Market Conditions: Will Soaring Mortgage Rates Put a Damper on the Chicago Market?
The 10-year treasury hit a 2-year high yesterday of 2.89%. That is pushing mortgage rates up over 4.5%.
Many people who were looking to buy properties this summer have already locked in lower rates. Many locks are good for up to 3 months so properties that went under contract even 60 days ago that haven’t yet closed will most likely get lower rates.
But if rates stay at this level, the 3.3% 30-year fixed mortgage rates look to be a thing of the past for many buyers.
We’ve debated many times over the last 6 years whether or not rising rates would impacct buyers.
Another wrinkle in this market is that a large percentage of purchases are being made with all cash, which makes the mortgage rates moot anyway.
What’s the level at which rates would have to rise to really make an impact on sales?
Have we hit it already or is it some magic figure like 5% or 6%?
I’m not sure the fact that there are so many cash purchases out there makes mortgage rates moot. It is all about return on capital and with fixed income investments yielding more, the become an alternative to buying and renting places out.
This spike in Internet rates is inky temporary. It’s been a 30 year downward trend. no economic reasons this summer to reverse this trend.
The trend in rates has to be up. The thing is that if rates are going up the economy must be improving and that offsets the impact of rising rates. In the past 50 years mortgage rates have mostly been above 4% and once hit 18%. And houses still sold.
“In the past 50 years mortgage rates have mostly been above 4% and once hit 18%. And houses still sold.’
Of course they did. But it lowers the number of people who can afford the $475,000 2 bedroom, 2 bath condo in Lakeview.
So how much does it affect the market? Right now- there’s no inventory and more demand than what’s for sale. You’d think prices will hold. But once rates go back over 5%- then what?
Are you seeing a slowing Gary? It’ll be over the next few weeks when the rates really start to bite. Anyone who had the old 3.3% rates will have closed by now.
“no economic reasons this summer to reverse this trend.”
Fed stimulus finally ending perhaps?
The bond rally has been one of the longest bull markets in history. Truly massive. The implications of its end won’t really become apparent for years.
“What’s the level at which rates would have to rise to really make an impact on sales?”
Although they always threaten to take it away, right now you can deduct mortgage interest, so technically the increase in rates is somewhat offset by the tax deduction (if you itemize). I’d rather have the lower rate than the deduction any day of the week, but it is also nice to have them both.
What about current owners who still have mortgages with rates above 5%? Move up buyers could still move and end up with a lower rate than on their current place.
I wonder about the psychological impact of rising rates. In the grand scheme of things, anything below 10% was considered low. Going from 10% down to 8% sounds great, but going from 3% to 4% sounds awful to a lot of people.
“The thing is that if rates are going up the economy must be improving and that offsets the impact of rising rates.”
If rates are especially high, there is some wage inflation, too, which is a more direct offset. No evidence of wage inflation that I’ve seen for the near term.
“the increase in rates is somewhat offset by the tax deduction (if you itemize)”
$12,200 standard deduction for married filing jointly. $100k joint income in IL, with taxes a $400k house in city, gets you right there on itemizable taxes alone. So (basically) all the mortgage interest is deductible for a CC-typical buyer. And for the high-end of CC, the deduction phase-outs (Pease) are back, so for those making over $300k (mfj–or $250k indiv), there’s a reduction in the deduction amount (together with a probable AMT hit).
Rates on the ten year are unlikely to be over 3% any time soon for an extended period of time, and the “tapering” fears are just a bunch of nonsense perpetuated by the financial info-tainment channels to get some volatility back in the bond market for traders so that the interest rate futures pits don’t get closed down and ran by computers only.
Do you really see any prospects for explosive wage/gdp/economic growth?
“What about current owners who still have mortgages with rates above 5%? Move up buyers could still move and end up with a lower rate than on their current place.”
Are there people like that who have equity/cash enough to be move up buyers? In menaingful numbers?
“Will Soaring Mortgage Rates Put a Damper on the Chicago Market?”
No.
“What’s the level at which rates would have to rise to really make an impact on sales?”
Over 6%.
I for the most part agree with chuck except that I’d say they have to be over 8% to make an impact.
“Of course they did. But it lowers the number of people who can afford the $475,000 2 bedroom, 2 bath condo in Lakeview.”
Those 2/2’s were moving at $475k in 2006. What were rates then? What were starting salaries at, say, the large law firms then? (And yes, lots of associates at the large firms here buy a place after their first year or so, and it’s often a $400k+ 2/2). Sure, there are smaller first year classes at firms these days, but the rates are lower and the salaries are higher.
Yeah, I may rescind what I said. I could see it having SOME impact at 6%, but for a significant impact, would likely need to be higher.
I just bought a new place in the city in 2012 and locked in an arm at 2.9%. If I was shopping now and the best I could get was a 4.5%, I’d be buying significantly less house.
A married couple of teachers, policeman, postal workers, etc could afford a place for $475k. There are plenty of couples in my neighborhood like this – who bought townhouses for that price or more. Two people, each making $60k could afford a $475k house.
“Those 2/2?s were moving at $475k in 2006. What were rates then? What were starting salaries at, say, the large law firms then? … Sure, there are smaller first year classes at firms these days, but the rates are lower and the salaries are higher.”
Enough higher to make up the increased law school debt?
Also, in 2006, random homeless dude from Romania could have got a 100% loan for $475k. Now, notsomuch, even with $170k salary, esp with $150k in edu debt.
“I just bought a new place in the city in 2012 and locked in an arm at 2.9%. If I was shopping now and the best I could get was a 4.5%, I’d be buying significantly less house.”
how does one “lock in an arm?”
Just curious if there’s some feature out there that I haven’t heard of before
“Two people, each making $60k could afford a $475k house.”
Presuming that they can raise a 20% dp, sure. Assuming $800/month in taxes + assessment, (for $120k gross–which is well above median family income) at 4%, that’s 26% of gross, at 6%, it’s 30.75%, and at 8% it’s 35.9%. It becomes a definite stretch at 8%.
“Are you seeing a slowing Gary? ”
For the week ending August 10 contracts written were up 84% and 53% for SFHs and condos vs. last year. But let’s knock 20% off that number for contracts that won’t make it to closing and it becomes 47% and 22%.
The rapid increase in property valuations will level out now that rates are moving up. Properties were very undervalued over the past few years are were priced for the “worst case” scenario for the economy going forward. The improving economy, combined with very low rates, has caused the market to return back to fair market value. Going forward, housing prices will be dependent on the movement in rates coupled with increases / decreases in incomes. If rates rise and incomes follow, then housing prices will move higher with inflation. If either of those variables move in opposite directions, then prices will move up or down accordingly.
Obviously, the demand for particular neighborhoods will buck the trend based on where the higher paid professionals choose to live. Currently this is urban areas (e.g., Lincoln Park, Gold Coast, River North, Lakeview, Roscoe Village, North Center, Lincoln Square, ect).
I think I told everyone back in 2008 that location was the key. If you listened and purchased a solid home with utility (please don’t show me new construction block buildings), then I promise you are above water. You are also most likely refinanced into a low 3% rate and owning your property for fractions of what it would have cost to rent. Buy smart and buy often!
Check out the graph here: http://economistsoutlook.blogs.realtor.org/2013/08/20/mortgage-rates-6/
“Check out the graph”
So, as rates doubled from 78-82, sales went down by 50%.
“I think I told everyone back in 2008 that location was the key. If you listened and purchased a solid home with utility (please don’t show me new construction block buildings), then I promise you are above water. You are also most likely refinanced into a low 3% rate and owning your property for fractions of what it would have cost to rent. Buy smart and buy often!”
I own a unit with in a building made with block that has climbed back to within 1% of my 2007 purchase. Fortunately, I was never underwater becuase I was dumb enough to put a large down payment but I was close.
I now have a 30yr jumbo at 3.75% on a different property that I plan to live in for a while barring any personal circumstance changes beyond my control….
People with direct financial ties to the residential real estate industry will always want the common folk to think that prices are going up and that things are stable. Its all about the belief that things are going to be ok in the future. How have expectations of future economic factors in Illinois improved in the past year? If anything this pension mess is worse than it ever was and public schools in the city will decline along with the declining budgets. I don’t see how this helps out real estate prices at all, which along with increases in rates adds more uncertainty. I predict 1-2% appreciation into next year as there’s nothing screaming high single digit appreciation with all the negative factors out there.
“how does one “lock in an arm?”
Just curious if there’s some feature out there that I haven’t heard of before”
You typically get a 5,7, or 10-year arm, with 5-yr being the most common. That means that your rate will begin to adjust after that time period is up, but not before. Therefore, you are locked-in for 5, 7, or 10 years. The reset when that time frame is up is what gets people into trouble. If you can barely afford the payment on your place that has a 5-year arm locked-in at 2.5%, you’ll probably be in trouble when that five years is up and rates have risen 200 bps. Usually your rate can only jump X% per year after the lock period is up. It isn’t really wise to take an arm unless you don’t plan to be in your place long-term (longer than 5-7 years) or if you do plan to be in your place long-term and rates are currently high but expected to go down.
I took a seven year arm a few months ago because I assume I’ll want a SFH in 5-7 years. Even if I stay in my current place for longer than 7 years, the money I save in the initial 7 years will probably outweigh the high rate I’ll pay in anything over 7 years.
“how does one “lock in an arm?”
More info, that fixed portion of an ARM changes daily just like a 30yr fixed. If I lock in the fixed portion today at 2.5, my pal who lock in tomorrow for the same product may pay 2.55. It just depends on the market and what programs are available.
7 year interest only ARM at 2.5% here. Don’t plan on living here for more than 5 years myself.
Rates can go to 7% or so before any real contraction in the number of homes are sold. Plus, if rates go that high than the economy and inflation will be going up as quickly. It all evens out in the end.
“So, as rates doubled from 78-82, sales went down by 50%.”
Yes, but rates had to hit 10% before that happened and and sales were at a pretty decent level even at 12% and sales continued to rise as rates went from 7 – 10% and as rates dropped over the last few years sales continued to decline. The point is that there isn’t a lot of correlation between the two.
” I predict 1-2% appreciation into next year as there’s nothing screaming high single digit appreciation with all the negative factors out there.”
You can sell the February Chicago Case Shiller contract at 125.20 right now. The July announcement was at 117.9. No real market beyond February yet.
Amazing how low interest IO ARM loans make those 2/2’s in lake view cost $400,000’s …..
Rates are still so low, I’m not sure it’s going to matter until they are up to 8%+.
Where is the wage growth coming from that will drive the long term market? Rate rises in the past were accompanied by wage growth but the rise this year has not. When it continues into the mid 5’s, this will continue to mute appreciation that would have been mid single digit into the low single digits in all but the top top locations.
@anonny (August 20, 2013, 10:54 am)
“Sure, there are smaller first year classes at firms these days, but the rates are lower and the salaries are higher.”
No, this is wrong and misleading. (1) Market-rate associate salaries at major Chicago firms have stalled at 2006 levels for all degrees of seniority, but since bonuses are lower, effective pay has gone down even in nominal terms, never mind real ones. Some firms even cut starting salaries to $145k from $160k. (2) Student loan rates are much higher now. A fourth or fifth year associate is likely to have at least some loans at 2-3% while a first year associate is likely to have all loans at 7%+. (3) Class sizes didn’t just decline — they cratered. Ca. 2008 we were seeing summer classes of 80+ at the biggest Chicago firms. Now, typical class sizes are more like 10-30.
The good news for associates is that Chicago market rate is still the same as NY market rate.
Still, in 2011 there were (IIRC) ~300 NALP summer associates in all of Chicago, so going forward, I wouldn’t hang my hat on the Chicago Vault-ranked firm junior associate demographic for a recovery in the $475k condo market.
“The point is that there isn’t a lot of correlation between the two.”
That’s a faulty conclusion. Rates have doubled exactly once (in the graphed period)–and sales halved. Perhaps there is a correlation only when there are extreme moves up; we can’t test that until we have another time when rates double, and we very well may see that soon. Whatever the result as rates go from 3.5 to 7, it *still* won’t disprove that rates going from 8 to 16 won’t halve sales on a consistent basis.
anyone see existing home sales?
http://finance.yahoo.com/news/u-existing-home-sales-jump-140326850.html
Existing home sales up, even though borrowing costs are up.
Not sure how long that will last, but I’m not expecting rates to continue to rise as it is, so BUY NOW OR BE PRICED OUT FOREVER!
“Whatever the result as rates go from 3.5 to 7, it *still* won’t disprove that rates going from 8 to 16 won’t halve sales on a consistent basis.”
I don’t think it would be a function of the percentage move but rather how high they get. I would expect a problem around 10% based on history.
“You can sell the February Chicago Case Shiller contract at 125.20 right now.”
How are these traded? And what is the cost of getting in and out of positions?
“How are these traded? And what is the cost of getting in and out of positions?”
You just need a futures account, which has some costs. I’m with Interactive Brokers and I think it costs me like $20/month but then this goes towards the commissions. Commissions are like nothing – $2 – 3. The real cost is the spread, which can be large as you go out but then shrink as you get closer to final settlement. You can check them out here: http://datasuite.cmegroup.com/dataSuite.html?template=hsng&category=Housing&exchange=XCME&selectedProduct=CHI&selected_tab=real-estate
August is 122.80/ 123.40
November is 130/ 130.80
I don’t trade the CS futures and I’m not an active futures trader at all. I just have the account to diversify my currency exposure a bit and once in a blue moon I might do a commodities trade.
“Amazing how low interest IO ARM loans make those 2/2?s in lake view cost $400,000?s …..”
The ARM products inflate the pricing on 2/2’s? Or make buying a $400k place seem much less expensive? Both?
Either way, buying a 2/2 with anything BUT an ARM is foolish. Honestly, I’m kicking myself for buying our current place with a normal 5 year ARM. Should have gone with an interest only. And for our next place, unless we somehow manage to stretch and buy a place we’d love living in for the next 20+ years, we’ll certainly go with an ARM again.
I bought my SFH with a 7 year ARM and then refinanced with a buydown at 2.25% in another 7 year ARM. If I’m still living in Chicago in 7 years I will need a PET scan of my brain.
“Either way, buying a 2/2 with anything BUT an ARM is foolish”
That’s because everybody else is doing it so you have to do. But you can’t deny that the lower monthly payments significantly contribute to additional buying power. And the extra buying power keeps prices high.
“Either way, buying a 2/2 with anything BUT an ARM is foolish”
Serious question: why is that? Isn’t the rule of thumb you take an ARM when you think interest rates will go down when the ARM resets? And does that only apply to unicorn properties that are in GZ hoods that will not lose value or for 2/2.
“Serious question: why is that? Isn’t the rule of thumb you take an ARM when you think interest rates will go down when the ARM resets? And does that only apply to unicorn properties that are in GZ hoods that will not lose value or for 2/2.”
Yes, the rule of thumb is true if you plan to be there long term. If you plan to be there for no longer or only slightly longer than the lock of your ARM, then it doesn’t matter what rates are doing. The nature of a 2/2 is that you probably won’t be there long term.
Don’t forget the fact that the spread between ARMs and fixed loans can often save you a ton of money. At times, there are products out there which, based on the spread at the time, will guarantee you a lower cost until the loan is in its early to middle teens.
“Don’t forget the fact that the spread between ARMs and fixed loans can often save you a ton of money.”
The savings are often illusory, because borrowers typically either 1) buy more house with the ‘savings’ or 2) pay an artificially higher price for the unit because, as above, the other buyers are using ARMS to ‘buy more house with the savings’.
I’d venture to say that it’s *rare* that a buyer says “I can only afford $400,000 and I save the $XXX per month by getting an ARM”; they’re more likely to say “I can only afford $400,000 with an amortizing loan but I can afford $470,000 with an ARM for the same monthly payment.”
“Don’t forget the fact that the spread between ARMs and fixed loans can often save you a ton of money. At times, there are products out there which, based on the spread at the time, will guarantee you a lower cost until the loan is in its early to middle teens.”
Nope.. you appear to be benefiting because you are only taking the cheap part of an i-rate curve that is in contango. It is the fact you are not paying to protect the back end. Your unhedged in term and that is all you are doing. No free lunch- never a free lunch!!!. Ask the schmucks at Metalgasellschaft (or however the hell u spell it)…
I’m with HD. A VAST majority of people are using ARMs to increase their budget, not to save money. These are the same people who borrow from their retirement and take cash advances on credit cards to do the same.
‘MURICA!
“A year ago I remember someone saying to me, “leave trading the markets to the pros, you just can’t compete against them” … I thought that was good advice…
DZ.. forget about it..
If I had $1 for every time I heard a broker pitch an ARM/IO/NINJA and say “you can sell or refinance in 5 years…”
“Should have gone with an interest only.”
Annony, that’s because for 5 years you have refused to acknowledge stoner Ze… ROFLMAO!!!
“If I had $1 for every time I heard a broker pitch an ARM/IO/NINJA and say “you can sell or refinance in 5 years…””
If the answer is anything other than “I’d hae *almost* enough for that Frappuccino”, then you waste *far* too much time talking to mortgage brokers.
I’d venture to say that it’s *rare* that a buyer says “I can only afford $400,000 and I save the $XXX per month by getting an ARM”; they’re more likely to say “I can only afford $400,000 with an amortizing loan but I can afford $470,000 with an ARM for the same monthly payment.”
This is probably true, but not for me and plenty of others out there. I locked in a 30 when I bought and refinanced with a 7-yr ARM recently. I could afford my place on a 30 and I can surely afford it on a 7. For me, there is a free lunch. I save a bunch of money now with my ARM. No matter what I do, I’ll be victim to the back end of the curve when I move in 5-8 years. It doesn’t matter if I’m currently in a 30 yr or a 7 year. It does matter that I pay a much lower rate now.
“Your unhedged in term and that is all you are doing.”
Dude, if your paying 125 basis points to hedge interest rates in years 10-30 or whatever, you better be pretty sure that your gonna continue to carry the loan during that period. Otherwise your throwing that money away.
I get the argument that a lot of people shoot themselves in the nuts with ARMs, but that doesn’t mean that if you know what you’re doing and have the discipline to save that they’re bad products. Some people can’t handle their whiskey either but that doesn’t mean that I can’t enjoy some now and then.
If you were able to lock in at 3.5% or below, the spread between the 7 year ARM and 30 year was ~ 1%. Not earthshattering but it does allow borrowers to qualify for more house. Also, with the ARM you would be more likely to have to escrow RE taxes. Some banks with the 30 year only require 1 escrow with 20% down, which can be the insurance escrow only.
People seem really at ease with financial risk and don’t mind the interest rate risk at the end of the term because they think they will either be making a lot more money in 7 years, can sell at a higher price, or think that rates wont really be that much higher. I read an article that said that those who borrow from their 401(k) often come back to borrow from it again and again, usually 3-4 times over their careers.
Most want to maximize what they can afford. I took a 30-year fixed because I am terrified of everything and kept thinking, “What if?”
Very few people know what they are doing in terms of finance… even the mention of basis points makes me laugh because I once asked a Fidelity personal broker what a basis point was and she didn’t know. In fact, she became extremely angry with me for asking. She had been talking about basis points a lot in her spiel to me, so I decided to ask. This is when I first started working and ended up looking it up on the internet to find out.
Who cares if you have to escrow taxes/insurance? You have to pay them no matter what.
I think everyone can agree that using an ARM to buy more house can be dangerous, but that isn’t the only use for an ARM. There are many scenarios where it could be used responsibly. A little financial risk is OK as long as you can cover your bet. I know I can cover mine. However, I work in commercial real estate finance, so I’m familiar with the risks and accept them.
“I think everyone can agree…”
I’m gonna stop you right there sparky!
“There are many scenarios where [an ARM] could be used responsibly.”
Uhoh, Laura Lou might see that and give you a solid lashing. Didn’t you know that ARMs (used *basically* everywhere except the US) are “exotic financing”?
Does anyone think we are at the market cycle low in interest rates?
Does anyone live in their house for more than 2-5 years?
Does anyone want to not have a mortgage?
Does anyone want to retire within their lifetime?
……………….. guess not
“Dude, if your paying 125 basis points to hedge interest rates in years 10-30 or whatever, you better be pretty sure that your gonna continue to carry the loan during that period.”
Dude, I am not expressing an opinion on the intended term of your ownership. I am just factually stating the reasoning for the pricing. You are short i rate your way.. if you take it off by taking off the loan so be it… nonetheless you are short i until you do… no argument to it… none at all!!
“Does anyone want to not have a mortgage?”
Why, when someone is offering you (essentially) free money and giving you a put? Why would I *not* take 3.25 money for 30 years and pay it back as slowly as possible? At retirement, it’s likely the annual mortgage payment is almost certainly going to be less than proprety tax–why would I pay that off early?
Anon,
I see people in their 50s still using arms, not funding their retirement, trying to figure out how they are going to fund their children’s education. They would love to have no mortgage, and have admitted that they will never retire. These are high income earners living in multi-million dollar properties.
We are in our early 40’s no mortgage and are very happy. I hear that money is cheap argument all day long…. In the end it’s “show me the money”……… Net Worth is what important…… Not how cheaply you can borrow money.
“I see people in their 50s still using arms, not funding their retirement, trying to figure out how they are going to fund their children’s education. They would love to have no mortgage, and have admitted that they will never retire. These are high income earners living in multi-million dollar properties. ”
1. The reason they’d love to have no mortgage is that they bought too much house, and it’s making it hard for them to maintain the rest of their lifestyle.
2. I, too, would love for my mortgage to magically disappear.
3. If they are so desirous of having no mortgage, why not sell the manse, and buy on HD’s street with teh cashed out equity?
4. Not ignoring the 2d para humblebrag, just not much to say.
Answering number 3. Their fairly stupid and like to give the appearance of being wealthy. For some reason this is the American Dream….. Not in building real wealth.
“Their fairly stupid and like to give the appearance of being wealthy. For some reason this is the American Dream….. Not in building real wealth.”
Right, and if they had an appropriately-sized (for their actual wealth position) house and mortgage, free borrowed money can assist in building ‘real wealth’. I bet that, for many of those people, a ‘normal’ mortgage payment (with recent v.v. low rates) would be less than their aggregate monthly car payments.
Oh no don’t want to get into the car payment debate another poser money draw…… I know you always like to have the last word ….. So good night
I agree that an ARM “can” be used responsibly, but hardly ever is; and I’ll go on to state that the typical homebuyer who uses one in such a low-interest environment as this, is most likely not thinking things through and is buying more house than s/he can really afford.
What’s fine for a real estate professional who has a definite plan and is prepared to accept more risk, is not fine for the typical home buyer who is frightened of being priced out FOREVER and always hankers after something priced just a few notches higher than the most he can afford with a conventional 30 year fixed. All widespread ARM usage accomplishes is to inflate prices while saddling buyers with unsustainable debts that will often end up blowing up in their faces.
“I think everyone can agree that using an ARM to buy more house can be dangerous, but that isn’t the only use for an ARM. ”
And I think everyone can agree that using a Graphix bong to smoke marijuana is dangerous, but that isn’t the only use for a Graphix bong. It can be used to smoke legal products.
I smoked that marijuana but I didn’t inhale.
I borrowed using an ARM but I did it to save money, not to buy more house for the same payment.
I’m sure there are plenty who buy these arguments…but here in the *real* world….
HD, please tell us you didn’t smoke the little packet of “authentic Native American tobacco” that came with your Graphix…
“Yes, the rule of thumb is true if you plan to be there long term. If you plan to be there for no longer or only slightly longer than the lock of your ARM, then it doesn’t matter what rates are doing. The nature of a 2/2 is that you probably won’t be there long term.”
What I think most interesting about this discussion is that:
1. We are back to discussing people living in properties for just 3 to 5 years (as if there is no risk to doing so)
2. We have been in a bond bull market for 30 years. Other than he who shall not be named, most of us have never lived in a world as an adult where treasuries were rising. We have never been in a world where mortgage rates were only going UP. We only know mortgage rates going down.
You get conditioned by your experiences. Why would you NOT take an ARM? It’s worked for the last 20 years or so.
“No, this is wrong and misleading. (1) Market-rate associate salaries at major Chicago firms have stalled at 2006 levels for all degrees of seniority, but since bonuses are lower, effective pay has gone down even in nominal terms, never mind real ones. Some firms even cut starting salaries to $145k from $160k.”
Thank you for stating more clearly what I’ve been saying for awhile on this blog. Lawyers are making LESS money. They haven’t had a raise in years! The lock-step salary structure hasn’t changed in 7 years (going on 8 years shortly.) With inflation, they are making less.
And why would a first year associate even THINK about buying a $475,000 2/2?
First, they wouldn’t have the downpayment (unless they got help from the Bank of Mommy and Daddy).
Second, the layoffs are still happening. Winston & Strawn just laid off a bunch of its junior associates this year.
“And I think everyone can agree that using a Graphix bong to smoke marijuana is dangerous”
no it’s not.
Interest only ARM’s generally require a 30% down-payment. At least that’s what I had to fork over to get it. So even if there is a pull back in market prices, unless there is a cliff dive in property values, you should be able to sell without having to bring cash to closing. Used properly, you can borrow huge sums of money for 2.5% which isn’t much more than the rate of inflation. This keeps your monthly payments low and allows you to use your saved cash to invest in stocks and bonds, which will easily eclipse 2.5% over a 7 year period. While risky, if you’re market savvy with real estate, stocks, and economics, you can save a nice sum of money in the process.
It’s funny watching you all argue over something to which the true answer is neutral.. There is no right or wrong.. it is a risk based answer. and since risk is essentially 50/50 on this one (as with almost any market).. answer is neutral, if you understand what you are doing.
“And I think everyone can agree that using a Graphix bong to smoke marijuana is dangerous”
what? dangerously smooth maybe…
“Interest only ARM’s generally require a 30% down-payment”
that I didn’t know. I assume there are ARMs that require less down-payment but have more interest baked into them?
I did a 80/15/5 in 2003 with 5.875% and refi’d in 2009 at 4.8%. My downstairs neighbor just sold his condo for about 5K more than I currently owe on mine. Would I have been better off doing an ARM? I think in 2003 you just needed a pulse and a library card to get one.
What idiot has larger car payments than their mortgage?
eesh
Having multiple car loans questions a person true budgeting abilities and financial planning. That is not good debt to have. Multiple car loans, an ARM, probably lots of student debt….this is the type of issues people are dealing with, much of which is self inflicted in order to “stay on track”. You can’t build wealth in that manner unless it all works out close to perfect, especially when the margin of safety is low.
I don’t know if you’re aware but most households in america in their late 20’s-40’s have at least one car loan, a mortgage and a lot have student loan debt. some might call it irresponsible living, but I call it modern living. it’s extraordinary difficult for most households to avoid debt in our culture especially when school costs what it does and most college grads start off in debt, new and used cars cost 10’s of 1000’s of $, home prices are rising again (in
in no small part due to low interst rates and abudent FHA financing). living within ones means for the ordinary household usually means older and/or junker vehicles, no vacations, limited spending outside of the home, living in a working class or middle class neighborhood, and lots of saving. but that’s insanely difficult in today’s world and is just not realistic for most mainstream households. for example, the biggest restaurant chains in the country like Applebee’s count on Americans with disposable income to visit their establishments. disposable income is defined as whatever money they have left at the end of the week before the next payday. this is middle and suburban America too – which is not known for its profligate spending habits or materialistic culture.
the fact of the matter is that it’s really expensive to live in the world these days. debt is everywhere and it is required, along with a income (one or two wage earners) just to keep up with the times. sure there are the profligate who tries desperately to live the UMC lifestyle and has nothing to show for it at the end of a career. but for the typical household making $60,000 to $80,000 with 2 kids in ameri a today, the debt adds up quickly and a job loss wipes out even the most prudent of savers. it’s not realistic to say that a $70k household should live on $40k. taxes insurance and the mortgage take up a large chunk and there’s not much left over to save. my personal opinion is that it takes $100k income and an $70k lifestyle to truly be able to save and live more than paycheck to paycheck with a truly middle class lifestyle. that excludes a large chunk of America.
“What idiot has larger car payments than their mortgage?”
not the idiots oilc knows–their mortgage payments are still meaningful multiples of the $1800/mo they spend on their 2 car leases. But that was my point–if they lived in Skokie, down the block from HD, they could still have the Rover and the CLS, but also be saving money bc their house payment would be less thatn their cars.
“That is not good debt to have.”
Debt is debt, if it’s used to maintain invested assets, and at rates lower than (conservative) expected returns, what’s the difference if it’s for a house, a degree, a car or whatever?
“You are short i rate your way.. if you take it off by taking off the loan so be it… nonetheless you are short i until you do… no argument to it… none at all!!”
Ok, but turn off the traderbro for a bit, what’s the practical effect? I get that it’s an unhedged risk but this is not the cattle pits where you don’t want to have any exposure over night and you are sending the onyl woman that works for you (the high school dropout with the big breasts) to Jersey Mikes to get subs for the guys for lunch and then you are all going to get trashed after the tickets are closed by 3:30 or so, or whatever. Why should I spend a bunch of money to hedge a risk the worst case scenario of which I can handle (if I had to, I can handle 10% interest on the balance I’ll have on my mortgage in 10 years or whenever), that is unlikely to occur (it’s very unlikely that we would go back above where interest rates were since the mid-90s until the last 3 – 4 years, say the 5 – 7 % range) and for which there are many events which render the risk unrealized (moving, continuing to build cash and equity reserves, appreciation)? I am sorry that the American public is generally stupid financially, but I wholeheartedly reject the lowest common denominator argument that nobody gets to hold a knife, or eat Kindereggs or run up the stairs three at a time or get an adjustable rate mortgage.
“I assume there are ARMs that require less down-payment but have more interest baked into them?”
That’d be “more principal”; the i/o does not amortize at all, the ‘regular’ ARMs amortize the principal.
“Debt is debt, if it’s used to maintain invested assets, and at rates lower than (conservative) expected returns, what’s the difference if it’s for a house, a degree, a car or whatever?”
Levering up on rapidly depreciating goods such as cars & electronics, fancy dinners, etc. is financial suicide
I agree with Sonies. Large car loans are not smart and there is no tax benefit too.
The interest only mortgage is an interesting option for the financially sophisticated, but it does require that higher down payment. It is up to the borrower to pay down principal if they want, but for most Americans, they would pay nothing to principal, which means these borrowers are just renting from the bank…
“Levering up on rapidly depreciating goods such as cars & electronics, fancy dinners, etc. is financial suicide”
That’s not what I said.
I said that, if you have $100,000 of debt at 3%, it’s immaterial what you spent that $100k on, provided that you used borrowed money to *avoid* liquidating (or not making) investments with expected (after tax) returns over 3%.
Not true at all, it totally matters what you spent the 100k on! Unless you are only concerned with the arbitrage aspect of it. I am more concerned with the balance sheet aspect of it. For example if you borrow 100k to buy a house and 2 years later its still worth 100k, you are far better off than if you borrowed 100k to buy a car and 2 year later its worth 60k. I am not sure what kind of arguement you are making to be honest.
“I am not sure what kind of arguement you are making to be honest.”
Seriously? You don’t understand that argument?
There are two option for spending $100,000 that someone is going to spend anyway:
1. Liquidate $100k of investments (or forgo making investments over, say, 5 years) or
2. Borrow the $100k at a rate under your expected ROI on your investments.
You’re saying that the ONLY sensible thing to do is forgo investment returns. Why?
What a nitpicker
Your rate of expected return would have to be different depending on what sort of asset you used to purchase with said debt money.
JJJ… I think you are forgetting who is cc’s biggest supporter of I/o loans. I don’t disagree with you at all on any of your points. Just simply stating why the “apparent” benefit exists. All you are doing is taking advantage of is a curve in contango and mismatching terms. If the curve was flat you wouldn’t be able to, if it was backwardated the arm would trade over. Quick look shows 10 vs 30 yr spread at over 100 so you are just cutting the back off and taking risk to do it. Your risk perspective on a personal basis is an entirely different story from the pricing, and as I said it is essentialy a 50/50 bet so who cares. As for big tittied clerks getting me lunch… Unfortunately that wasn’t my scene.
As for sonies and anon, you are talking past one another- what matters most should be what debt will be the cheapest of the 2 to acquire. If you need debt on the aggregate.
Ze they are not talking past one another….
anon said the following:
“Debt is debt, if it’s used to maintain invested assets, and at rates lower than (conservative) expected returns, what’s the difference if it’s for a house, a degree, a car or whatever?”
Yes debt is debt but there are consequences to the debt…… and anon said what’s the difference if its for a house, a degree, a car or what ever? So what? there is no diff in debt that is used for an investment vs debt that is used for consumption.
Come on people use some common sense here?
anon said the following: “Debt is debt, if it’s used to maintain invested assets, and at rates lower than (conservative) expected returns, what’s the difference”
Yes, I did say that. All those words there are significant.
Are you saying that, taken as a *given* that one is going to spend $100k on frivolities (Rover; cristal; diamonds; wedding) given a choice between taking $100k out of investments you expect to have a 5% post-tax annual return for the next 5 years, and borrowing $100k at a fixed 2.25% rate, that you would liquidate? And that you would advise those less fortunate than you (but still fortunate enough to have $100k in invested assets) to do the same?
Really?
Girls, girls. your both pretty. let’s move on.
Anon forgive me as English is a second language but you said:
“Debt is debt, if it’s used to maintain invested assets, and at rates lower than (conservative) expected returns, what’s the difference if it’s for a house, a degree, a car or whatever?”
To me this means that you think that the type of debt doesn’t matter. Just trying to nit the king of the pickers here.
Now your secondary comment is regarding a cost of capital analysis, do I take out a loan or do I draw down on assets. The answer to this question is more complex and the answer depends on an analysis of a persons net worth, liquid assets, income/expenses, and risk tolerance.
You see anon things are not that simple if they were then everyone would be a millionaire and not have a mortgage. Oh and who is getting a 5 year loan a 2.25% why don’t you go over to lending club apply for a loan and tell me what rate they give you………. lol I might fund it for you.
“why don’t you go over to lending club”
Why on earth would I want to help enrich Bobbo?
Anyway:
Condition 1: A person must spend (ie *not* invest) $X on something.
Condition 2: There are *only* 2 choices for obtaining the $X–liquidate an investment with an expected after-tax return of 5%/a, or borrow at a fixed rate of 2.5%.
Condition 3: Neither of those rates is open for argument about ‘reality’.
Condition 4: Don’t fight the hypo.
Condition 5: It’s a f’ing hypothetical, get over ‘reality’.
You and Sonies are both arguing that either:
1. That person shouldn’t spend that money (which violates conditions 1 thru 5 and is therefor rejected).
2. They should liquidate their investment postion.
While I understand why #2 is *practical* advice for most people, that is *still* fighting the spirit of the hypo–not talking about ‘most people’; talking about someone who is going to spend $100k on a Rover, or plastic surgery; or new furniture, or an Everest expedition, and has open the option of borrowing that sort of coin at a rate below a reasonable investment expectation. And, to that person, whether that $100k is for Booth, a Rover, a vacation home, a boat, or a year’s worth of bottle service, under the conditions stated, that debt is still just $100k in the red on the balance sheet (and offset by the $100k investment *not* liquidated).
Anon dear lets not get all worked up here…..
I live in the real world not in a hypothetical one.
My position is not to liquidate their investment position, as I mentioned above there needs to be analysis of the person. For someone like Jenny their money is probably sitting in a bank account getting what .5% tops. Maybe they should liquidate. This is all nonsense anyway for the average joe who saves 100k and has a normal job they aren’t going to blow the money on a Rover…… all the posers I know lease them.
And your still lumping a real estate purchase in the same category as a years worth of bottle service, come on now. I will do an quick hypo analysis for you……… and lets say you keep the 100k invested and take out the 100k loan for a ten year duration. Both assumptions will exclude the cost of interest.
100k Investment in Mutual funds………………………………. value after 10 year hold 200k
100k Loan in 1year of bottle service …………………………… value after 10 year hold 0
Valuation after 10 years……………………………. ……………. 200k
100k Investment in Mutual funds……………………………….. value after 10 year hold 200k
100k Loan invested in Mutual funds…………………………….. value after 10 year hold 200k
Total net work after 10 years……………………………………….. 400k
You don’t see a difference regarding the debt?
“You don’t see a difference regarding the debt?”
Still fighting the hypo. There is NOT an option to invest that money; it must be spent. It’s a modified Brewster’s Millions scenario.
“Still fighting the hypo. There is NOT an option to invest that money; it must be spent. It’s a modified Brewster’s Millions scenario.”
Your examples:
And, to that person, whether that $100k is for Booth, a Rover, a vacation home, a boat, or a year’s worth of bottle service, under the conditions stated, that debt is still just $100k in the red on the balance sheet.
I’m pretty sure if you plug in the Booth Education or vacation home into my summary the outcome is much different………. You keep trying to change the rules come on just admit there is a difference.
“As for big tittied clerks getting me lunch… Unfortunately that wasn’t my scene.”
It’s nobody’s scene these days considering the floors are mostly closed, and the meathead traders are now selling furniture, or used cars or grooming dogs; and the trades are being executed by quants, or HFT computers.
Oh one other thing…….. as you said “under the conditions stated, that debt is still just $100k in the red on the balance sheet.
Yes it is red on the balance sheet but what you purchase is in black and depreriates over time…….. after the 1 year bottle service goes to zero …….. after 10 years the car goes to zero……… after 10 years the vacation house goes to 150k………. get it?
Whatever. I’ll take that $100k loan now, richie richenstein.
‘Whatever. I’ll take that $100k loan now, richie richenstein.”
Sure, go on over to lending club and I will fund it……. your not going to be getting that 2.5% rate that you had your heart set on. 🙂 Oh and I’m not Jewish I’m Chinese remember???
Chinese… now i understand why you arent getting it…
“Oh and I’m not Jewish I’m Chinese remember???
No, I don’t, and not everyone with ‘stein’ in their name is Jewish.
Oy Veh
“Applications for U.S. home loans fell for a third straight week as average mortgage rates hit their highest level this year, although demand for purchase loans increased, data from an industry group showed on Wednesday.”
“The gauge of loan requests for home purchases, a leading indicator of home sales, held up better, rising 2.4 percent.”
“The gauge of loan requests for home purchases, a leading indicator of home sales, held up better, rising 2.4 percent.”
Chuk- no matter how you try and say that the buyers are staying in the game- they’re not. The new home sales data from last month showed what’s going on. While that is national data, ask any realtor out there in Chicago right now. Things have slowed. It hasn’t dropped off a cliff- but sales are definitely slowing. Look at the number of reduced listings. It’s increased.
The rising rates ARE impacting home sales. And the rate rise has only just begun. Sadly, buyers are pulling out when their mortgage payments have risen just $100 or $150 a month. Imagine when it’s $300 or $400 a month?
But we have to get back to “normal” rates at some point.
“Chuk- no matter how you try and say that the buyers are staying in the game- they’re not.”
Good. I’d like to buy another place.