Nick and I talked about the stock market and real estate market today. As you know, Nick is head of mortgage sales for Zillow. He says that he doesn’t see how the real estate market can go much higher than it is now…. he thinks it will go down. The Fed is going to be raising interest rates several times this year.
Currently the Federal Reserve interest rates stand at 0.75%. The Fed is expected to raise rates 3 times in 2017 to 1.5%. It has said it intends to raise rates to 2% in 2018 and 3% in 2019. This means mortgage rates will rise accordingly (and probably a bit more).
Currently mortgage rates are 4-4.3% for a 30 year fixed rate loan. If rates go up, here is what payments on a $500,000 mortgage look like:
- 4% – $2,400
- 5% – $2,700
- 6% – $3,000
- 7% – $3,320
- 8% – $3,670
- 9% – $4,020
Most people buy all the house they can afford… they spend 33% of their income on housing on average. This means that each time interest rates tick up, they can afford substantially less house.
Ultimately, increasing mortgage interest rates will substantially tamp down demand. People will get priced out of the market and will be unable to buy. Demand decreases will lead to price decreases in houses.
If we bought a house today, we are at a high risk that the house would substantially decrease in value. This leaves us two choices:
- Buy something small that is a lifestyle purchase (under $4k / month in payments). This house would likely go down in value too.. if interest rates went to 7%, the house price would likely fall 25%. A $800k house would lose $200k in value. This is the equivalent of paying $5,500 in rent for 3 years.
- Wait 2-4 years for prices to come down
- Rent a million dollar house now?
- Stay where we are (I dont like)?
Nick’s futher advice from his just buying a house – Don’t buy a house and be poor in it… install baller sinks and countertops… furnishings and that sort of thing.
My conclusion is that if we do buy, we should limit ourselves to $4k or less a month in mortgage payments. This caps us at an $800k budget. From an investment perspective, I would prefer not to buy a house now. If we must do so from a lifestyle perspective, we should get something smaller.