Rising Rates: Some Impacts

 

The 30-year fixed-rate mortgage is one of America’s secret weapons, because it makes inflation an ally of the homeowner who locks in a low rate, and ends up paying a decreasing share of their income toward their mortgage as the years pass. In the entire world, only the United States and France (!) have 30-year fixed-rate mortgages.

But in the UK, “fixed” means fixed for a number of months, or maybe a year or two – and then the rate is variable. Which means that the rapid rise in interest rates is going to hammer most of the world, who have been making their calculations under the assumption that low interest rates were here to stay. This is a brutal multiplier on the inflation afflicting the world’s economies, and it may lead to some pretty drastic unintended consequences.

Rising rates are also extremely damaging to real estate investors, who, unlike residential homeowners, do not have access to 30-year fixed-rate financing. The end result is going to be quite a lot of turmoil in the real estate markets, all the way from new-build constructions to purchases and refinancing.

In the UK, they are suggesting that mortgage rates have now reached as high as they will go, but I reckon the Green Cult will continue to force everything higher. I welcome your prognostications!

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  1. Bryan G. Stephens Thatcher
    Bryan G. Stephens
    @BryanGStephens

    The bank was willing to refinance me until I am 80 when I was 50, so I was all for it. Never going to get that deal again. 

     

    • #1
  2. Bob Thompson Member
    Bob Thompson
    @BobThompson

    iWe: The 30 year-fixed-rate-mortgage is one of America’s secret weapons, because it makes inflation an ally of the homeowner who locks in a low rate, and ends up paying a decreasing share of their income toward their mortgage as the years pass. In the entire world, only the United States and France (!) have 30 year fixed-rate mortgages. 

    The changes in the structure of financial institutions in the United States over the last 60 years has been just as drastic as the changes in the structure of our culture. Just as what we think of as the cultural institutions purpose as serving the common people has vanished so has the purpose served by the banking institutions. 

    The decade of the seventies, with its inflation and rising rates, caused drastic changes in our financial structure. A number of technological and business innovation events  in this period changed everything about banking and lending operations. That entire business went from operations based on manual labor to computer based automation. Legislative actions changed what services different financial institutions were allowed to offer. Savings and Loans  and Mutual Savings Banks mostly failed and disappeared. Commercial banks and Credit Unions picked up the mortgage lending business and the American form of banking enterprise went from a balance of control distributed between state and federal charters and regulation to one where almost all banking is control by the Federal Reserve and a few large commercial banks that operate nationally and even internationally.  The continued existence of 30 year-fixed-rate-mortgages today is very surprising and even amazing. 

    Our culture is divided between rural and urban but our banking, which should be distributed in a way to support the business of the people, does not match that culture at all.  We are beginning to see why things are turning this way. Fixed-term mortgages won’t be available for the common people  for much longer if the pattern continues. Neither will commercial lending for small businesses.

    • #2
  3. Bryan G. Stephens Thatcher
    Bryan G. Stephens
    @BryanGStephens

    Bob Thompson (View Comment):
    ixed-term mortgages won’t be available for the common people  for much longer if the pattern continues. Neither will commercial lending for small businesses.

    That is a scary thought.

    • #3
  4. cdor Member
    cdor
    @cdor

    I have only owned one house. I bought it in 1981. The 30-year home mortgage was 143/4%. I will type it out…fourteen and three-quarters percent. After about six years of the Reagan Presidency, I was able to refinance to a 15-year 7% rate. I made double payments and paid the loan off in about 7 more years. We have done seven major remodel projects, several of which necessitated us to move out of the house for three or four months. At our age most people are “downsizing”. That’s not an issue for us–we never upsized!

    My point is that for decades and decades, even centuries, the home mortgage rate has been in the neighborhood of 5 to 8 percent. This last decade of “lowest rates evah” have been abnormal. Senior citizens who are living off of their savings need to be able to receive a decent interest earning on their money without investing in risky platforms. Inflation at 2 to 4% and being able to earn 4 to 5 % on three-year CDs with 30-year mortgages at 6 or 7 % is a stable economy. That’s my humble opinion.

    • #4
  5. Mad Gerald Coolidge
    Mad Gerald
    @Jose

    iWe: In the entire world, only the United States and France (!) have 30 year fixed-rate mortgages. 

    I had no idea.  What a blessing!

    • #5
  6. Full Size Tabby Member
    Full Size Tabby
    @FullSizeTabby

    iWe: Rising rates are also extremely damaging to real estate investors, who, unlike residential homeowners, do not have access to 30 year fixed rate financing.

    In my immediate neighborhood the effect is the opposite. The rising rates are helping the investor-funded real estate entities (at least relative to owner-occupiers). 

    Real estate investment entities attract investors  who provide capital, with which the investment entity makes cash offers to buy houses. No mortgages needed. The investors are eager because the underlying real estate is more likely to hold its value than are many of the stock market alternatives.

    Real estate investment entities have bought several of the houses recently for sale in my subdivision, and are now renting them out.  

    • #6
  7. cdor Member
    cdor
    @cdor

    Full Size Tabby (View Comment):

    iWe: Rising rates are also extremely damaging to real estate investors, who, unlike residential homeowners, do not have access to 30 year fixed rate financing.

    In my immediate neighborhood the effect is the opposite. The rising rates are helping the investor-funded real estate entities (at least relative to owner-occupiers).

    Real estate investment entities attract investors who provide capital, with which the investment entity makes cash offers to buy houses. No mortgages needed. The investors are eager because the underlying real estate is more likely to hold its value than are many of the stock market alternatives.

    Real estate investment entities have bought several of the houses recently for sale in my subdivision, and are now renting them out.

    Do you think it will have a positive effect on your subdivision property values if more and more homes are owned by corporate investors and the occupiers are all renters? You had better sell soon, it seems to me.

    • #7
  8. Bob Thompson Member
    Bob Thompson
    @BobThompson

    Full Size Tabby (View Comment):

    iWe: Rising rates are also extremely damaging to real estate investors, who, unlike residential homeowners, do not have access to 30 year fixed rate financing.

    In my immediate neighborhood the effect is the opposite. The rising rates are helping the investor-funded real estate entities (at least relative to owner-occupiers).

    Real estate investment entities attract investors who provide capital, with which the investment entity makes cash offers to buy houses. No mortgages needed. The investors are eager because the underlying real estate is more likely to hold its value than are many of the stock market alternatives.

    Real estate investment entities have bought several of the houses recently for sale in my subdivision, and are now renting them out.

    I owned five residential properties at one time but I didn’t really think of myself as a Realestate investor, just someone who owned and self-managed rental properties. I don’t think that type of investor is helped by rising mortgage rates but the rental property value will likely increase.

    • #8
  9. Full Size Tabby Member
    Full Size Tabby
    @FullSizeTabby

    A non-real-estate business model I am happy to see killed off by higher interest rates is the business model that instead of investing in research and development of new products, an investment company would buy companies that had developed new products but needed capital to push those products to market, exploit the daylights out of the new product without putting in any further development, and then just abandon the purchased company. To control costs, the first thing the investment company would do is fire the research and development staff at the purchased company that had developed the product. With costs quickly reduced, the investment company thereby earned high returns. The model depends on low interest rates for financing the purchase. Given the high failure rate for research and development of new products, it made sense for the investment company to buy mostly developed products rather than try to develop products on its own. But since the investment company knew nothing about the technology of the products of the purchased company, the investment company could not extend or expand the product line of the purchased company, and so the purchased company eventually died of atrophy. This business model was rough on the towns where those companies that actually developed new technology were located. 

    • #9
  10. Bryan G. Stephens Thatcher
    Bryan G. Stephens
    @BryanGStephens

    Full Size Tabby (View Comment):

    A non-real-estate business model I am happy to see killed off by higher interest rates is the business model that instead of investing in research and development of new products, an investment company would buy companies that had developed new products but needed capital to push those products to market, exploit the daylights out of the new product without putting in any further development, and then just abandon the purchased company. To control costs, the first thing the investment company would do is fire the research and development staff at the purchased company that had developed the product. With costs quickly reduced, the investment company thereby earned high returns. The model depends on low interest rates for financing the purchase. Given the high failure rate for research and development of new products, it made sense for the investment company to buy mostly developed products rather than try to develop products on its own. But since the investment company knew nothing about the technology of the products of the purchased company, the investment company could not extend or expand the product line of the purchased company, and so the purchased company eventually died of atrophy. This business model was rough on the towns where those companies that actually developed new technology were located.

    Sounds evil to me.

    • #10
  11. Zafar Member
    Zafar
    @Zafar

    Mad Gerald (View Comment):

    iWe: In the entire world, only the United States and France (!) have 30 year fixed-rate mortgages.

    I had no idea. What a blessing!

    So when interest rates went up, mortgages were subsidised by other borrowers?  And vice versa if they fell below the fixed rate?  How often did either of these situations happen?  Did it work out in the wash, or was there (I’m suspicious) a transfer of wealth from other borrowers to people with mortgages?

    • #11
  12. kedavis Coolidge
    kedavis
    @kedavis

    Bob Thompson (View Comment):

    Full Size Tabby (View Comment):

    iWe: Rising rates are also extremely damaging to real estate investors, who, unlike residential homeowners, do not have access to 30 year fixed rate financing.

    In my immediate neighborhood the effect is the opposite. The rising rates are helping the investor-funded real estate entities (at least relative to owner-occupiers).

    Real estate investment entities attract investors who provide capital, with which the investment entity makes cash offers to buy houses. No mortgages needed. The investors are eager because the underlying real estate is more likely to hold its value than are many of the stock market alternatives.

    Real estate investment entities have bought several of the houses recently for sale in my subdivision, and are now renting them out.

    I owned five residential properties at one time but I didn’t really think of myself as a Realestate investor, just someone who owned and self-managed rental properties. I don’t think that type of investor is helped by rising mortgage rates but the rental property value will likely increase.

    Don’t higher interest rates tend to LOWER home prices, because the interest means it costs more to buy?

    But the higher eventual monthly payments would allow home rental prices to go up.

    • #12
  13. Bob Thompson Member
    Bob Thompson
    @BobThompson

    kedavis (View Comment):

    Bob Thompson (View Comment):

    Full Size Tabby (View Comment):

    iWe: Rising rates are also extremely damaging to real estate investors, who, unlike residential homeowners, do not have access to 30 year fixed rate financing.

    In my immediate neighborhood the effect is the opposite. The rising rates are helping the investor-funded real estate entities (at least relative to owner-occupiers).

    Real estate investment entities attract investors who provide capital, with which the investment entity makes cash offers to buy houses. No mortgages needed. The investors are eager because the underlying real estate is more likely to hold its value than are many of the stock market alternatives.

    Real estate investment entities have bought several of the houses recently for sale in my subdivision, and are now renting them out.

    I owned five residential properties at one time but I didn’t really think of myself as a Realestate investor, just someone who owned and self-managed rental properties. I don’t think that type of investor is helped by rising mortgage rates but the rental property value will likely increase.

    Don’t higher interest rates tend to LOWER home prices, because the interest means it costs more to buy?

    Only for a short time when the higher rates are caused because of inflation. Usually you will get a reduction in home sales.  Home prices are affected by inflation but that is not the only factor. I have had several rentals and every one of them was initially bought as my residence so the loans I had were at the rate when I bought as owner-occupied. I owned 9 houses and sold 8 times took a small loss on one, kind of knew I would under the circumstances that made up for that.

    • #13
  14. kedavis Coolidge
    kedavis
    @kedavis

    Bob Thompson (View Comment):

    kedavis (View Comment):

    Bob Thompson (View Comment):

    Full Size Tabby (View Comment):

    iWe: Rising rates are also extremely damaging to real estate investors, who, unlike residential homeowners, do not have access to 30 year fixed rate financing.

    In my immediate neighborhood the effect is the opposite. The rising rates are helping the investor-funded real estate entities (at least relative to owner-occupiers).

    Real estate investment entities attract investors who provide capital, with which the investment entity makes cash offers to buy houses. No mortgages needed. The investors are eager because the underlying real estate is more likely to hold its value than are many of the stock market alternatives.

    Real estate investment entities have bought several of the houses recently for sale in my subdivision, and are now renting them out.

    I owned five residential properties at one time but I didn’t really think of myself as a Realestate investor, just someone who owned and self-managed rental properties. I don’t think that type of investor is helped by rising mortgage rates but the rental property value will likely increase.

    Don’t higher interest rates tend to LOWER home prices, because the interest means it costs more to buy?

    Only for a short time when the higher rates are caused because of inflation. Usually you will get a reduction in home sales. Home prices are affected by inflation but that is not the only factor. I have had several rentals and every one of them was initially bought as my residence so the loans I had were at the rate when I bought as owner-occupied. I owned 9 houses and sold 8 times took a small loss on one, kind of knew I would under the circumstances that made up for that.

    But everything goes into the final monthly payment, including property taxes etc.  Buying a home in an area with higher property taxes also affects how much of the actual house, someone can afford.  And that’s another reason why places like California want to be able to deduct their higher taxes from federal taxes, forcing other people in other states to make up the difference.

    • #14
  15. iWe Coolidge
    iWe
    @iWe

    Zafar (View Comment):

    Mad Gerald (View Comment):

    iWe: In the entire world, only the United States and France (!) have 30 year fixed-rate mortgages.

    I had no idea. What a blessing!

    So when interest rates went up, mortgages were subsidised by other borrowers? And vice versa if they fell below the fixed rate? How often did either of these situations happen? Did it work out in the wash, or was there (I’m suspicious) a transfer of wealth from other borrowers to people with mortgages?

    Not at all. The rates and costs are locked in at the time of the mortgage. Even for the lender. 

    • #15
  16. Bob Thompson Member
    Bob Thompson
    @BobThompson

    Zafar (View Comment):

    Mad Gerald (View Comment):

    iWe: In the entire world, only the United States and France (!) have 30 year fixed-rate mortgages.

    I had no idea. What a blessing!

    So when interest rates went up, mortgages were subsidised by other borrowers? And vice versa if they fell below the fixed rate? How often did either of these situations happen? Did it work out in the wash, or was there (I’m suspicious) a transfer of wealth from other borrowers to people with mortgages?

    Here in America, in most areas particularly urban, unless they have been destroyed like parts of Detroit, the homeowner profits regardless of loan rate fluctuations after a few years. It is true, that there are numerous ways in which wealth can transfer in these processes. Home price appreciation insures this and much of that is due to inflation but not all, some is just a rise in market valuation.

    • #16
  17. kedavis Coolidge
    kedavis
    @kedavis

    Bob Thompson (View Comment):

    Zafar (View Comment):

    Mad Gerald (View Comment):

    iWe: In the entire world, only the United States and France (!) have 30 year fixed-rate mortgages.

    I had no idea. What a blessing!

    So when interest rates went up, mortgages were subsidised by other borrowers? And vice versa if they fell below the fixed rate? How often did either of these situations happen? Did it work out in the wash, or was there (I’m suspicious) a transfer of wealth from other borrowers to people with mortgages?

    Here in America, in most areas particularly urban, unless they have been destroyed like parts of Detroit, the homeowner profits regardless of loan rate fluctuations after a few years. It is true, that there are numerous ways in which wealth can transfer in these processes. Home price appreciation insures this and much of that is due to inflation but not all, some is just a rise in market valuation.

    But that’s not “profit” unless they sell, and it’s probably still not “profit” unless they relocate and buy another home in an area with lower prices.  If they buy again where they are, everything they look at buying has probably increased in price too.

    Meanwhile, their taxes likely increase on the higher valuation.

    • #17
  18. Bob Thompson Member
    Bob Thompson
    @BobThompson

    kedavis (View Comment):

    Bob Thompson (View Comment):

    Zafar (View Comment):

    Mad Gerald (View Comment):

    iWe: In the entire world, only the United States and France (!) have 30 year fixed-rate mortgages.

    I had no idea. What a blessing!

    So when interest rates went up, mortgages were subsidised by other borrowers? And vice versa if they fell below the fixed rate? How often did either of these situations happen? Did it work out in the wash, or was there (I’m suspicious) a transfer of wealth from other borrowers to people with mortgages?

    Here in America, in most areas particularly urban, unless they have been destroyed like parts of Detroit, the homeowner profits regardless of loan rate fluctuations after a few years. It is true, that there are numerous ways in which wealth can transfer in these processes. Home price appreciation insures this and much of that is due to inflation but not all, some is just a rise in market valuation.

    But that’s not “profit” unless they sell, and it’s probably still not “profit” unless they relocate and buy another home in an area with lower prices. If they buy again where they are, everything they look at buying has probably increased in price too.

    Meanwhile, their taxes likely increase on the higher valuation.

    I lived in Arlington, Va where I first bought in 1968. Bought my second home in 1975, turned the first into a rental with positive cash flow. Bought my third in 1977. Turned the second into a rental. Each move was up but not by much and I had some good advances in my work. Bought our fourth in 1980, turned the third into rental. My wife had now started working part time in real estate sales since our children were getting older. And we were frugal, not living beyond our means, no debt except the mortgages and maybe a car loan. Our net worth was growing through this period so just a few years later we sent all three children through college without borrowing. My son only did 3 years then but he’s done now. I don’t think this could be done now.

    • #18
  19. Unsk Member
    Unsk
    @Unsk

    I think the FED is completely off it’s rocker.

    As far as the impact of the now 7 plus percent mortgage rates, I believe Housing prices will take a huge and sustained hit causing millions to lose their homes and many more to be substantially hurt financially unless the FED completely reverses course. At today’s housing prices, s 7 plus percent mortgage makes most homes really unaffordable at anything near todays prices.
    Twenty plus percent of homeowners have variable rate motgages and they are going to take s huge hit with mortgage expenses perhaps doubling. Many others who will be forced to sell because of a job loss or other financial duress likely will find that their equity will have vanished leaving them nothing.

    Jay Powell is talking a lot of unsupportable nonsense as to why he has raised interest rates so fast and so high.

    These higher interest rates will only make inflation worse, actually much worse, not better, forcing several times the current Federal Debt financing costs, drastically forcing down Federal revenue, and driving up welfare spending causing once again a huge deficit driven, excess money supply driven inflationary huge multi-trillion money print.

    Powell says the employment situation is still strong when the Household Survey had shown no new net full time jobs for six months on top of the scores of big employers shedding thousands of jobs.

    Powell says apartment rental rates are still strongly rising driving up inflation when in fact the most accurate surveys showing apartment rates sharply dropping.

    He says he has the tools to quickly repair the economic damage if his credit tightening overshoots,  but like most Progressive Bureaucrats he cannot understand that if he bankrupt hundreds of thousands of businesses those businesses may never come  back leaving a massive hole in the economy and a massive dent in the standard of living,

    Powell also forgets history that the last time the FED  drastically raised interest rates in a recession like we have now we ended up in the Great Depression.

    • #19
  20. ToryWarWriter Reagan
    ToryWarWriter
    @ToryWarWriter

    The fed raising rates has nothing to do with fighting inflation.

    It has to do with breaking the WEF and overseas Eurodollar.

    Those people want to kill billions and make us eat bugs.

    Dont believe me?  Read their books.

    • #20
  21. Red Herring Coolidge
    Red Herring
    @EHerring

    cdor (View Comment):

    I have only owned one house. I bought it in 1981. The 30-year home mortgage was 143/4%. I will type it out…fourteen and three-quarters percent. After about six years of the Reagan Presidency, I was able to refinance to a 15-year 7% rate. I made double payments and paid the loan off in about 7 more years. We have done seven major remodel projects, several of which necessitated us to move out of the house for three or four months. At our age most people are “downsizing”. That’s not an issue for us–we never upsized!

    My point is that for decades and decades, even centuries, the home mortgage rate has been in the neighborhood of 5 to 8 percent. This last decade of “lowest rates evah” have been abnormal. Senior citizens who are living off of their savings need to be able to receive a decent interest earning on their money without investing in risky platforms. Inflation at 2 to 4% and being able to earn 4 to 5 % on three-year CDs with 30-year mortgages at 6 or 7 % is a stable economy. That’s my humble opinion.

    Glad I refinanced for the lower rate and set it up to reduce the months needed to pay off the loan rather than to reduce monthly payments. I am mortgage free. I only have one car loan and it is interest-free for another two years.

    • #21
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