Market Conditions: Will 5% 30-Year Average Mortgage Rates Impact the Chicago Market?
We’ve been chattering about the possibility of 5% average mortgage rates for years here on Crib Chatter.
Every time the rates have gotten close, they have retreated…until now.
For the first time since 2011, 30-year average mortgage rates have hit 5%.
Just a reminder, but in August, the average 30-year fixed mortgage rate was 4.55% up from 3.88% in August 2017.
Most of the current buyers have likely locked in those lower August rates but moving forward, such as in January and February 2019, those buyers likely won’t have that same lower rate.
Some argue that 5% mortgage rates are still “cheap” compared to the 6%+ level of the pre-2011 period so what’s the big deal?
But home prices have now returned to 2007-2008 highs, or even exceeded them. 5% rates mean higher monthly costs.
How much would a standard 2/2 monthly mortgage payment rise with 5% rates?
This 2-bedroom in Michael’s Terrace at 1309 N. Wells in Old Town came on the market in June 2018.
The listing says it was “gut rehabbed.”
It has an east facing balcony and windows.
The kitchen has white cabinets, quartz counter tops and new stainless steel appliances.
It has hardwood floors in the living/dining room.
This unit has the features buyers look for including central air, washer/dryer in the unit and garage parking is included.
Originally listed in June for $419,000 it has been reduced to $414,900.
I ran the mortgage costs for this unit at 30-year rates of 4.55% and at 5% on Baird and Warner’s mortgage calculator.
At 4.55% with a 10% down payment, or $41,490, the monthly mortgage payment including taxes, PMI and insurance is $2671.04 (this doesn’t include the assessments):
- Principal: $1903.12
- Taxes: $494.92
- Ins/PMI: $273 (PMI = $152; INS = $1452 yearly)
- Total = $2671.04
At 5% with a 10% down payment:
- Principal: $2004.55
- Taxes: $494.92
- Ins/PMI: $273
- Total = $2772.46
The 5% rate is just $101.42 more a month.
Is the 5% rate a game changer in the Chicago market or is it much ado about nothing?
Patrick Santry at Coldwell Banker has the listing. See the pictures here.
Unit #907: 2 bedrooms, 2 baths, no square footage listed
- Sold in February 1995 for $122,000
- Sold in April 1999 for $195,000
- Sold in February 2004 for $280,000
- Originally listed in June 2018 for $419,000
- Reduced and raised
- Currently listed at $414,900 (includes garage parking)
- Assessments of $560 a month (includes doorman, exterior maintenance, scavenger and snow removal)
- Taxes of $5939
- Central Air
- Washer/dryer in the unit
- Bedroom #1: 15×11
- Bedroom #2: 13×11
- Living room: 19×16
- Kitchen: 13×7
“The 5% rate is just $101.42 more a month.”
Or the monthly is the same at ~$395k, with a lower dp.
Who gets a mortgage nowadays with PMI?
5% is still relatively low historically. However, the issue is that home prices are a bit higher, so you have to factor that into it as well.
I don’t think 5% will stop most well qualified borrowers, but there are always some folks on the margins who might lower their price point or not qualify altogether. These folks aren’t the typical buyer in the greenzone though in my experience.
Anonny, anyone without 20% down…
In many cases, paying PMI is cheaper than avoiding it with a HELOC because first mortgage lenders make adjustments now for secondary financing. Also, as prime rate has been creeping up, the cost of HELOCs is pretty high.
“Who gets a mortgage nowadays with PMI?”
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Did you say “let them eat cake” in a prior life?
I avoided PMI by getting a VA loan, but back then, that was the only way I could.
“Did you say “let them eat cake” in a prior life?”
Ha! Nah, all three of my purchases have been 10 percent down, but no PMI. First two were “lender paid”, i.e., the interest rate was a half percent higher, and they waived the PMI requirement. Third one used a second mortgage (which for the reasons cited by Russ is less than ideal; it was the only way to get me through underwriting this time). Interest is deductible, PMI isn’t (though I suppose with the cap that’s going to be less valuable).
“Or the monthly is the same at ~$395k, with a lower dp.”
What???
In order to compare you have to compare apples to apples. What would the cost of the property be at the same price with the same down payment with two different mortgage rates. Because that’s what buyers are going to be dealing with shortly.
But maybe, anon (tfo), you are arguing that buyers will look at a lower price point as the rates rise in order to keep the same monthly payment.
This is the behavior that was apparent in the housing market when rates rose in the 1970s. Instead of buying the $300,000 house, buyers bought the $200,000 one.
But will everyone simply trade down as rates rise this time? We have argued this in the past. Most of you argued “no.” Will buyers change locations and size of the property to buy “down”? And what does that mean for more expensive properties? Will they sit? Or will they eventually be reduced causing the entire market to decline?
There are lots of unknowns about what will happen to people’s behavior.
“First two were “lender paid”, i.e., the interest rate was a half percent higher, and they waived the PMI requirement.”
I don’t think I would have taken this deal. After a few years, you can get the PMI off but you can never get back that half a point and it would add up over the life of the loan (much more than the PMI).
Nearly everyone has PMI now if they didn’t put 20% down. It’s pretty common and standard. Not as many people are doing the two loans since the financial crisis either. The banks have pretty much stopped most of the strange funding. But you can still put down 3%, as many have said.
By the way, this property has been on the market for 5 months even though it has been renovated and is in a hot neighborhood and has all the bells and whistles including c/a, w/d and parking.
I don’t care what Gary says the data is saying. The market has slowed and it’s unclear why.
Compare it to 2011 rates though, and throw in the increased property taxes and go ahead and adjust for the deductibility changes, then it’s more like [quick calculations] approximately _way_ more expensive than it used to be.
I don’t think 5% is some barrier causing people not to buy, but increased rates, like increased taxes, affect overall costs and so cause people to be less willing to pay higher prices — I think it’s one reason the market is likely to stay pretty flat, or basically at inflationary rates of increase at this point.
Something is wrong with the site. I’m no longer able to access comments about market conditions. What happened?
Regarding this property and it not selling–
I think it’s a really nice 2/2, in a hot location (although I’d avoid both Wells Street, especially that close to Division, and anything built in 1990 as a personal preference).
I do love the windows, though, both in the living area and the master.
But… the place seems pretty small. Both bedrooms are on the small side, and the master bath is basically the same as the guest bath, meaning both are small too. The kitchen is tiny and there’s no real place for a dining area.
Also, based on the realtor comments, it sounds like some rehab has been done since the place was put on the market — the comments say the bathrooms are original to 1990, and these aren’t great but it claims gut rehab and they seem more to current taste. (It was off the market in early July to early August, I bet that’s when.)
Beyond that, price in 2004 was $280K, and assessments were probably a lot lower then (although current assessments are okay for an elevator building from 1990 with a doorman).
$280K in 2004 means (this is very rough), they are currently trying for about $415K (and obviously the price was higher originally). That’s an increase of about 48% since 2004, or about 3.4% per year. I don’t think the market is anything like that — I think that in neighborhoods that were already developed it’s closer to averaging at inflation at best from that period once you take into account the dip from 2008-2012.
So overpriced.
And re the market cooling, note this place went on the market in June, when everyone thought the market was hot and lots of places were selling instantly.
Hi Sabrina,
I respect and read Gary’s monthly blogs with great interest. However I agree with you the market has slowed, and slowed considerably. I speak to brokers everyday and everyday I ask them, “How’s the market, how’s the showing activity?”. The answer across the board (e.g., Compass, @, Redfin, etc) is the market is beyond dead and something unusual is happening. I spoke with an agent who had a townhome in Blaine (typically what us brokers would call a golden listing) and the broker said 2 showings in 4 weeks and no interest. I asked if it was priced to high and the broker said 2 other identical units sold with multiple offers earlier in the year at the same price. When even the ‘Golden Listings’ can’t get activity we know something is wrong.
I think Gary is right on with his data analysis looking back, but there is no denying that buyer activity has dried up and non existent this fall. Something’s has changed and it will be interesting to see if this carries over to the spring market. If buyers stay on the sideline this spring we are in for a 10 – 15% haircut in short order.
Run your housing payment calculator using interest rates and taxes from 2017 as compared to what is coming in 2019. I bet you will find payments for buyers will be up a good 20-25% between the rise in interest rates and taxes. And now we can’t even deduct these expenses on our tax returns! Not good for valuations going forward.
“So overpriced.”
The 2/2s in this building are about 1100 square feet. I would consider them starter condos in this neighborhood but the prices always reflected that.
Prices can vary depending on if the unit has been updated. But if it has the new kitchen and baths, these usually sell in the low $400,000s. So this price is not that unusual for the building. Yet, it’s sitting there with no takers.
“I’m no longer able to access comments about market conditions.”
What do you mean by “access” them?
“I would consider them starter condos in this neighborhood . . . .
usually sell in the low $400,000s.”
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Maybe it’s time to review what people consider to be “starter” homes. True, Sabrina says starter “in this neighborhood” but where are people moving from when they sell to move to “this neighborhood?”
In another thread people pretty much agreed that $500,000 homes were not starter homes, but there was some push back at even that price point. Something about young couples earning big bucks and able to save a down payment quickly.
The whole idea of real estate purchases was that one bought a “starter” home and then moved up the food chain. Is that expectation model still good? If it is, what are your price points for “starter” homes of various types — SFH, row house, condo, …. Forget location, style, etc., just finances.
Then maybe people can look at how much is available at each price point and not just say generic “inventory” is low.
“what are your price points for “starter” homes”
income dependent.
What is a starter home for a surgeon just out of fellowship is very different from a starter home for a CPS teacher (or pick any other pair you like). Both of whom can ‘afford’ the starter home of their choice, but are unlikely going to have overlapping searches.
#901 in the same building (quite similar) listed on June 4 for $425K, sold in September for $385K. The kitchen is not as updated — old cabinets (but I expect the only difference is paint), and then old dark granite.
Bigger point is that no one perceived the market as slow in June, and Gary’s stats indicate that it was not.
I think buyers are picky right now, despite the low inventory, but I thought that in the spring too.
“Maybe it’s time to review what people consider to be “starter” homes.”
I believe the entire concept of starter homes are falling out favor among many classes of people. Stats show that fewer and fewer people are even moving at all, in-state, out-of-state, or anywhere. More people are buying their forever homes and staying put, especially those households with kids. There are various reasons for this which you can research yourself. I believe this trend is reflected in the low inventory at any given time. I would like to move into a bigger house (my house is not a starter home). My home may be more expensive, but so is everyone else’s. I could sell my $400,000 home and buy a $600,000 home I guess, but I’m not real excited at taking on a much bigger mortgage at this time.
“Maybe it’s time to review what people consider to be “starter” homes. True, Sabrina says starter “in this neighborhood” but where are people moving from when they sell to move to ‘this neighborhood?'”
If it’s a starter, they were renting before. I don’t think that many people sell and buy a smallish 2/2. Not unless they are older or perhaps a couple who are certain they won’t have kids/committed single person.
“In another thread people pretty much agreed that $500,000 homes were not starter homes…”
It wouldn’t have been for me (but then I was single, in my 20s, put 5% down, and was conservative about what price I wanted to pay, specifically less than 2x my income, even though the income was expected to go up — I didn’t want to be house poor and had school loans).
I think that other place was bigger than this one, but would have to check.
“The whole idea of real estate purchases was that one bought a “starter” home and then moved up the food chain. Is that expectation model still good?”
I’m not sure when the idea of “starter homes” came in. My parents’ generation bought and stayed. My parents bought their first house when I was 5, sold it and bought another when I was 8 (because we moved to a different state for a job opportunity for my dad), and then sold it only after they retired. I have some neighbors now (baby boom age) who bought their houses as young couples and raised their kids there and still live there.
I ran into the concept of starter home when living in Chicago, with the idea that you’d buy something likely more affordable but too small to raise kids in (for most), and then move up as your income increased or you married (if single) or decided to have kids or had a second kid.
In my SoCo place, which was largely 3/2s, I think a number of people originally bought it as a starter place (I did not, but my unit was one of the bigger ones). One of my neighbors (in one of the less expensive units) was mid 20s and her parents co-signed, I know, so definite starter (or maybe they thought it was a good investment). When I first lived there, it was mostly couples without kids, and the first few years people usually moved after having a baby (granted, one of these were in basically a garden unit). The original people in the other larger unit moved when they had a baby too, however.
Then people got caught by the downturn, and it turned into a place with toddlers and eventually school age kids, although most seemed to want to move when they had 2. But now there are a couple of families with children attending Blaine, as well as one with 2 children (although still baby and toddler ages).
So it kind of transitioned from starter place to not so much. I do know the most recent people who moved in had sold places they owned before.
“What???
In order to compare you have to compare apples to apples.”
I am. I am comparing what size loan you get for $2671.04 at 4.55% v 5%.
And suggesting (since I guess it was opaque??) that places like this that compete directly with available rentals will have some downward pressure on values. 5% lower price = same monthly nut.
“I believe the entire concept of starter homes are falling out favor among many classes of people.”
One thing is that more people seem to want to stay in the city to raise kids, and the idea of sending your kids to public school in the city (at least through elementary school) seems a lot more common then it used to, as a lot more schools seem to have become acceptable and I think there’s also an understanding/belief that committed parents can help turn a neighborhood school.
I think you and I agreed in a prior discussion that to some extent this has been fallout of the housing market crash and people getting stuck, although in a way it exacerbated a trend that was already starting to happen in some areas.
“More people are buying their forever homes and staying put, especially those households with kids.”
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I read that New York Times article about “forever homes” a few days ago myself. Cut through the marketing hoopla, and all it was saying was that mother-in-law apartments are back.
“What is a starter home for a surgeon just out of fellowship is very different from a starter home for a CPS teacher (or pick any other pair you like). Both of whom can ‘afford’ the starter home of their choice, but are unlikely going to have overlapping searches.”
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True enough, but when you’re dealing with economics and markets you’re dealing with averages and medians. The housing market has niches, to be sure, but I find it hard to believe that there is no consensus on starter home price points. Will those price points apply to everyone? Of course not, but to have sustainable markets (not everyone can build for/sell to doctors) a builder needs some idea of price points when he figures out who he’s building for/marketing to.
Below are the numbers assuming the following:
2017 – 3.75% Int Rate & RE Taxes of $5,939.25
2019 – 5.0% Int Rate & Re Taxes of $8,298.70 (assessed valuation 30% increase)
2017 2019
Mortgage $1,534 $1,778
RE Taxes $495 $692
Total $2,029 $2,470 Increase of 22%
John, starter home price points depends on location as cost of living can vary so much. Also lifestyles.
A late 20s MBA type or BigLaw associate making $150k+ is not going to be looking to buy a $200k ranch in Joilet just as some auto mechanic making $55k isn’t usually looking to buy a 2/2 in Lincoln Park.
Here’s something …
“Maximizing people are those who strive to get the very best out of every decision. A key assumption in economics is the notion that individuals are mostly rational, and armed with complete information about their choices. Rational individuals will always choose the option that maximizes their satisfaction. They approach decision-making with the goal of achieving the best possible outcome. In order to accomplish this, they are willing to engage in an exhaustive search of all possible options, investing substantial time and effort in the process.”
When “maximizing” people find low inventory, I think that makes it very hard for them to make any decision at all. This is where people say they are being “picky”. But the problem is they can’t make a decision without a lot of choices.
“. . . in the 1970s. Instead of buying the $300,000 house, buyers bought the $200,000 one.”
Since median house prices in the ‘70s were one-fifth of your example, you probably meant to say “Instead of buying the $50,000 house, buyers bought the $40,000 one.”
https://fred.stlouisfed.org/series/MSPUS
But Russ, why can’t you just agree that the $150k+ person isn’t *really* buying a starter home, notwithstanding that a given home purchase is made with the clear intention that it is a ~5 year home, with a plan to move on to a bigger/better property afterwards?
I mean “starter home” only admits to a single definition for all people, right?
“A late 20s MBA type or BigLaw associate making $150k+ is not going to be looking to buy a $200k ranch in Joilet just as some auto mechanic making $55k isn’t usually looking to buy a 2/2 in Lincoln Park.”
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I agree with anon. Russ’s distinction doesn’t mean that there isn’t such a beast as a “starter home” in Joliet, or a “starter home” in Chicago. It only means that the two cities have two different “starter” homes/price points.
Now, some of us were/are/will be blessed with buying first homes that are not “starter” homes in anybody’s book. That doesn’t mean that there can’t be a loose consensus that “these homes are starter homes” and “those homes are move up homes” and “the houses over yonder are aspiration homes.”
Unless, of course, one rejects the entire idea of starter homes and moving up the food chain.
“I agree with anon.”
If you agree with me on this point, then I don’t agree with myself.
I’m not sure I understand what you are asking for, JohnC. Definitions of what “starter homes” are in various areas? Look at price for various sizes — a 2/1 or 2/2 condo is likely to be a starter home (or else an “I’m downsizing and moving back to the city” place for retired people, etc.).
You said: “but to have sustainable markets (not everyone can build for/sell to doctors) a builder needs some idea of price points when he figures out who he’s building for/marketing to.” Obviously this depends on location. There’s no consensus on price points.
You can look at the median price paid by first-time buyers, but a first-time buyer in Old Town is going to pay a different price than a first-time home buyer in Winterset, IA.
” a first-time buyer in Old Town is going to pay a different price than a first-time home buyer in Winterset, IA”
You don’t need that extreme. A first time buyer in Old Town is going to pay a different price than a first time buyer in Belmont-Cragin.
Land in the green zone is too dear for builders to target ‘first time buyers’ of the sort imagined in this discussion. *NO ONE* is building product in the GZ (or SF, Manhattan, Seattle, etc) for this hypothetical buyer pool. Those people buy where dirt is much cheaper.
“Since median house prices in the ‘70s were one-fifth of your example, you probably meant to say “Instead of buying the $50,000 house, buyers bought the $40,000 one.”
I didn’t say anything about it being the median house price. I just said that people traded down. Even those buying at a higher price point. They had to.
And, unless salaries really start taking off, it looks like that’s what’s going to happen again. But it also means people will be priced out of a lot more neighborhoods as a result.
But it could mean gentrification of some neighborhoods as people are priced out. Can’t afford the West Loop anymore? Maybe will do East Garfield Park. Humboldt Park could also see more gentrification as people are priced out of West Town.
“But the problem is they can’t make a decision without a lot of choices.”
I thought the data actually showed the opposite is true? That the more choices you have the more paralyzed you become. Hence, if your 401k plan has 50 choices, many people don’t invest in any of them. But if there are just 5 choices, they do.
Similarly, in real estate, most buyers actually buy after looking at 5 or fewer homes. (this would probably not apply to any of you on this blog, however. ha!) But yes- it’s true. Most home buyers don’t want to look at endless properties. They decide pretty quickly. Again, less choice is actually better.
Thanks for the example Dan P.
People aren’t realizing how much the tax increases will impact the monthly payment. It’s crazy. It’s the double whammy.
Just got here. I’m still in the “everyone trades down camp”, which means that only somewhere up the food chain are prices impacted. The other factor will be what is driving the higher interest rates. If it’s inflation or a thriving economy, which I think covers all the possibilities, then how could prices go down?
As for the market…I do expect October to be another slow month but if market times or sale/ list prices are not impacted then I’ll have to take another look at cancellations/ expirations.
“True, Sabrina says starter “in this neighborhood” but where are people moving from when they sell to move to “this neighborhood?””
They’re not selling. They are renting or moving from another city and want a basic 2/2 and don’t want to rent. This unit (and building) would be considered a “starter” type property in Old Town as most in the neighborhood with the same amenities (parking, c/a, w/d) are more expensive.
But yes, I agree with others, that “starter homes” vary by neighborhood and city/town. A starter home in Beverly is very different than one in North Center.
I should have also mentioned inventory levels. Condo/ townhome inventories have been rising but are still pretty low by historic standards. Will need to see where those are at the end of October.
“Condo/ townhome inventories have been rising but are still pretty low by historic standards.”
Thanks for checking in Gary, with your observations and the data.
But inventories are already low so that really doesn’t tell us that much about what is going on out there, does it? It will take more than a few months to show significant change.
Also, I think those who have had their properties on the market all summer may withdraw them by the end of October and just wait until spring to list again. I think inventory will drop again in November/December but we’ll see those same properties come back in February.
“less choice is actually better.”
It depends on the personality type. The above is true for a “satisficer”.
“The ‘satisficing’ concept was first proposed by the U.S. Nobel Prize-winning economist Herbert A. Simon, who created the portmanteau by combining the words ‘satisfying’ and ‘sufficing’. Simon believed that when satisficers are presented with a decision to make, they will consider what they want, then evaluate their options to find the solution that meets their requirements.”
Satisficers are OK with low inventory if they find something that meets their requirements. Maximisers will probably not buy anything if there is not enough choice.
“Also, I think those who have had their properties on the market all summer may withdraw them by the end of October and just wait until spring to list again.”
I just talked to someone who is going to do this, and do some inexpensive updating. This place is in the ‘burbs, however.
“Also, I think those who have had their properties on the market all summer may withdraw them by the end of October and just wait until spring to list again.”
I just talked to someone who is going to do this, and do some inexpensive updating. This place is in the ‘burbs, however.
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I have a co-worker who is doing exactly that with her place in West Town. Listed this Summer for over $800k, no takers, price reductions to under $800k, will take off the market end of October and re-list in the Spring.
And that’s what I’ve been looking for – evidence of listings being cancelled or expired at higher than normal rates. Haven’t seen it yet.
Meh. Honestly, a 5% interest rate doesn’t bother me. I remember paying almost 9% plus points in the early 90s. Paying plus or minus 20K on the purchase price doesn’t really annoy me either. Buying a house now is still a hedge against inflation. I’m playing the long game.