How high will mortgage rates climb in the next 36 months?

[irvinehomeowner]

The economy might be booming, but housing is in a recession: Top real estate CEO says he’s never seen anything like it in 20 years

Redfin’s Glenn Kelman discusses his business, salary, and all things housing with Fortune.

finance.yahoo.com

So this article says basically what I've been saying, despite rising rates, prices have remained high and this is partly due to owners staying put and thus less inventory.

This time it is different. Some people just won't see it.

 

[ThirtySomethingWEquity]

So this article says basically what I've been saying, despite rising rates, prices have remained high and this is partly due to owners staying put and thus less inventory.

This time it is different. Some people just won't see it.

If rates stay high, you'll have less and less investors coming into the market and more and more will sell to get better/safer returns elsewhere. But this is going to be a dog slow process, and I imagine at best it would keep prices flat or kept to a more modest increase.

 

[sgip]

what’s the pro and con to make all kinds of mortgage assumable?

VA, FHA, and ARM loans (Conventional and Portfolio) are all assumable. It would be legally impossible to make all 2019-2021 fixed rate loans in the 3's assumable.

Bearing that in mind, the bigger "bang for the buck" in terms of opening up more inventory isn't necessarily lower rates. IMHO it would be increasing the Capital Gains Exemption to $1.5m or higher for married couples. A simple change like this could give sellers a greater reason to list their home than just having a lower rate.

 

[CalBears96]

If rates stay high, you'll have less and less investors coming into the market and more and more will sell to get better/safer returns elsewhere. But this is going to be a dog slow process, and I imagine at best it would keep prices flat or kept to a more modest increase.

Why would you sell when you locked in below 3% to buy elsewhere and take out a loan at 7%? You'll probably have less buyers, but investors are paying mostly cash, so high rates won't affect them. Just like IHO said, inventory will stay low unless rates start dropping, which would allow homeowners to upgrade.

 

[sgip]

Why would you sell when you locked in below 3% to buy elsewhere and take out a loan at 7%? You'll probably have less buyers, but investors are paying mostly cash, so high rates won't affect them. Just like IHO said, inventory will stay low unless rates start dropping, which would allow homeowners to upgrade.

If a seller nets more cash from their sale due to higher capital gains exemptions, the resulting higher down payment will mute the impact of higher rates - assuming the seller buys another home promptly. Some might want to wait for lower rates/prices to appear before stepping back into housing. At least there is certainty that housing stock would increase with people taking the gains they can with the higher exemptions. A good thing given how limited the number of available homes are today.

 

[irvinehomeowner]

At the prices in Irvine, gains are above $500k so there is also that tax that is a deterrent to sell.

 

[qwerty]

At the prices in Irvine, gains are above $500k so there is also that tax that is a deterrent to sell.

If you sell a home that is worth $3M that you bought for $1M, you would have a $2M gain. For simplicity we will assume no selling costs and assuming married filing jointly and capital tax rate of 20%. After the $500k exemption you are paying long term capital gains taxes of 20% for federal on the remaining $1.5M. That is is $300k. Most people selling a $3M home will likely be paying 3.8% for the net investment tax. So that is another $57k. For California let’s assume a marginal tax rate of 10.3% so that is another $155k. So you just paid $512k in taxes so you now have $2.5M in net proceeds (assuming no mortgage, no selling costs). If you buy another $3M home in a different location you now have to come up with another $500k. And if you did have a mortgage you are perhaps going from a rate in the 2s or 3s to something in the 6s or 7s and higher property of at least $20k per year.

As SGIP pointed out this couple is more likely to sell their home if the federal cap gains tax exemption were much higher. If the cap gains exemption was $1.5M the t taxes would be $171k vs $512k or savings about $341k

 

[sgip]

@qwerty

Thanks for the number run.

Assuming a 2019 $1.5m purchase using a $1m mortgage ($500k down), and a $2.5m sale, what would the current estimated tax penalty be?

I'm using a 3.0% 30 yr fixed at origination so about an $878k balance as of today.

My guess is that this is closer to the position many sellers are in today as they decide "Do I sell and move up in a high rate environment or keep my low rate mortgage and stay put?"

 

[qwerty]

@qwerty

Thanks for the number run.

Assuming a 2019 $1.5m purchase using a $1m mortgage ($500k down), and a $2.5m sale, what would the current estimated tax penalty be?

I'm using a 3.0% 30 yr fixed at origination so about an $878k balance as of today.

My guess is that this is closer to the position many sellers are in today as they decide "Do I sell and move up in a high rate environment or keep my low rate mortgage and stay put?"

The initial gain is $1M ($2.5M sales price less $1.5M purchase price). Selling costs would be about $125,000 (5% x $2.5M) so the adjusted gain is $875,000. Next we would subtract $500,000 for the gain exemption (assumes married), so the taxable gain $375,000.

The taxes would be as follows:

- fed cap gains at 20% is $75,000
- CA taxes at marginal tax rate of 10.3% is $38,625
- investment tax at 3.8% is $14,250

Total taxes are $127,875 or 5.1% of the sales price.

 

[sgip]

Thanks @Querty! Great stuff here!

I view the $127,875 not as 5.1% of the sales price, but 12.8% of your $1m profits!

The net from sale, assuming the mortgage is paid down to $875,000 would be $872,125 ($1.125m equity from sale, less closing costs - $125,000 and taxes - $127,875 equals $872,125)

A $2.5m home with $875k down is a loan of $1,625,000. If jumbo rates are 6.875% the mortgage only payment is $10,675. Not all that attractive of a monthly nut and a detriment to selling. Assuming both Fed and California taxes are mitigated through a change of investment taxation law, the down payment increases to $988,600. This changes the monthly to $9,932. Still a big leap, but sub $10k which for many is a psychological bridge too far.

The original mortgage of $1m at 3.0% was a payment of $4,216, so in any scenario a seller today would see more than a doubling of their mortgage nut.

Bear in mind many 2019 vintage homes priced at $1.5m were 3/3 or 4/3 SFR condos with zero lot lines. Many $2.5m Irvine homes this seller would be buying up to are 4/4 to 5/5 SFR's which have a higher quality of life level IMHO for example:

https://www.redfin.com/CA/Irvine/22-Maywood-92602/home/5772782

So, a Seller might be tempted to make the leap from a $4,200 mortgage to a $9,900 mortgage if SF, location, property type etc made sense. When rates come down from 6.875 to 3.875 that shaves $2,800 off of their loan payments and is a reasonably possible scenario. If a seller waited for a 3.875% rate before they sell, and if they didn't get the kind of tax breaks we're discussing, who knows what type of property would be available.... It's possible as well that the seller would rent for $6-7k per month and invest that $988k into BTC, Gold, Tesla (name your own hot-button investment scheme here) and wait to see what will happen over the next 2-3 years. Cash, as we know, is King.

Something to chew on as everyone wants to know how we can get more inventory to market.

 

[irvinehomeowner]

Same. I look at the tax as a % of my gain which is a deterrent.

And I would probably invest and rent. No need to hold any property as I advance into retirement other than maybe for the kids as they won’t be able to live in Irvine at these prices.

 

[socal78]

As a homeowner, our current floorplan no longer works for me. (Screams at clouds: "I hate garage laundry!!!!!") I would love the flexibility to sell & repurchase somewhere nearby. But for all of the reasons listed above by Qwerty, we're staying put as long as the current conditions remain how they are. I'm a Dave Ramsey kind of girl. We live completely debt-free except for a conservative mortgage at 3-point-something which we're about to knock the balance in half this month. I want the house paid off. We can easily have our current house paid off in a handful of years, be completely debt-free and actually have a chance at retirement at a good age. That matters. I'm certainly in no mood to take on a truckload more property tax just to even make a lateral move of similar square footage but a different layout. Not to mention escrow fees, capital gains taxes, blah blah blah. I don't really want to deal with renters unless maybe they were my own kids. So, here we sit. Not budging.

 

[irvinehomeowner]

These are reason's why inventory shouldn't skyrocket any time soon.

 

[irvinehomeowner]

Bearing that in mind, the bigger "bang for the buck" in terms of opening up more inventory isn't necessarily lower rates. IMHO it would be increasing the Capital Gains Exemption to $1.5m or higher for married couples. A simple change like this could give sellers a greater reason to list their home than just having a lower rate.

Lower rates will allow people to rebuy without increasing their nut too much, but there is still a higher property tax if they move up.

The increased gains exemption will definitely spur people to sell their homes... and if like me, I would just sell and NOT rebuy. This way I save on both an increased mortgage and property tax. Or, downsize to keep the monthly the same... but it would be a much smaller home if in the same area.

 

[panda]

I think one important metrics we are overlooking is the unemployment rate. You can see from the chart the unemployment rate moves in a wave pattern and never in a flat line. When the unemployment spike up to 10% from 5%, buyers will not enter the market even with declining interest rates. There is a misconceptation, that once the FED starts cutting rates, there will be a suddent demand for housing. Look at 2008-2009 when the interest rates were near zero when many buyers were fearful to buy.

 

[zubs]

Prop 19 will help people aged 55+ to keep their current property tax if they sell their current house and buy a new house in CA.

This is my understanding of it.
Example:
You bought a home for $500,000 back in 2000 (Property tax in 2024 is probably around $7,000)
Your home is now worth $1,500,000.

You sell your home for $1,500,000 and buy smaller house for the same amount closer to the beach.
Your property tax remains $7,000, going up 2% per year due to prop 13.

However, if you sell your house @ $1,500,000 and buy a $2,000,000 house, then you only get to keep your low $7,000 property tax on the sale price. The $2,000,000 - 1,500,000 = $500,000 would be taxed normally. I think...shrug.

 

[Danimal]

I love garage laundry. My old woodbury home has it and i loved it. We didnt have to worry about the noises since we usually did laundry at night. My current IP home has it on 2nd floor. Not my cup of tea.

 

[socal78]

I love garage laundry. My old woodbury home has it and i loved it. We didnt have to worry about the noises since we usually did laundry at night. My current IP home has it on 2nd floor. Not my cup of tea.

Oh man, you have it so good!

I will never again do garage laundry. That unfortunately rules out a lot of homes.

 

[irvinehomeowner]

We've had all types... garage laundry, upstairs laundry, garage pass-thru laundry, dedicated first floor laundry. For convenience, the upstairs laundry rules, but just getting a washer/dryer up and down the stairs is a pain (if you get new ones or move multiple times) and we did have a mishap with flooding in one home. So we don't mind a 1st floor dedicated laundry room.

@panda Yes, unemployment is another variable to consider, but then you just prove my point, there are too many variables to accurately predict what is going to happen with 100% certainty. How many times did several people here say that high interest rates will cause the prices to drop? Or that prices lag inventory? Or that there is nothing the government can do to alleviate the crash.

And of course, a certain someone will point out that for exactly 12 minutes on a Monday, prices dropped 3%... but in the overall picture, prices are so much higher than in 2018... it's irrelevant.

I read this somewhere else but the best time to buy was yesterday, the 2nd best time to buy is today... just as long as you can afford it and stay a while.

 

[usctrojancpa]

Prop 19 will help people aged 55+ to keep their current property tax if they sell their current house and buy a new house in CA.

This is my understanding of it.
Example:
You bought a home for $500,000 back in 2000 (Property tax in 2024 is probably around $7,000)
Your home is now worth $1,500,000.

You sell your home for $1,500,000 and buy smaller house for the same amount closer to the beach.
Your property tax remains $7,000, going up 2% per year due to prop 13.

However, if you sell your house @ $1,500,000 and buy a $2,000,000 house, then you only get to keep your low $7,000 property tax on the sale price. The $2,000,000 - 1,500,000 = $500,000 would be taxed normally. I think...shrug.

That is correct. You take the basis of the "exit" property and then you add the difference of the sales price of the "move up" property minus the sales price of the "exit" property. So in your example, the basis would be $700k + $500k = $1.2m and the property tax on the "move up" home would be $7k + $5k (1% of the $500k) for a total of $12k per year. Prop 19 always you to do this 3 times in a lifetime and can be from any properties in CA.