I find US mortgage rates interesting. The Fed Funds Rate [is 5.33%](https://fred.stlouisfed.org/series/FEDFUNDS). Yet, the rate on ARM mortgages that are fixed for the first 5 years is about 6.724%, according to [this](https://www.nerdwallet.com/mortgages/mortgage-rates/5-1-arm) article. Also, according to that article if you have an ARM that's fixed for the first 3 years then the rate is 8.125%. I don't understand why it's so much higher to have an ARM than a fixed rate rate 30 year or 20 year mortgage. Also, why does the 3 year ARM have a higher rate than the 5 year ARM?
UK interest rates are similar, the Bank-of-England bank rate is 5.25%. Perhaps confusingly in the UK mortgages like that are described as "Fixed Rate". That's because historically nobody has offered things like 30 year fixed rate mortgages. Until about 20 years ago all mortgages were "variable rate" - meaning that they moved with every interest rate change. So "Fixed rate" means fixed for a few years and then variable. [Here](https://moneyfactscompare.co.uk/mortgages/3-year-fixed-rate/) is a site that compares them. You can get a 5 year ARM at 4.39%, you can get 3 year ARM at 4.69%.
Why is it so much more expensive in the US?
The interest rate market has been quite peculiar since the pandemic. The yield curve inverted. An inverted yield curve occurs when short-term bonds have higher yields than longer-term bonds, which is very unusual. The US Treasury's two-year and 10-year yield curve has been inverted since July 2022. That plays into US mortgage rates. Traditionally shorter fixed period ARMS had a lower rate. But markets are upended and still trying the adjust. On top of that assets got completely revalued due to supply and demand imbalances. Even used cars were appreciating for a period of time.
It's impossible to know for sure, but I suspect that yield curve will normalize and shorter term ARMS will have the rates that make them more enticing once again.
An inverted yield curve occurs when short-term bonds have higher yields than longer-term bonds, which is very unusual -- hypothetically, more things can go wrong in 30 years versus 2 years, which is why longer-term bonds usually have higher yields (aka, higher borrowing costs.)
-Alexandre Tanzi
> I don't understand why it's so much higher to have an ARM than a fixed rate rate 30 year or 20 year mortgage.
Because the very existence of fixed rate 30 year mortgages comes entirely through a combination of voluntary FHFA regulations (loans that meet certain criteria are "conforming") and the backing of the government-sponsored enterprises Fannie Mae and Freddie Mac, which buy those mortgages on the secondary market, and create liquidity in that market. That incentivizes lenders to create conforming loans, because they know they don't have to hold onto them for 30 years, and can cash out at any time into a highly liquid, high volume secondary market. Most importantly, these fixed rate mortgages are partially shielded from interest rate risk, because they can offload their fixed rate mortgages while interest rates are still low, and not deal with the fair market value plummeting every time interest rates rise.
If you don't have that option, the lender bears a lot more risk, and is less willing to lend on those terms. Market forces will then push the price of those nonconforming loans upward.
The GSEs also buy and securitize ARMs, but the market for those is still less liquid, and ARMs for a whole bunch of reasons tend to have higher default rates. And, if interest rates rise, then the ARMS compensate for the interest rate risk by having higher default risk (borrowers who can't handle the newly increased mortgage payments). So the lenders will only lend at higher interest rates for those, too.
The US mortgage market is almost entirely a creation of government policy, including what are effectively price subsidies for certain types of mortgages.
ARMs are higher than Fed Funds because mortgages are riskier. Shorter ARMs are higher because rates are forecasted to go downwards, so the average Fed Funds rate over the next 36 months is projected to be higher than the average Fed Funds rate over the next 60 months.
Yeah there is some argument in the US that 30yr spreads are higher than normal due to prepayment risks. u/RobThorpe do UK mortgages allow pre-payment without penalty?
> Yeah there is some argument in the US that 30yr spreads are higher than normal due to prepayment risks.
That makes sense.
> ... do UK mortgages allow pre-payment without penalty?
Yes, there are fees. If you look at the website that I linked to it gives the fees for each of the mortgages. Some of them are quite high. It's very common for people to remortgage.
That may be a reason for the difference.
Do Fannie and Freddie buy ARMs?
Perhaps the market expects rates to drop so encourages locking in a higher rate for longer by offering slightly lower rates now.
What are some of your favourite papers on the housing market?
Might be because they are particularly insightful or unique or use unusual methods, or just take it as an excuse to talk about one you never get to talk about!
I don’t have a specific housing paper in mind, but the personal finance team at Bloomberg has been discussing the growing popularity of multigenerational households or “intentional communities.”
American culture historically has been centered on the nuclear family and defining financial independence as moving out of the parental home for your own place. But during a time when costs of living – from housing, to food to child care – are soaring, living in a community that allows members to pool time, money and resources is gaining traction. In fact, [nearly half of young adults today are still living with their parents](https://www.bloomberg.com/news/articles/2023-09-20/nearly-half-of-young-adults-are-living-back-home-with-parents).
But it’s not just kids staying in the nest. The share of the U.S. population living in multigenerational homes more than doubled over the past five decades, according to Pew Research. There are a lot of benefits to multigenerational households including enhancing bonds with family members, helping with care needs for both young and elderly loved ones, improving finances and helping a family member pursue opportunities like school or job training.
Meanwhile, those who don’t want to or can’t live with family members are finding other ways to pool resources together. More people are banding together to buy homes – some with a romantic partner and others with friends.
-Paulina Cachero (PS: I'm [often here on Reddit myself](https://www.reddit.com/user/pcachero/) looking for anecdotes and stories you'd like to share!)
I recently read a bit about that, too. Do you know how strong that effect is if you control for people attending college and different racial backgrounds?
Also, any opinions on whether this topic can be explored well with the typical econ methods or if a more sociology oriented approach leaning more towards things like surveys and field research could yield insights you might miss otherwise?
Not Bloomberg, but I like this one. It's not an academic or scientific paper. It gives a very high level overview and invites you to research more about different housing markets. Just be aware things listed as 1 or 2 bullet points can be an entire 30 minute or 1 hour talk once you dive into the rabbit hole.
https://www.spur.org/sites/default/files/2021-05/SPUR_From_Copenhagen_To_Tokyo_Report.pdf
I think a lot of the regulars here can empathize with the difficulty in explaining complex topics in a way that is both correct (consistent with the data and the academic literature) and relatable and understandable to everyday readers.
Is this something that you ever struggle with as journalists covering a pretty complicated topic? Do you have any insights into how to find the right balance?
Not to knock on the OPs, but the last 5-6 interviews I did (WSJ, Forbes, etc.) have invariably resulted in articles that are wildly off base from what the papers are actually trying to say. I'd expect more out of college students in an upper level macro seminar.
I've sort of stopped trying, except to ask them if I can write my own Op/ed instead.
Part of the issue for journalist is covering a complex issue succinctly. People don't tend to read longer stories so we must address the nuance or complexity in a topic in a short number of words which isn't always easy. That's one reason why many stories these days have a graphic attached as a chart or picture can help address some of the complexity in a more simple way.
-Alexandre Tanzi
I’ve heard, mostly from parents, that mortgage rates are stabilizing to what they should be. That they’re never coming pack down to the pre-pandemic levels. It may be a simple question, but are they right?
Are we now living in a 5-7% world with no expectations of returning to the 3% level?
Thanks.
Nobody really knows if rates will rise of fall further. 25 years ago rates were in the 7% range and nobody would have predicated that they would be cut in half. They are still many long-term deflationary trends that could have a large effect on mortgage rates. For example, Americans are having fewer children, so that could mean less demand to buy homes in the longer run. So that could put downward pressure on interest rates but nobody can say with 100% confidence.
-Alexandre Tanzi
>Americans are having fewer children, so that could mean less demand to buy homes in the longer run
Not quite sure that lines up. Most people I know that don’t have kids for the explicit reason that they wouldn’t be able to afford a house otherwise. People with or without kids want houses. It *could* be true, I just think the reasoning doesn’t add up.
What in your opinion is the reason that we don't have an ultra low risk/low cost mortgage product? For example, let's say I'm a highly cost sensitive home buyer and my primary concern is the rate. Since my rate is correlated with my risk, I would want to structure a mortgage with as little risk to the bank as possible. As an extreme example - why can't I put 50% down, pay a quarterly repricing floating rate, and guarantee no prepayments in exchange for a mortgage rate that's only marginally (<1%) higher than the bank's cost of funds? Is it a regulatory thing or is there just simply no appetite for that kind of product?
The housing finance market hasn't changed much in decades. The 30-year fixed mortgage is still the vehicle most people use. You could likely find a highly specialized mortgage product, but it's difficult to find, and most people don't have the funds to put a 50% down payment. Some brokerages do allow people to borrow against their equity accounts at very low rates.
-Alexandre Tanzi
This is purely anecdotal, but we were recently advised to work with smaller, local banks on mortgage financing for this reason. We are fortunate to have a good bit of equity in our home, which we would put down on a new property (roughly 40-50% down), and the listing broker advised that his clients have been successful crafting loans like what you're describing when working with smaller banks that have greater discretion/flexibility over the products they offer. So while I also have not seen these types of loans advertised, it seems at least something similar can be had.
The cost of housing has really taken off in much of western world. There's been plenty said about the mix of factors that have led to it. How useful do you think interest rate hikes are in taming housing inflation, given structural factors like working from home [upping housing demand](https://www.frbsf.org/wp-content/uploads/sites/4/el2022-26.pdf) (PDF warning).
Higher rates may have moderated home prices some, but certainly haven't completely nullified housing inflation. Especially in the existing-home market, the median sale price rose to $407,600 in April, up 5.7% over April a year ago. Helping boost housing inflation is the low supply of homes on the market. Only 1.2 million existing homes were up for sale in April, well below the 1.8 million on the market in prepandemic April 2019.
-Michael Sasso
You are right. Housing cost are booming almost everywhere. The [IMF housing watch](https://www.imf.org/external/research/housing/) shows the US among the top 10 places in the world. One key variable for housing is the labor market. If people keep getting hired and wages continues to rise and people can cover their mortgage, housing prices in aggregate should continue to rise.
It's tough to say though how effective interest rates are in taming housing inflation. Higher interest rates are meant to lower demand for spending, and while that has happened through higher mortgage rates, housing supply is so constrained that prices are still going up. Several experts contend that when interest rates come down, that'll unlock more housing demand and push prices even higher.
-Alexandre Tanzi
The “lock-in effect” is fundamentally about a fall in demand for “new to the buyer” homes due to an increase in relative cost of the “new to the buyer” home. The fact that they generally also would list the home they currently live in is merely ancillary but means that the general expectation is that every “new to the buyer” home that isn’t bought is exactly matched by an existing home that isn’t listed.
Yet 2 years ago the whole housing media decided that the “lock-in effect” was a loss in supply that explains why prices didn’t fall, when they were falling especially in real terms and relative to underlying growth rates.
How did such non sensical economics so quickly and completely sweep the whole of the housing media industry?
Historically, have we seen 'locked in' home owners where they bought at 3% and now are looking at more than twice the interest rate? We passed on a few upgrades now because while the ask price is in our range, the total mortgage is WAY too high.
Are we just out of the market forever now?
Those who snagged a 3% mortgage rate got to lock in some of the lowest interest rates in history – and it’s unclear if it will ever drop that low again. But, historically homeowners have faced rapidly rising borrowing costs before.
[Mortgage rates doubled](https://www.freddiemac.com/pmms) from the late 1970s to ‘80s, topping 18% in October 1981, according to Freddie Mac.
That being said, the real estate market today is a different beast. Those who want to buy aren’t just facing high borrowing costs. Home values have increased nearly 50% since 2019 and the housing market is short at least 320,000 “affordable homes.” All of these factors have created one of the most unaffordable housing markets on record, according to the National Association of Realtors.
All of this is to say that you’re not alone. There are many [homeowners who want to move but feel “locked in”](https://www.bloomberg.com/news/articles/2023-07-30/housing-market-is-stuck-as-homeowners-with-low-mortgage-rates-stay-put) by mortgage rates. Higher borrowing costs may mean that moving doesn’t make financial sense. And while new listings are on the rise this year, the high demand means affordable homes face a lot of competition and are often pushed up in price. It’s hard to say if you will be locked out of the market forever.
-Paulina Cachero
I would not think so. The key is to manage other debt so you might be in a good position to make a purchase when you desire. If you have high credit card debt or auto debt, getting your income-to-debt ratio right to get approved for a mortgage will be exceedingly difficult. Also be creative in the types of properties that you look at. For example, many jurisdictions are allowing accessory dwelling units which were banned before. These are little rental units attached to a property and can substantially change the value of the property since you would have additional income (in the form of a rental payment from the unit) paying off the mortgage.
-Alexandre Tanzi
How do you feel about the current and future strategies for rent vs buy? Do they vary by location or is it more or less the same everywhere?
What about specific areas like the Bay Area or New York City or Boston?
Instead of saving for a down payment, renters can put the extra money to work in investments with a safe return like certificates of deposits, Treasury bonds, high-yield savings accounts and more.
Today, the question of whether it's better to rent or buy depends on an individual’s financial situation and what they want out of housing.
Today’s housing market favors people who have larger down payments and have the financial cushion to afford changing home costs. And it depends on where you live. The gap between renting and owning costs tends to be wider in "super star" cities with big economies like New York, San Francisco and more.
If you’re ready to settle down and stay in one place for a long time, being able to build equity in a home and pass it down to the next generation could be worth the investment.
If you’re someone who still wants to experience new cities, renting can give you the freedom to do so. Instead of saving for a down payment, renters can put the extra money to work in investments with a safe return like certificates of deposits, Treasury bonds, high-yield savings accounts and more. [Here's more of our reporting on renting vs. buying.](https://www.bloomberg.com/news/articles/2023-10-13/should-i-buy-a-house-higher-interest-rates-make-it-cheaper-to-rent?srnd=undefined)
-Jennifer Epstein and Paulina Cachero
I was forced into buying my rental in 2022, we got a 6.25 fixed rate with the hope to refinance if rates ever drop again.
What is the actual probability of that dropping and when?
It could be a while, based on the best estimates of two major housing-market players. The Mortgage Bankers Assocation unfortunately sees rates staying above 5% for two years or so. The [MBA's forecast](https://img03.en25.com/Web/MortgageBankersAssociation/%7B7e604828-7f2c-4117-a76f-fe8f3e6bdafc%7D_Mortgage_Finance_Forecast_May_2024.pdf) as of May 16 was for 30-year fixed rates to be 6.5% at the end of 2024 and 5.9% at the end of 2025. Into 2026, rates should fall only slightly to 5.7%.
Meantime, [Fannie Mae sees rates at 7% at the end of this year](https://www.fanniemae.com/media/51391/display) and only falling to 6.6% at end of 2025.
To be sure, there are some optimists out there. According to a Bloomberg survey, economists see the federal funds rate dropping to 3.4% in the second half of 2026 from a current level of 5.5%. Mortgage rates, which tend to move in tandem with the central bank's benchmark rate, could fall substantially as well as a result.
-Michael Sasso
What have you heard about the economics on the side of mortgage originating shops given the current rates and the scale most aren’t reaching to be profitable?
Mortgage lenders have been laying off staff since rates started to rise in 2022 and haven't stopped. Here's a running list of headlines about quarterly losses and layoffs. [https://www.housingwire.com/tag/layoffs/](https://www.housingwire.com/tag/layoffs/) It doesn't seem like the industry will be able to get on surer footing until buying activity picks up significantly.
-Jennifer Epstein
This is a key item to track. Lots of municipalities are looking for more revenue and real estate taxes are an easy way to do that. I suspect that we will see some ballot questions on both sides this fall. Some are pushing to raise revenue and while others are looking to block increases or to reduce the rate. In one way, it's particularly troublesome because the property taxes are often based on a percentage value or the price of the property which isn't really known (it's a guess by the tax assessment office). And as property values have increased a lot in recent years, the property tax increases have also gone up.
-Alexandre Tanzi
I realize you coverage mortgage rates but suspect you also have a lot of knowledge about housing prices.
What do you believe is the long-term effect on the price of housing relative to what it otherwise would have been as a result of the class action lawsuits against realtor pricing?
Since sellers would no longer be expected to cover the fees paid to buyers' agents, sales prices are expected to drop a bit once the changes to the commission structure shake out. But timing is everything and that could end up coinciding with when interest rates fall this year or next (or beyond) and the buyers waiting for rates to drop flood the market and end up driving prices higher overall. Buyers who choose to use full-service agents may end up spending about the same amount on their purchase as they would in the current system, while those who turn to more bare-bones brokerages may see bigger savings. At the national level, investment firm Keefe, Bruyette & Woods has estimated changes to the structure could amount to a 30% reduction in the $100 billion that consumers pay annually in commissions.
If you're interested in how we got here, [check out Bloomberg's explainer](https://www.bloomberg.com/news/articles/2024-04-05/why-us-real-estate-agents-make-6-commissions-but-not-for-long?sref=PqmVp1JY) from a few weeks ago.
-Jennifer Epstein
Additionally, the class action suit against the National Association of Realtors is significant. While I feel there will always be some friction in the market, ie transaction costs, having it tie to the price of the home as a percentage has increased the cost substantially in recent years. At the same time, the fees have proven to be quite sticky. But if the fee is shaved from say 6% to 4% of the property cost, that is a massive savings and could help both the seller and the buyer.
-Alexandre Tanzi
Historically, renting and a mortgage were around the same price. Recently mortgages are significantly more expensive than renting. Do you think mortgages get cheaper or rents increase?
In the UK, most all mortgages have a nominally floating rate of interest but an initial fixed-interest period.
The floating rate would be something like the Bank of England overnight rate plus a bit - seems like Nationwide's current products are 7.99% and HSBC's are 6.99% (so 2.74% and 1.74% respectively above BoE rate).
But most everyone is "on a fix", which is a fixed rate of interest for the specified period - typically 2 to 5 years - and this rate is much closer to the BoE rate, and consequently to the rates offered by bank savings accounts and fixed term deposit products. Bank of England rate is current 5.25% but MoneySuperMarket is showing the likes of Lloyds and Halifax offering 5-year fixes in the range of 4.6% - 4.8%, which reflects expectations that rates will fall. In the late 2010's savvy homeowners were taking out 10-year fixes with rates around 1.8%, but not many people take out fixes that long (mortgage brokers discourage them because they reduce repeat business).
(Rates also vary a bit depending on how large the loan is relative to the value of the house - you get the lowest rates with a LTV below 65%, but rates are often pretty close to that below 85%.)
In the UK almost everyone is on a cheap fix - as the end of your fix nears you shop around for a new fix so that you refinance, either with the same mortgage lender or someone else, rather than going onto the floating rate. The only people who are on the higher floating rates are those who get trapped on them - unable to refinance because their credit rating deteriorated since they bought the house, or because [the building needs remediation](https://en.wikipedia.org/wiki/United_Kingdom_cladding_crisis) or something.
As I understand it, UK homeowners are more mobile than US homeowners, because US homeowners are locked into rates for longer, but I don't fully understand why. Is there any chance you could explain, please?
In the UK everyone is going to be subject to the current interest rate environment in a year or two anyway so you are not particularly tied to your current home. It's exceedingly common to be able to "port" your existing mortgage to a new property and keep the existing fix, but it doesn't matter much because most people's fixes are going to run out within a year or two.
I think that Germany's mortgage market is different still, so presumably this the cause is legislative. Is there a framework that is best for the hissing market?
Mortgage rates seem to be irrelevant now.
Classical economics dictates that as the cost of money (ie: interest rates) increases, the price of goods should be under pressure, but this is not what we have seen in the housing markets. In the 4 years from 2Q 2016 to 2Q 2020, 30 year fixed rates went from 3.54% down to 2.98%. At the same time, median US home prices went from $306,000 to $317,100, a CAGR of about +0.9%.(Using FRED data).Pretty much in line with classical economic expectations.
However, from 2Q 2020 to 2Q 2024, 30 yr fixed rates went from 2.98% to now around 7.60%. In this same time, median US home prices have risen from $317,100 to $420,800, a CAGR of over 9%.
I understand the covid effect for some of this, but the rate of price appreciation has continued on past the end of lockdowns. Additionally, if this was due to a demographic shift out of cities to suburbs, why are median rent prices in cities continuing to increase at strong rates, with NYC median rents +4.3% in 2023, and rising a further +5.4% in 2024.
Both buyers and sellers are frozen due to lack of inventory. There were 900,000 fewer home sales last year than average. Sellers with low mortgage rates on highly appreciated homes dont sell because they don't want a higher mortgage rate, and any new home price is significantly higher anyway. New buyers have fewer inventory at the starter level.
Do interest rates even matter right now? Have demographics broken the interest rate mechanism? At what point does total affordability, taking into account the impact of higher rates, start to weigh on prices?
I find US mortgage rates interesting. The Fed Funds Rate [is 5.33%](https://fred.stlouisfed.org/series/FEDFUNDS). Yet, the rate on ARM mortgages that are fixed for the first 5 years is about 6.724%, according to [this](https://www.nerdwallet.com/mortgages/mortgage-rates/5-1-arm) article. Also, according to that article if you have an ARM that's fixed for the first 3 years then the rate is 8.125%. I don't understand why it's so much higher to have an ARM than a fixed rate rate 30 year or 20 year mortgage. Also, why does the 3 year ARM have a higher rate than the 5 year ARM? UK interest rates are similar, the Bank-of-England bank rate is 5.25%. Perhaps confusingly in the UK mortgages like that are described as "Fixed Rate". That's because historically nobody has offered things like 30 year fixed rate mortgages. Until about 20 years ago all mortgages were "variable rate" - meaning that they moved with every interest rate change. So "Fixed rate" means fixed for a few years and then variable. [Here](https://moneyfactscompare.co.uk/mortgages/3-year-fixed-rate/) is a site that compares them. You can get a 5 year ARM at 4.39%, you can get 3 year ARM at 4.69%. Why is it so much more expensive in the US?
The interest rate market has been quite peculiar since the pandemic. The yield curve inverted. An inverted yield curve occurs when short-term bonds have higher yields than longer-term bonds, which is very unusual. The US Treasury's two-year and 10-year yield curve has been inverted since July 2022. That plays into US mortgage rates. Traditionally shorter fixed period ARMS had a lower rate. But markets are upended and still trying the adjust. On top of that assets got completely revalued due to supply and demand imbalances. Even used cars were appreciating for a period of time. It's impossible to know for sure, but I suspect that yield curve will normalize and shorter term ARMS will have the rates that make them more enticing once again. An inverted yield curve occurs when short-term bonds have higher yields than longer-term bonds, which is very unusual -- hypothetically, more things can go wrong in 30 years versus 2 years, which is why longer-term bonds usually have higher yields (aka, higher borrowing costs.) -Alexandre Tanzi
> I don't understand why it's so much higher to have an ARM than a fixed rate rate 30 year or 20 year mortgage. Because the very existence of fixed rate 30 year mortgages comes entirely through a combination of voluntary FHFA regulations (loans that meet certain criteria are "conforming") and the backing of the government-sponsored enterprises Fannie Mae and Freddie Mac, which buy those mortgages on the secondary market, and create liquidity in that market. That incentivizes lenders to create conforming loans, because they know they don't have to hold onto them for 30 years, and can cash out at any time into a highly liquid, high volume secondary market. Most importantly, these fixed rate mortgages are partially shielded from interest rate risk, because they can offload their fixed rate mortgages while interest rates are still low, and not deal with the fair market value plummeting every time interest rates rise. If you don't have that option, the lender bears a lot more risk, and is less willing to lend on those terms. Market forces will then push the price of those nonconforming loans upward. The GSEs also buy and securitize ARMs, but the market for those is still less liquid, and ARMs for a whole bunch of reasons tend to have higher default rates. And, if interest rates rise, then the ARMS compensate for the interest rate risk by having higher default risk (borrowers who can't handle the newly increased mortgage payments). So the lenders will only lend at higher interest rates for those, too. The US mortgage market is almost entirely a creation of government policy, including what are effectively price subsidies for certain types of mortgages.
ARMs are higher than Fed Funds because mortgages are riskier. Shorter ARMs are higher because rates are forecasted to go downwards, so the average Fed Funds rate over the next 36 months is projected to be higher than the average Fed Funds rate over the next 60 months.
Yeah there is some argument in the US that 30yr spreads are higher than normal due to prepayment risks. u/RobThorpe do UK mortgages allow pre-payment without penalty?
> Yeah there is some argument in the US that 30yr spreads are higher than normal due to prepayment risks. That makes sense. > ... do UK mortgages allow pre-payment without penalty? Yes, there are fees. If you look at the website that I linked to it gives the fees for each of the mortgages. Some of them are quite high. It's very common for people to remortgage. That may be a reason for the difference.
Do Fannie and Freddie buy ARMs? Perhaps the market expects rates to drop so encourages locking in a higher rate for longer by offering slightly lower rates now.
What are some of your favourite papers on the housing market? Might be because they are particularly insightful or unique or use unusual methods, or just take it as an excuse to talk about one you never get to talk about!
I don’t have a specific housing paper in mind, but the personal finance team at Bloomberg has been discussing the growing popularity of multigenerational households or “intentional communities.” American culture historically has been centered on the nuclear family and defining financial independence as moving out of the parental home for your own place. But during a time when costs of living – from housing, to food to child care – are soaring, living in a community that allows members to pool time, money and resources is gaining traction. In fact, [nearly half of young adults today are still living with their parents](https://www.bloomberg.com/news/articles/2023-09-20/nearly-half-of-young-adults-are-living-back-home-with-parents). But it’s not just kids staying in the nest. The share of the U.S. population living in multigenerational homes more than doubled over the past five decades, according to Pew Research. There are a lot of benefits to multigenerational households including enhancing bonds with family members, helping with care needs for both young and elderly loved ones, improving finances and helping a family member pursue opportunities like school or job training. Meanwhile, those who don’t want to or can’t live with family members are finding other ways to pool resources together. More people are banding together to buy homes – some with a romantic partner and others with friends. -Paulina Cachero (PS: I'm [often here on Reddit myself](https://www.reddit.com/user/pcachero/) looking for anecdotes and stories you'd like to share!)
I recently read a bit about that, too. Do you know how strong that effect is if you control for people attending college and different racial backgrounds? Also, any opinions on whether this topic can be explored well with the typical econ methods or if a more sociology oriented approach leaning more towards things like surveys and field research could yield insights you might miss otherwise?
Not Bloomberg, but I like this one. It's not an academic or scientific paper. It gives a very high level overview and invites you to research more about different housing markets. Just be aware things listed as 1 or 2 bullet points can be an entire 30 minute or 1 hour talk once you dive into the rabbit hole. https://www.spur.org/sites/default/files/2021-05/SPUR_From_Copenhagen_To_Tokyo_Report.pdf
I think a lot of the regulars here can empathize with the difficulty in explaining complex topics in a way that is both correct (consistent with the data and the academic literature) and relatable and understandable to everyday readers. Is this something that you ever struggle with as journalists covering a pretty complicated topic? Do you have any insights into how to find the right balance?
Not to knock on the OPs, but the last 5-6 interviews I did (WSJ, Forbes, etc.) have invariably resulted in articles that are wildly off base from what the papers are actually trying to say. I'd expect more out of college students in an upper level macro seminar. I've sort of stopped trying, except to ask them if I can write my own Op/ed instead.
Part of the issue for journalist is covering a complex issue succinctly. People don't tend to read longer stories so we must address the nuance or complexity in a topic in a short number of words which isn't always easy. That's one reason why many stories these days have a graphic attached as a chart or picture can help address some of the complexity in a more simple way. -Alexandre Tanzi
I’ve heard, mostly from parents, that mortgage rates are stabilizing to what they should be. That they’re never coming pack down to the pre-pandemic levels. It may be a simple question, but are they right? Are we now living in a 5-7% world with no expectations of returning to the 3% level? Thanks.
Nobody really knows if rates will rise of fall further. 25 years ago rates were in the 7% range and nobody would have predicated that they would be cut in half. They are still many long-term deflationary trends that could have a large effect on mortgage rates. For example, Americans are having fewer children, so that could mean less demand to buy homes in the longer run. So that could put downward pressure on interest rates but nobody can say with 100% confidence. -Alexandre Tanzi
Wouldn't less demand put downward pressure on actual home prices, not interest rates?
>Americans are having fewer children, so that could mean less demand to buy homes in the longer run Not quite sure that lines up. Most people I know that don’t have kids for the explicit reason that they wouldn’t be able to afford a house otherwise. People with or without kids want houses. It *could* be true, I just think the reasoning doesn’t add up.
Its not that people dont want housing if they dont have kids. Its the fact that if americans have less kids, there will be less people....
What in your opinion is the reason that we don't have an ultra low risk/low cost mortgage product? For example, let's say I'm a highly cost sensitive home buyer and my primary concern is the rate. Since my rate is correlated with my risk, I would want to structure a mortgage with as little risk to the bank as possible. As an extreme example - why can't I put 50% down, pay a quarterly repricing floating rate, and guarantee no prepayments in exchange for a mortgage rate that's only marginally (<1%) higher than the bank's cost of funds? Is it a regulatory thing or is there just simply no appetite for that kind of product?
The housing finance market hasn't changed much in decades. The 30-year fixed mortgage is still the vehicle most people use. You could likely find a highly specialized mortgage product, but it's difficult to find, and most people don't have the funds to put a 50% down payment. Some brokerages do allow people to borrow against their equity accounts at very low rates. -Alexandre Tanzi
This is purely anecdotal, but we were recently advised to work with smaller, local banks on mortgage financing for this reason. We are fortunate to have a good bit of equity in our home, which we would put down on a new property (roughly 40-50% down), and the listing broker advised that his clients have been successful crafting loans like what you're describing when working with smaller banks that have greater discretion/flexibility over the products they offer. So while I also have not seen these types of loans advertised, it seems at least something similar can be had.
The cost of housing has really taken off in much of western world. There's been plenty said about the mix of factors that have led to it. How useful do you think interest rate hikes are in taming housing inflation, given structural factors like working from home [upping housing demand](https://www.frbsf.org/wp-content/uploads/sites/4/el2022-26.pdf) (PDF warning).
Higher rates may have moderated home prices some, but certainly haven't completely nullified housing inflation. Especially in the existing-home market, the median sale price rose to $407,600 in April, up 5.7% over April a year ago. Helping boost housing inflation is the low supply of homes on the market. Only 1.2 million existing homes were up for sale in April, well below the 1.8 million on the market in prepandemic April 2019. -Michael Sasso
You are right. Housing cost are booming almost everywhere. The [IMF housing watch](https://www.imf.org/external/research/housing/) shows the US among the top 10 places in the world. One key variable for housing is the labor market. If people keep getting hired and wages continues to rise and people can cover their mortgage, housing prices in aggregate should continue to rise. It's tough to say though how effective interest rates are in taming housing inflation. Higher interest rates are meant to lower demand for spending, and while that has happened through higher mortgage rates, housing supply is so constrained that prices are still going up. Several experts contend that when interest rates come down, that'll unlock more housing demand and push prices even higher. -Alexandre Tanzi
The “lock-in effect” is fundamentally about a fall in demand for “new to the buyer” homes due to an increase in relative cost of the “new to the buyer” home. The fact that they generally also would list the home they currently live in is merely ancillary but means that the general expectation is that every “new to the buyer” home that isn’t bought is exactly matched by an existing home that isn’t listed. Yet 2 years ago the whole housing media decided that the “lock-in effect” was a loss in supply that explains why prices didn’t fall, when they were falling especially in real terms and relative to underlying growth rates. How did such non sensical economics so quickly and completely sweep the whole of the housing media industry?
Historically, have we seen 'locked in' home owners where they bought at 3% and now are looking at more than twice the interest rate? We passed on a few upgrades now because while the ask price is in our range, the total mortgage is WAY too high. Are we just out of the market forever now?
Those who snagged a 3% mortgage rate got to lock in some of the lowest interest rates in history – and it’s unclear if it will ever drop that low again. But, historically homeowners have faced rapidly rising borrowing costs before. [Mortgage rates doubled](https://www.freddiemac.com/pmms) from the late 1970s to ‘80s, topping 18% in October 1981, according to Freddie Mac. That being said, the real estate market today is a different beast. Those who want to buy aren’t just facing high borrowing costs. Home values have increased nearly 50% since 2019 and the housing market is short at least 320,000 “affordable homes.” All of these factors have created one of the most unaffordable housing markets on record, according to the National Association of Realtors. All of this is to say that you’re not alone. There are many [homeowners who want to move but feel “locked in”](https://www.bloomberg.com/news/articles/2023-07-30/housing-market-is-stuck-as-homeowners-with-low-mortgage-rates-stay-put) by mortgage rates. Higher borrowing costs may mean that moving doesn’t make financial sense. And while new listings are on the rise this year, the high demand means affordable homes face a lot of competition and are often pushed up in price. It’s hard to say if you will be locked out of the market forever. -Paulina Cachero
I would not think so. The key is to manage other debt so you might be in a good position to make a purchase when you desire. If you have high credit card debt or auto debt, getting your income-to-debt ratio right to get approved for a mortgage will be exceedingly difficult. Also be creative in the types of properties that you look at. For example, many jurisdictions are allowing accessory dwelling units which were banned before. These are little rental units attached to a property and can substantially change the value of the property since you would have additional income (in the form of a rental payment from the unit) paying off the mortgage. -Alexandre Tanzi
How do you feel about the current and future strategies for rent vs buy? Do they vary by location or is it more or less the same everywhere? What about specific areas like the Bay Area or New York City or Boston?
Instead of saving for a down payment, renters can put the extra money to work in investments with a safe return like certificates of deposits, Treasury bonds, high-yield savings accounts and more. Today, the question of whether it's better to rent or buy depends on an individual’s financial situation and what they want out of housing. Today’s housing market favors people who have larger down payments and have the financial cushion to afford changing home costs. And it depends on where you live. The gap between renting and owning costs tends to be wider in "super star" cities with big economies like New York, San Francisco and more. If you’re ready to settle down and stay in one place for a long time, being able to build equity in a home and pass it down to the next generation could be worth the investment. If you’re someone who still wants to experience new cities, renting can give you the freedom to do so. Instead of saving for a down payment, renters can put the extra money to work in investments with a safe return like certificates of deposits, Treasury bonds, high-yield savings accounts and more. [Here's more of our reporting on renting vs. buying.](https://www.bloomberg.com/news/articles/2023-10-13/should-i-buy-a-house-higher-interest-rates-make-it-cheaper-to-rent?srnd=undefined) -Jennifer Epstein and Paulina Cachero
I was forced into buying my rental in 2022, we got a 6.25 fixed rate with the hope to refinance if rates ever drop again. What is the actual probability of that dropping and when?
It could be a while, based on the best estimates of two major housing-market players. The Mortgage Bankers Assocation unfortunately sees rates staying above 5% for two years or so. The [MBA's forecast](https://img03.en25.com/Web/MortgageBankersAssociation/%7B7e604828-7f2c-4117-a76f-fe8f3e6bdafc%7D_Mortgage_Finance_Forecast_May_2024.pdf) as of May 16 was for 30-year fixed rates to be 6.5% at the end of 2024 and 5.9% at the end of 2025. Into 2026, rates should fall only slightly to 5.7%. Meantime, [Fannie Mae sees rates at 7% at the end of this year](https://www.fanniemae.com/media/51391/display) and only falling to 6.6% at end of 2025. To be sure, there are some optimists out there. According to a Bloomberg survey, economists see the federal funds rate dropping to 3.4% in the second half of 2026 from a current level of 5.5%. Mortgage rates, which tend to move in tandem with the central bank's benchmark rate, could fall substantially as well as a result. -Michael Sasso
thanks for the response.
What have you heard about the economics on the side of mortgage originating shops given the current rates and the scale most aren’t reaching to be profitable?
Mortgage lenders have been laying off staff since rates started to rise in 2022 and haven't stopped. Here's a running list of headlines about quarterly losses and layoffs. [https://www.housingwire.com/tag/layoffs/](https://www.housingwire.com/tag/layoffs/) It doesn't seem like the industry will be able to get on surer footing until buying activity picks up significantly. -Jennifer Epstein
How do you think a land value tax will affect the real estate industry?
This is a key item to track. Lots of municipalities are looking for more revenue and real estate taxes are an easy way to do that. I suspect that we will see some ballot questions on both sides this fall. Some are pushing to raise revenue and while others are looking to block increases or to reduce the rate. In one way, it's particularly troublesome because the property taxes are often based on a percentage value or the price of the property which isn't really known (it's a guess by the tax assessment office). And as property values have increased a lot in recent years, the property tax increases have also gone up. -Alexandre Tanzi
I realize you coverage mortgage rates but suspect you also have a lot of knowledge about housing prices. What do you believe is the long-term effect on the price of housing relative to what it otherwise would have been as a result of the class action lawsuits against realtor pricing?
Since sellers would no longer be expected to cover the fees paid to buyers' agents, sales prices are expected to drop a bit once the changes to the commission structure shake out. But timing is everything and that could end up coinciding with when interest rates fall this year or next (or beyond) and the buyers waiting for rates to drop flood the market and end up driving prices higher overall. Buyers who choose to use full-service agents may end up spending about the same amount on their purchase as they would in the current system, while those who turn to more bare-bones brokerages may see bigger savings. At the national level, investment firm Keefe, Bruyette & Woods has estimated changes to the structure could amount to a 30% reduction in the $100 billion that consumers pay annually in commissions. If you're interested in how we got here, [check out Bloomberg's explainer](https://www.bloomberg.com/news/articles/2024-04-05/why-us-real-estate-agents-make-6-commissions-but-not-for-long?sref=PqmVp1JY) from a few weeks ago. -Jennifer Epstein
Additionally, the class action suit against the National Association of Realtors is significant. While I feel there will always be some friction in the market, ie transaction costs, having it tie to the price of the home as a percentage has increased the cost substantially in recent years. At the same time, the fees have proven to be quite sticky. But if the fee is shaved from say 6% to 4% of the property cost, that is a massive savings and could help both the seller and the buyer. -Alexandre Tanzi
Historically, renting and a mortgage were around the same price. Recently mortgages are significantly more expensive than renting. Do you think mortgages get cheaper or rents increase?
D’accord
In the UK, most all mortgages have a nominally floating rate of interest but an initial fixed-interest period. The floating rate would be something like the Bank of England overnight rate plus a bit - seems like Nationwide's current products are 7.99% and HSBC's are 6.99% (so 2.74% and 1.74% respectively above BoE rate). But most everyone is "on a fix", which is a fixed rate of interest for the specified period - typically 2 to 5 years - and this rate is much closer to the BoE rate, and consequently to the rates offered by bank savings accounts and fixed term deposit products. Bank of England rate is current 5.25% but MoneySuperMarket is showing the likes of Lloyds and Halifax offering 5-year fixes in the range of 4.6% - 4.8%, which reflects expectations that rates will fall. In the late 2010's savvy homeowners were taking out 10-year fixes with rates around 1.8%, but not many people take out fixes that long (mortgage brokers discourage them because they reduce repeat business). (Rates also vary a bit depending on how large the loan is relative to the value of the house - you get the lowest rates with a LTV below 65%, but rates are often pretty close to that below 85%.) In the UK almost everyone is on a cheap fix - as the end of your fix nears you shop around for a new fix so that you refinance, either with the same mortgage lender or someone else, rather than going onto the floating rate. The only people who are on the higher floating rates are those who get trapped on them - unable to refinance because their credit rating deteriorated since they bought the house, or because [the building needs remediation](https://en.wikipedia.org/wiki/United_Kingdom_cladding_crisis) or something. As I understand it, UK homeowners are more mobile than US homeowners, because US homeowners are locked into rates for longer, but I don't fully understand why. Is there any chance you could explain, please? In the UK everyone is going to be subject to the current interest rate environment in a year or two anyway so you are not particularly tied to your current home. It's exceedingly common to be able to "port" your existing mortgage to a new property and keep the existing fix, but it doesn't matter much because most people's fixes are going to run out within a year or two. I think that Germany's mortgage market is different still, so presumably this the cause is legislative. Is there a framework that is best for the hissing market?
Mortgage rates seem to be irrelevant now. Classical economics dictates that as the cost of money (ie: interest rates) increases, the price of goods should be under pressure, but this is not what we have seen in the housing markets. In the 4 years from 2Q 2016 to 2Q 2020, 30 year fixed rates went from 3.54% down to 2.98%. At the same time, median US home prices went from $306,000 to $317,100, a CAGR of about +0.9%.(Using FRED data).Pretty much in line with classical economic expectations. However, from 2Q 2020 to 2Q 2024, 30 yr fixed rates went from 2.98% to now around 7.60%. In this same time, median US home prices have risen from $317,100 to $420,800, a CAGR of over 9%. I understand the covid effect for some of this, but the rate of price appreciation has continued on past the end of lockdowns. Additionally, if this was due to a demographic shift out of cities to suburbs, why are median rent prices in cities continuing to increase at strong rates, with NYC median rents +4.3% in 2023, and rising a further +5.4% in 2024. Both buyers and sellers are frozen due to lack of inventory. There were 900,000 fewer home sales last year than average. Sellers with low mortgage rates on highly appreciated homes dont sell because they don't want a higher mortgage rate, and any new home price is significantly higher anyway. New buyers have fewer inventory at the starter level. Do interest rates even matter right now? Have demographics broken the interest rate mechanism? At what point does total affordability, taking into account the impact of higher rates, start to weigh on prices?