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What's going to give first? Interest rates? House Prices?

I was on the market to buy a place. First time home owner jitters, but interest rates started to rise fast. Buying power dropped so much that I'm dropped out. At these rates, I really need the price to drop by 20%-ish. I'm sitting on cash and it feels like shit. I wonder how other people feel.

Arguably the 1980-81 era is a bit of an outlier, but perhaps instructive due to some of the similarities. The Fed under Volcker caused mortgage rates to rise to close to 20%. This was done to quell inflation that had proven persistent during the 70s. Back in '08 I recall looking at home sales data for my state (Oregon) during that era and there were quarters where the average selling price went down almost 20%. Of course, that's average selling price - it doesn't necessarily translate to home prices falling 20%, volume also fell (also consider that Oregon was very timber dependent then and there was suddenly a lot less home building going on). I suspect we'll see mortgage rates this time around hit 8% which really isn't an unusual rate historically, but given current prices that kind of rate will cause disruption. Bottom line: wait for rates to go higher - prices will fall. You can refinance the mortgage after rates go back down some, but I wouldn't expect to see 3% 30 year mortgages for a long time.
Timing the market is risky. Nothing guarantees that things will pan out the way you describe + your reader might be throwing money down a rental drain unless they buy.
The FRED 30 year fixed average puts things in perspective. https://fred.stlouisfed.org/series/MORTGAGE30US

We have had a historic move up in rates but that is coming out of COVID with rates at levels that don't even make sense to lend at for 30 years with out the Fed.

It would seem hard to believe housing prices are not overvalued with that artificially low rate regime but it is also hard to see housing prices crash in a massive inflationary environment. I would think we have a small pull back and then a flat line as time catches up with price.

Of course, real estate price is always local so generalizing to the whole country doesn't mean so much.

Canada I think is more interesting than the US with all the adjustable rate mortgages. Obviously, that is not going to end well when those rates adjust as an adjustable rate mortgage is basically a bet on what is happening, not happening.

Housing isn't overvalued. Housing is in shortage, so it priced at the maximum of affordability. Either you pay the landlord or previous owner (low interest) or you pay a bank (high interest), but either way you pay all you can.
Interest rates are highly sensitive to markets that have fairly tight feedback loops.

Home prices are set by relatively few transactions taking place at any one time in a close geographic area. There’s going to be a good amount of lag between higher rates prices actually dropping, especially given that the trend was increasing prices. We’ll likely see a leveling off first, then a degree of fall.

It’s hard to speculate about how much the prices will fall, ultimately homeowners make up such a large proportion of the population that they have a lot of leverage as a voting block, and government is responsive to their desire to protect their investment. Given the degree of run up we saw during, and even prior to, COVID, I’d estimate that there is a lot of room for prices to come down, but a lot of that drop is going to be driven by policy, not “free” markets.

I think it depends on if real estate is still being devoured by investment groups. And during high inflation, it doesn't seem like they're going to stop parking their money in homes any time soon. And since they can buy with cash, interest rates don't matter to them.
I think that was a temporary market distortion caused by too much QE and pent up demand from COVID making single family homes more liquid than they would have been otherwise.

Pooling money to buy single family homes only makes sense to me when the entire bond and equity market is over priced. Surely, there is a ton of capital that wishes it was liquid right now and not in portfolios of slightly over priced single family homes with liquidity drying up by the moment.

How much influence do investment groups really have on the housing bubble?
Something like 15% of all home sales over the past year were institutional buyers according to a report by the national association of realtors. [0]

It was more dramatic for some counties - Austin’s for example saw 41% of homes sold to institutional buyers.

As rates rise and a recession looms, time horizon before profitability shrinks and ability to pay rent falls into question, which puts these regions at risk of a crash in price as these parties may have to liquidate.

Tread lightly!

[0] https://cdn.nar.realtor/sites/default/files/documents/2022-i...

EDIT: 20% to 15%

Well even Blackrock only has $60 Billion in housing in a $36 Trillion housing market. So not much (although it varies by location and market prices can be affected by outliers.. so there are exceptions, sure).

Keep in mind, these investment groups need to make cash on cash return above their hurdle rate, otherwise their investors pull the plug. Their goal is to make returns, not take all the housing from poor families while they cackle to themselves in their underwater bond villain lair while petting a white cat.

Also, historically, 1% interest rate increases leads to 10% decrease in home price because of the mathematics of mortgages and the fact that most people only look at the monthly. As far as "Cash" buyers, a sizeable number aren't actually cash, there are a number of services that make it appear that way for home purchasing. My brother used one to make a "cash" offer in the Bay Area recently.

TL;DR - Unless you have a wife who is 8 months pregnant, just wait. There's no need to buy in while prices and rates are both this high.

Someone has to be buying up all those houses in CA that the people fleeing the state are still selling at inflated prices.

If the net population of a state has dropped enough for them to loose at least one seat in the house of representatives, but houses are still selling for high prices than logically it's not people buying up those houses.

> If the net population of a state has dropped enough for them to loose at least one seat in the house of representatives,

While California is estimate to have lost some population after the 2020 census, the seat lost due to the 2020 census was with a population gain from 2010. The fixed number of seats means gaining population at less than the national average can result in seat loss (more easily the more seats you have to start with.)

With the right nationwide distribution of population gains, a state could even lose seats while gaining population at or above the national average rate (especially if some of the states that start out with population below the average size of a house seat are gaining population slower than the national average, since they can't lose seats in any case.)

> but houses are still selling for high prices than logically it's not people buying up those houses.

In California as everywhere else in the nation, the number of active listings has fallen dramatically in recent years; prices are high not because demand is high (particularly), but because supply has become very low. It doesn't take many people trying to buy to drive market clearing prices high when almost no one is selling.

Incorrect. CA population grew 2010-2020, but other states grew faster.
No one really knows . I've seen figures from 10% all the way to 70% in some markets.
My personal opinion, based on what happened in 2008 in my area, is that the exact impact will be local. I think in some traditionally desirable places, prices will level out or only decrease slightly as interest rates rise. Lower inventory will help keep these prices up as increased competition keeps prices inflated despite higher interest rates.

In other places, I think prices will fall as rates rise, since overall affordability will go down, but there won't be as much buyer competition to prop prices up.

At some point, the dam will break and people who've been sitting on the sidelines and accumulating large down payments will start bidding prices up again, causing more sellers to list, which in turn will get more buyers involved.

Same boat. I did some investigation into historical interest rates vs. housing prices, and I learned that there's really only a weak correlation between housing prices and interest rates (and funnily enough, it's a positive correlation).
There’s too many confounding factors to drawn conclusions based on regressing interest rates vs home prices.

Interest rates are strongly correlated with government policy, which is crafted to respond to overall growth and inflation, which drive home prices.

I'm glad the housing market is slowing down. I'm not in a rush to buy (not willing to do super short review dates after listing) and not willing to get into a bidding war.
I’m glad it’s slowing too, but I’m 40 and at this point I’ll probably never outright own a home unless I inherit one. This sucks.
I feel like Mr. Biswas.

There's no winning.

For reference, historically, mortgage rates were greater than 6%. "Since 2008" isn't that meaningful, other than to imply "since QE regime began."
The mortgage I got (FHA) in July of 2008 was 6.25%. The house I grew up in, had a mortgage at 9%, and was only that low because my parents won a contest at the local bank.
Back in the day many mortgages were “assumable”, like taking over someone else’s car lease. That’s the only way my parents could afford to buy a home in 1981. Interest rates were above 15%.
On the other side of the coin, you used to be able to earn 6, 7, 8%, maybe even more, just by parking money in a savings account. I'd love to find a bank today offering even just 3%.
Wait a few months and you’ll see 3% again, savings acct interest rates are usually a few bps below the federal funds rate.
True, I was getting 5% interest on my checking account.
Another interesting landmark: there’s a Law & Order episode from 1996 where they suspect that a judge’s 5% fixed mortgage is a bribe because, as the detective notes, “I had to get on my knees just for a seven percent adjustable.”

https://subslikescript.com/series/Law__Order-98844/season-6/...

The percentage doesn't matter a great deal. It has everything to do with serviceability of the debt.

If homes were $150,000 for 3bed 2 bath. 20% interest rate on mortgage would be $3000/monthly or $36,000/year amortized for 10 years.

Kind of crazy but doable. The key point is the $150k and not $1mil. So as interest rates go up, the affordability of the homes goes down and so they cant sell for the same $.

The average rent price will also be really similar to whatever this service rate is. So if the best mortgage rates are coming in around $3000/month. Rent will be that much more or less. The key ROI or rent vs buy is that you are paying into equity when buying. So you'll find rent vs buy is usually measured in months. That is to say, if you're staying in the general area of the city or whatever. You might as well buy so long as you'll stay for about a year.

Though this is a risk. If housing crashes in price because of brain drain exodus out of a region, or immigration were to be shut down, or politicians in general being bad causing the crash. Then you might end up owing more than its worth. However, it's an important detail, much of a country's wealth is in its developed land. So when housing crashes, it's literally dropping the wealth of the country. That's a sure way to get your head chopped off as a politician.

Historically affordability (defined by home prices, interest rates and income levels) has never been so bad.

Let's hope prices level things out. People always mention how high interest rates used to be.

I’m closing next week, so I gander this is the top of the housing market.
curious about logic behind buying at ATH.
Historically buying real estate at an all time high has been a good investment

Of course nobody can know if it's the case this time

probably needs a place to live...
It is new construction. I put the deposit down in October.
The land (which is the expensive part of expensive housing) is almost certainly not new.
My parents bought our first house in 1979 and they said the interest rate was 12%

I bought my house in 2002 and had a 6.5% interest rate. That was the lowest rates had ever been at least going back to 1970. A year later I refinanced down to 5.5% and then in 2010 down to 3% before paying it off a few years later.

So yeah 5.78% is higher than the rates of the last 15 years but historically it is still quite low.

Yeah, but look at the case-shiller or the house price to avg incomes[1]

Back in the 80's homes were 4-5x the avg income

2002 5-6x

Now 8-9x

I rather buy something on 12% that's 4x my income than what my option is today.

[1] https://www.longtermtrends.net/home-price-median-annual-inco...

My parents' mortgage in 1966 was at 4.875%, if I recall correctly.
Ironically, my local credit union dropped their 30 year fixed rate from 6.0% to 5.875% after the FED raised rates yesterday. I guess they raised them less than they were expecting?
They were higher due to uncertainty of even higher rate announcements.
Sounds like they over-raised them prior to the FED rate hike.
Love how people assume it was something nefarious. It's a damn credit union, not a bank. They likely dropped the rate because the long bond (30-year) yield actually dropped after the Fed "raised rates".
We started seriously looking for houses to buy in April, and got a rate of 5.125% later that month. We were really hoping for something <5%, but I'm grateful that we didn't wait too much longer.

Of course, now the "worry" is that rising rates will sink the market value. So long as I keep my job or can still find another easily, that's not much of a concern; but the prospect of a recession, with layoffs and hiring freezes, is in the back of my mind.