Investing 102

[sik68]

Hey guys,

I'm no macro economist, but shouldn't the opportunity cost of borrowing in a low rate environment be the same as a high rate environment? That is, if inflation does correspond to market cycles, which I'm guessing aren't tied at the hip.

Granted, a mortgage is 30 years, and market cycles are much shorter than that, so I definitely see the appeal of locking in a cheap mortgage now....when the inflation pendulum swings hard the other way, I will be quite off-put to buy a house at over double the rates my peers are locking in now. I suspect so will a lot of people, and it will hurt house prices, maybe enough to compensate for the crappy loan rate I'll be offered.

Am I sounding like a ? These supposedly low housing prices AND low rates just doesn't make supply and demand sense... When one goes up the other should come down, no?

[GregWeld]

Steven --

Here's the problem with that thinking.

Interest compounds at the payback total will be HUGE compared to the lower interest rate - not to mention the monthly payment will also be far higher.

The housing prices might not rise as much - as demand dampens - but they still tend to rise... so by waiting - you not only pay a higher first cost - your monthly outlay is higher and your total outlay is also.


EXAMPLE:

You buy a house at 300K with 50K down - and finance 250K at 8%

Monthly payment is - 2,146.91
Total payback is - 772,888.12


Same house same down payment but at 4%


Monthly payment is - 1,506.04
Total payback is - 542,173.77

[sik68]

Originally Posted by GregWeld

Steven --

Here's the problem with that thinking.

Interest compounds at the payback total will be HUGE compared to the lower interest rate - not to mention the monthly payment will also be far higher.

The housing prices might not rise as much - as demand dampens - but they still tend to rise... so by waiting - you not only pay a higher first cost - your monthly outlay is higher and your total outlay is also.


EXAMPLE:

You buy a house at 300K with 50K down - and finance 250K at 8%

Monthly payment is - 2,146.91
Total payback is - 772,888.12


Same house same down payment but at 4%


Monthly payment is - 1,506.04
Total payback is - 542,173.77

I totally get the compound interest part, but why would that house sell for the same price at 8% as 4%. Since payment affordability is based off a ratio of monthly income, the house should be cheaper.

I'm simply trying to justify to myself that I won't be screwed over when I go to buy a house in 5 or so years when these dream rates are gone.

[Flash68]

I know it was an example, but if rates go to 8% (not even terrible on a long term scale) anytime in the next few years housing would be in for a world of hurt re pricing.

Yes, that same house should be able to be bought for less because affordability for qualification purposes (DTI) would be reduced dramatically in that environment.

Depends also what income growth was over that period that arrived at an 8% interest rate environment. Inflation out of control most likely?

[Bucketlist2012]

You guys are some smart dudes. Me ? More lucky than smart , but I was always told to hang out with smarter people to accelerate my Learning.

I have the obvious money management skills which go a long way in life, Investing 101, but my Investing 102 skills need work, and this thread helps alot.

There is a truth with the correlation of Prices being higher as rates are lower. On paper , as the rates dropped 1%, my Home went up 100K in "Value". So the Guy buying 2 years ago was getting a home for 280,000 @ 5%. Now he will pay 380,000 @ 3.75%. So when rates rise again, prices should drop...

Mike, you got it right planning and studying and keeping debt low. No matter what, it will all pay off.

And I am just trying to keep up with Dave, and Greg and some of you other guys, and trying to absorb all the knowledge I can...

[Flash68]

Mike, stop it. You know very well what you are doing over there.

[Bucketlist2012]

Originally Posted by Flash68

Mike, stop it. You know very well what you are doing over there.

Dave...

Haha..Yes, I do my best...But you guys do teach this old Dog new tricks...

I just need to get healthy so I can chase you guys around the track...

But thanks to this thread, I am smarter now than I was before..

[GregWeld]

I totally disagree with the "hypothetical" discussion of houses going DOWN when rates rise. The historic "norm" proves that to be incorrect assumption. They won't go rising to the stratosphere like they did with the artificially low rates we have now... and most like what you'll see (which I've seen in my own personal history) is that as the rates go higher --- you'll just adjust your dream house DOWN the scale -- so your monthly will be higher for a less desirable home.

What the low rates have allowed folks to do is to buy way more house than they would have "ordinarily" been able to afford on a monthly basis.

Rates creep up slowly -- and people just make the adjustment.

Now -- if rates SUDDENLY went sky high in a 6 month or 1 year period that would be a different story - but that isn't the norm and if it did rock this way - the WORLD will be in a depression so nobody will be buying anything!

[Bucketlist2012]

Originally Posted by GregWeld

I totally disagree with the "hypothetical" discussion of houses going DOWN when rates rise. The historic "norm" proves that to be incorrect assumption. They won't go rising to the stratosphere like they did with the artificially low rates we have now... and most like what you'll see (which I've seen in my own personal history) is that as the rates go higher --- you'll just adjust your dream house DOWN the scale -- so your monthly will be higher for a less desirable home.

What the low rates have allowed folks to do is to buy way more house than they would have "ordinarily" been able to afford on a monthly basis.

Rates creep up slowly -- and people just make the adjustment.

Now -- if rates SUDDENLY went sky high in a 6 month or 1 year period that would be a different story - but that isn't the norm and if it did rock this way - the WORLD will be in a depression so nobody will be buying anything!

My Wife just said what you said.... Damn....

[Flash68]

Originally Posted by GregWeld

I totally disagree with the "hypothetical" discussion of houses going DOWN when rates rise. The historic "norm" proves that to be incorrect assumption. They won't go rising to the stratosphere like they did with the artificially low rates we have now... and most like what you'll see (which I've seen in my own personal history) is that as the rates go higher --- you'll just adjust your dream house DOWN the scale -- so your monthly will be higher for a less desirable home.

That is a nice anecdotal piece and I don't disagree, however, interest rates and home prices are for the most part inversely connected over time. It's not perfect, but it does largely follow that "hypothetical."