Inflation here? gas/grocery prices just continue to climb (2 Viewers)

[UncleTrvlingJim]

The problem as i see it, housing prices are SO inflated right now, that any one of a dozen factors could contribute to a sharp decline in housing prices. Supply, imo, being the main catalyst. If it costs $200/sq ft to build and $220/sq ft to buy existing today, you are rolling the dice that number will be same 5 years from now. ( supply being a) cost of materials to build and b) number of homes on market )

Crapshoot lol.

dont roll 7 on the come out. lol.

Agree, we aren't in a true bubble since it's normal supply and demand that driving up housing prices right now and not speculation... BUT, housing prices to income is getting seriously out of whack. The hope of course is that supply increases at an appropriate rate (and not a crash), and that rising interest rates cools demand down somewhat, causing an easing of price increases and maybe some modest price reductions.

Again, there are too many qualifying statements in the above, which means we've got raised risk.

 

[El Caliente]

Buying bacon is nuts right now

Try buying baby formula.

 

[guidomerkinsrules]

Try buying baby formula.

Yeah I’ve been sort of following that story
No thank you - can’t imagine what that would be like for parents who need formula and can’t find it. I’d go a bit batty

 

[Eeyore]

again, on the plus side, inflation makes managing our national debt better (of course, that's until the higher interest payments catch up to us, and assuming our economy grows at a pace to keep up with inflation).

The banks will get in trouble (housing bubble?) and we'll give them trillions to help them out.

Socialism for the banks. Capitalism for the poor.

 

[guidomerkinsrules]

The banks will get in trouble (housing bubble?) and we'll give them trillions to help them out.

Socialism for the banks. Capitalism for the poor.

Crapitalism

 

[DaveXA]

The banks will get in trouble (housing bubble?) and we'll give them trillions to help them out.

Socialism for the banks. Capitalism for the poor.

While I wouldn't say they won't still get in trouble, the problem for banks in the sub-prime crisis pre-2008 was they were lending tons of money people who shouldn't otherwise be borrowing money. They would underwrite no-doc loans and loans to people that were not properly vetted. Those sub-prime loans were then packaged into investment vehicles that were leveraged, often several times, and unwitting buyers didn't know that the mortgage backed loans were actually junk, so when home prices started going down, those mortgage backed securities lost a shirt ton of value and everyone in line got hammered. Had the banks not been bailed out, our country would look far, far different today.

Where we're at today, the banks aren't anywhere near as leveraged as they were back then, but that doesn't mean they won't have other issues. They'll suffer some in a downturn, but I don't expect them to be bailed out again. Who knows though. Could happen, I'd just say it's not likely.

 

[guidomerkinsrules]

While I wouldn't say they won't still get in trouble, the problem for banks in the sub-prime crisis pre-2008 was they were lending tons of money people who shouldn't otherwise be borrowing money. They would underwrite no-doc loans and loans to people that were not properly vetted. Those sub-prime loans were then packaged into investment vehicles that were leveraged, often several times, and unwitting buyers didn't know that the mortgage backed loans were actually junk, so when home prices started going down, those mortgage backed securities lost a shirt ton of value and everyone in line got hammered. Had the banks not been bailed out, our country would look far, far different today.
.

it wasn't just that they were lending to 'those' people - it's that the targeted them and often pressured them into really, really bad deals

 

[brandon8283]

So theoretically, if you believe that interest rates are only going to go up temporarily before going back down, and if you believe that home prices will not fall dramatically before your term is up, then an ARM is a logical choice to make. Those are two big assumptions, but not unreasonable.

Housing prices are driven by a large housing shortage, and it isn't likely to be alleviated in the next five years, so while they might fall some, there's a good chance that they won't fall that much.

However, this does introduce more risk into the system and from a policy level, we need to have a plan in place if it all falls apart again.

A lot more risk involved in the ARM to save a percentage point, even if you get one with a longer fix. The longer fix just makes it that much harder to predict where interest rates will be when it's adjustment time.

For example, right now, a 10/6 ARM is roughly 4.75%. A 30-year fixed is roughly 5.5%.

On a $200,000 30-year loan, after ten years, the ARM will have paid $86,638 in interest. The fixed will have paid $101,348, a difference of $14,709. Over ten years, that's an average of $1,470 per year more.

But if, rates continue to climb as you suggest, then when the ARM starts adjusting every 6 months, it gets really ugly really fast. Let's say in the first year the ARM adjusts to 6.5% The fixed rate is paying $7,561 in interest in year 11 of the mortgage. The ARM (which is now effectively a 20-year mortgage on $160,418 at 6.5% that adjusts every six months) is now paying $10,308. So in the first year of adjustment, the fixed rate has already made up almost $3,000 of the difference in the two loans. The fixed will catch up in just a few years and the ARM will be left in the dust. And that's with only one adjustment upward of 1%.

What if the rates are at 8%-10% by year 10? You may decide to refinance into a fixed rate (that would probably still be around 7% at best) and you're still ending up worse than the fixed. Plus you lose the closing costs for refinancing, which will also eat into any savings you had.

Unless you plan to aggressively pay off the house (or sell it) prior to the expiration of the fixed part of the ARM, there's just realistically no reason to get an ARM over a fixed, pretty much ever.

 

[DaveXA]

it wasn't just that they were lending to 'those' people - it's that the targeted them and often pressured them into really, really bad deals

Of course they did. I mean, it was in a lot of ways predatory lending.

That said, I was a minister who was self employed and when I bought my first home in 2003, I did so with a no doc loan because my income was so inconsistent from month to month. I never missed a payment at that time, but I really didn't have any business buying a $400k home on the income I had at that time. I sought the bank out when looking for a home at the time, but my situation was pretty unique.

 

[B4YOU]

A lot more risk involved in the ARM to save a percentage point, even if you get one with a longer fix. The longer fix just makes it that much harder to predict where interest rates will be when it's adjustment time.

For example, right now, a 10/6 ARM is roughly 4.75%. A 30-year fixed is roughly 5.5%.

On a $200,000 30-year loan, after ten years, the ARM will have paid $86,638 in interest. The fixed will have paid $101,348, a difference of $14,709. Over ten years, that's an average of $1,470 per year more.

But if, rates continue to climb as you suggest, then when the ARM starts adjusting every 6 months, it gets really ugly really fast. Let's say in the first year the ARM adjusts to 6.5% The fixed rate is paying $7,561 in interest in year 11 of the mortgage. The ARM (which is now effectively a 20-year mortgage on $160,418 at 6.5% that adjusts every six months) is now paying $10,308. So in the first year of adjustment, the fixed rate has already made up almost $3,000 of the difference in the two loans. The fixed will catch up in just a few years and the ARM will be left in the dust. And that's with only one adjustment upward of 1%.

What if the rates are at 8%-10% by year 10? You may decide to refinance into a fixed rate (that would probably still be around 7% at best) and you're still ending up worse than the fixed. Plus you lose the closing costs for refinancing, which will also eat into any savings you had.

Unless you plan to aggressively pay off the house (or sell it) prior to the expiration of the fixed part of the ARM, there's just realistically no reason to get an ARM over a fixed, pretty much ever.

Disagree on some points. An ARM is 1-1.25 less than a fixed rate right now. When buying 400-600k homes with minimal down, you are talking $300/mo difference. If you think this is just a short term spike in rates, then why lock in at 5.25. The rate difference and future refi cost doesn’t make sense for a fixed. I also don’t think we see rates in the 6.5-8 range and that rates over the last few decades have trended downward. A 5-yr ARM is fixed for the first five years and average length of homeownership is 7yrs in many markets. I would be taking that 1-1.25 for the first 5 years or 18k based on my example over a fixed rate today.

I think 95% of instances a fixed makes sense, but right now I would take an ARM.

 

[brandon8283]

Disagree on some points. An ARM is 1-1.25 less than a fixed rate right now. When buying 400-600k homes with minimal down, you are talking $300/mo difference. If you think this is just a short term spike in rates, then why lock in at 5.25. The rate difference and future refi cost doesn’t make sense for a fixed. I also don’t think we see rates in the 6.5-8 range and that rates over the last few decades have trended downward. A 5-yr ARM is fixed for the first five years and average length of homeownership is 7yrs in many markets. I would be taking that 1-1.25 for the first 5 years or 18k based on my example over a fixed rate today.

I think 95% of instances a fixed makes sense, but right now I would take an ARM.

Believing that this is a short-term spike is betting against history, however. Outside of the easy money times post-Great Recession and again post-COVID, historical rates have almost always been above 6%, and in the 80s, another time of runaway inflation similar to now, the rates were as high as 14%.

In recent history, interest rates were starting to creep back up from around 2013-2019, right around the time we were truly in full recovery from the Great Recession, before they crashed again from COVID.

It's VERY possible that this is not a short-term spike, but rather a return to where interest rates would have been if not for the Great Recession and COVID.

Mortgage Rates

See the mortgage rate a typical consumer might see in the most recent Primary Mortgage Market Survey, updated weekly. The PMMS is focused on conventional, conforming fully-amortizing home purchase loans for borrowers who put 20% down and have excellent credit.

www.freddiemac.com

 

[Eeyore]

While I wouldn't say they won't still get in trouble, the problem for banks in the sub-prime crisis pre-2008 was they were lending tons of money people who shouldn't otherwise be borrowing money. They would underwrite no-doc loans and loans to people that were not properly vetted. Those sub-prime loans were then packaged into investment vehicles that were leveraged, often several times, and unwitting buyers didn't know that the mortgage backed loans were actually junk, so when home prices started going down, those mortgage backed securities lost a shirt ton of value and everyone in line got hammered. Had the banks not been bailed out, our country would look far, far different today.

Where we're at today, the banks aren't anywhere near as leveraged as they were back then, but that doesn't mean they won't have other issues. They'll suffer some in a downturn, but I don't expect them to be bailed out again. Who knows though. Could happen, I'd just say it's not likely.

Could have used that same bailout money to erase the mortgage debt on behalf of the people in trouble and the banks would have ended up with the money anyway. Instead we gave the banks the money and the people still had the debt

 

[TheRealJRad]

Could have used that same bailout money to erase the mortgage debt on behalf of the people in trouble and the banks would have ended up with the money anyway. Instead we gave the banks the money and the people still had the debt

The people who were foreclosed on due to this understood why it had to be this way, it’s ok!


Big ol /s if that wasn’t obvious

 

[kizzy821]

Could have used that same bailout money to erase the mortgage debt on behalf of the people in trouble and the banks would have ended up with the money anyway. Instead we gave the banks the money and the people still had the debt

More proof that life is a racket.

They need us to either already be in debt or actively trying to get in debt (e.g longing for that new house, car or vacation)

If we're not in enough debt, then they need us to have some babies, go back to school or renovate our kitchens. Anything to get us on that list of debtors.

Trying to get OUT of debt is something else they ironically push.

Doesn't matter. It all works against us.

Debt, the desire to acquire things and the need to pay them off is what keeps our dumb arses waking up everyday and to going to work.

Look how mad some people got about unemployment and stimulus checks. "How dare you not WORK?! That's our purpose here on earth!"

A god damned racket.

 

[Eeyore]

The people who were foreclosed on due to this understood why it had to be this way, it’s ok!


Big ol /s if that wasn’t obvious

The banks that gave anybody with a pulse a loan understood the risk. It's ok if they they lose on the risk that they knowingly, took.