mortgage interest tax breaks and property taxes, maintenance etc... your mileage may vary.
2) more fairly value the cost of money Fairly to whom? This ends up being a relative question. Higher interest rates mean that the time-cost of money is lower as well as the time yield of money is lower. Since houses are a long term asset paid with by a long term loan, a purchaser has to be aware of what the historical rates have been, whether their loan will reset, etc). If rates are low and fixed, they will be paying with 'cheaper' money.. allowing them to pay more for the asset (while having the same monthly cost). It also means that a down payment has a lesser effect on reducing the monthly cost.. and therefore values the down payment less.
3) it seems intuitive that sellers would have to price the cost of financing into their asking prices No they don't have to.. it is their choice at which to offer the property at. There are several variables. Are they sellers carrying a large loan balance on the property, such that if they sell at the market price.. they will be selling at below outstanding liens on the property? If so, they need to get approval for a short-sale from the lenders. Sometimes sellers are shocked that the 15% yearly suddenly ended and that suddenly there is no track left for the train. Many will probably end up chasing the market down instead of taking the hit up front and pricing at the market.

Obviously there are a lot of other side effects from high mortgage rates, such as an economic downturn, which might outweigh the above benefits, but that's not really what I'm considering.
This is actually a yes-no thing. A market down-turn and the degree of a downturn depends upon how many people used their houses as ATMs, how many are on Adjustables, what their LTV is, how many investment houses/banks have buried their exposure to CDOs/MBSs in SIVs(Structure Investment Vehicles). It is actually quite complicated, virtually guaranteeing that this market is going to be in turmoil. Watch consumer discretionary first, followed by non-discretionary.

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