Homeowners in Irvine's Beacon Park face up to $14,400 in extra taxes

[Cornflakes]

If interest rate goes up housing prices will go down

I'll say this for the millionth time... this relationship is not proportional, housing prices do not drop enough to match the cost of the rise in interest rate.

For example, 30-yr fixed interest rates in 2006 were 6.5, now they are 3.5 (or less). A 2750-3000sft SFR in Irvine was probably around $1m in '06, now they are about $1.3m. Assuming 20% down, if interest rates were to go back up to 6.5, that $1.3m house would have come down to $900k.

Does anyone think that's going to happen?

And when rates went down from 2006 to 2012, prices didn't go up. In 2012-2013, when rates took a small upturn, prices still went up.

Maybe it's just me, but the correlation between rates and pricing isn't that simple.

I'm with IHO on this. 

Also it is very possible that with the mortgage rate increase, the housing price will still continue to go up.  One of reason for the rate to increase is that there's significant inflation.  And with high inflation where wage also increase significantly, housing price will just keep going up.  I've seem this in the late 70's where 30 year mortgage rate were over 15% and housing price was still going up 20% a year. 

Like IHO said, it's complicated and interest rate is just one of many factors that affect housing prices.

It can be very complicated and I agree that rising rates are not always a knee jerk reaction to lower housing prices.  However, in todays climate, home prices will be very sensitive to rate adjustments because homes are priced at the fringe of affordability.  You already see the slow down in sales even with record low rates.  Rising rates will just amplify that and cause downward pressures in prices following shortly. 

1% change in rates will cause about 10% change in purchasing power.  Although I cannot say every 1% increase in rates will cause a 10% drop in price, I have no doubts you will see some significant decreases in home prices if you ever see even just a 1% change in rates, which by the way only gets us up to about 4.5% rates (historically very low still).  Kinda scary if you ever think rates will go up....

I am curious to learn some math behind it.

 

[Cornflakes]

If interest rate goes up housing prices will go down

I'll say this for the millionth time... this relationship is not proportional, housing prices do not drop enough to match the cost of the rise in interest rate.

For example, 30-yr fixed interest rates in 2006 were 6.5, now they are 3.5 (or less). A 2750-3000sft SFR in Irvine was probably around $1m in '06, now they are about $1.3m. Assuming 20% down, if interest rates were to go back up to 6.5, that $1.3m house would have come down to $900k.

Does anyone think that's going to happen?

And when rates went down from 2006 to 2012, prices didn't go up. In 2012-2013, when rates took a small upturn, prices still went up.

Maybe it's just me, but the correlation between rates and pricing isn't that simple.

I'm with IHO on this. 

Also it is very possible that with the mortgage rate increase, the housing price will still continue to go up.  One of reason for the rate to increase is that there's significant inflation.  And with high inflation where wage also increase significantly, housing price will just keep going up.  I've seem this in the late 70's where 30 year mortgage rate were over 15% and housing price was still going up 20% a year. 

Like IHO said, it's complicated and interest rate is just one of many factors that affect housing prices.

It can be very complicated and I agree that rising rates are not always a knee jerk reaction to lower housing prices.  However, in todays climate, home prices will be very sensitive to rate adjustments because homes are priced at the fringe of affordability.  You already see the slow down in sales even with record low rates.  Rising rates will just amplify that and cause downward pressures in prices following shortly. 

1% change in rates will cause about 10% change in purchasing power.  Although I cannot say every 1% increase in rates will cause a 10% drop in price, I have no doubts you will see some significant decreases in home prices if you ever see even just a 1% change in rates, which by the way only gets us up to about 4.5% rates (historically very low still).  Kinda scary if you ever think rates will go up....

I am curious to learn some math behind it.

Did some math and I see it. It's actually 11.3 percent drop in purchasing power for every 100 basis point increase in interest rate.

 

[Perspective]

Yep. A simple Excel amortization spreadsheet reveals the 10%+ change in financing power associated with each 100 bps change in rate.

 

[irvinehomeowner]

Additionally, not everyone finances (in Irvine at least), so interest rates don't have as much impact on pricing.

Also, there are always creative finance terms that will alleviate rising rates -- back when fixed rates were 7+, Option ARMs or Interest Only loans became the rage. Recently, when fixed rates were 4-5, people could use x/1 ARMs to lower the rate.

And although rising rates may affect the sales pace, the effect on pricing is much slower to follow. In real estate, prices goes up fast, but go down slow.

 

[Perspective]

Additionally, not everyone finances (in Irvine at least), so interest rates don't have as much impact on pricing.

Also, there are always creative finance terms that will alleviate rising rates -- back when fixed rates were 7+, Option ARMs or Interest Only loans became the rage. Recently, when fixed rates were 4-5, people could use x/1 ARMs to lower the rate.

And although rising rates may affect the sales pace, the effect on pricing is much slower to follow. In real estate, prices goes up fast, but go down slow.

Nope. The Ability to Repay Rule authorized in Dodd-Frank effectively ended most exotic financing in 2014. You can still make an option-ARM NINJA loan, but if/when the borrower defaults and sues, the burden shifts to the owner of the mortgage (mortgagee) to prove the borrower had the ability to repay the loan at origination.
http://www.consumerfinance.gov/poli...andards-under-truth-lending-act-regulation-z/

 

[Perspective]

Here's a brief summary of ATR:

Prior to January 10th, 2014, if a lender made a mortgage loan that a borrower couldn?t afford to pay back, there was no legal recourse.  A borrower couldn?t file a lawsuit complaining that the mortgage couldn?t reasonably be repaid.  There was no federal law against making mortgages to borrowers regardless of the borrower?s ability to repay the mortgage. 

After January 10th, 2014, federal law (12 CFR ? 1026.43) requires all lenders ensure borrowers have the ability to repay every mortgage loan a lender makes.  If a lender fails to do so, a borrower may within three years of the loan?s origination, file a lawsuit claiming the lender failed to consider and verify the borrower?s reasonable ability to repay the mortgage loan.  A successful lawsuit could result in statutory damages totaling up to three years? finance charges and fees.  Other statutory damages are available, in addition to actual damages, court costs, and attorney?s fees.  A borrower may also assert a violation of the ability to repay rules (?ATR?) in a defense to a foreclosure action at any point in the mortgage loan?s term.  The damages in this claim are limited to statutory damages totaling up to three years? finance charges and fees.

 

[Perspective]

ATR has effectively eliminated negative amortization, teaser rates, interest-only loans, etc. used as affordability products in the bubble run-up.

Ability to Repay: Payment Underwriting in ARMs

The monthly payment on an adjustable rate mortgage (?ARM?) used to qualify the borrower?s ability to repay must be calculated using the higher of the fully-indexed rate or introductory rate on a fully-amortizing substantially equal payment stream.  Borrowers use ARMs to stretch the amount they can finance, but ATR limits this practice.

e.g.  5/1 30-year ARM; first 60 payments fixed at 2.5%; current rate on index applicable to start months 61-360 is 3%; margin at initial adjustment is 2%.

The initial monthly payment on an $800,000 mortgage loan with this ARM would be $3,161, but the lender must use the payment ($4,295) on the fully-indexed rate (5%) to qualify the borrower.  ATR does not establish a front-end nor back-end DTI limit, but if a lender?s typical front-end PI (principal + interest, not considering taxes, insurance, HOAs, etc.) DTI limit is 28%, then:

? A verifiable income of $135,471 is necessary to minimally qualify for the $3,161 payment; but
? A verifiable income of $184,071 is necessary to minimally qualify for the $4,295 payment.