Affordability got Crushed! HUGE payment differences 2023 vs 2022.

[Brad S.]

I created a couple of charts/matrices to illustrate the affect that rapid rise in interest rates had on monthly payments, which in turn affects affordability. I'm guessing many BP visitors don't raalize the real differences, but they are sobering when you see actual #'s Mortgage rate data from FRED Economic Data (St Louis Fed).

As of Jan 6, 2022, the average 30yr fixed mtg rate = 3.22%, and rose to 6.48%, as of jan 6, 2022, 1 year later.

Rounding the rates to 3.25% and 6.5%, respectively, and using $100k loan amount, calculates to a payment of:

$435.21 as of Jan 6, 2022
vs
$632.07 as of Jan 5, 2023

That's a 45% increase in payment or a 31% decrease in borrowing power ($100k loan amt payment @ 3.25% = $68,854 loan amt pmt @ 6.5%)
Note: the above #'s are not reflected in my charts, since the charts start at 3%.

One assumption I have is that some of the price rise in the past couple of years, is due to unsupported demand fueled by the unusually low past rates. And that those prices did not reflect a true value of many properties, in a normalized market. And the market will take some time to stabilize to within typical affordability bounds. Not necessarily a crash, but a slowdown of increases and probably price declines in some markets. There are other factors involved of course.

Thoughts?

[David Ramirez]

Hey @Brad S.,

 Thanks for sharing those charts and matrices. It's crazy to see how much of an impact rising interest rates can have on monthly payments and affordability. I mean, a 45% increase in payment or a 31% decrease in borrowing power is no joke! Your analysis really puts things into perspective. And I totally get what you're saying about the housing market being fueled by low rates and that it might take some time for things to stabilize. It'll be interesting to see what happens in the future. Thanks again for sharing !

[Brad S.]

Quote from @David Ramirez:

Hey @Brad S.,

 Thanks for sharing those charts and matrices. It's crazy to see how much of an impact rising interest rates can have on monthly payments and affordability. I mean, a 45% increase in payment or a 31% decrease in borrowing power is no joke! Your analysis really puts things into perspective. And I totally get what you're saying about the housing market being fueled by low rates and that it might take some time for things to stabilize. It'll be interesting to see what happens in the future. Thanks again for sharing !

I'm glad you found them interesting. In my years of experience and talking with many RE investors, many like to offer their opinion based on general facts and feeling, but things get somewhat clearer when you see actual data. 

[V.G Jason]

Quote from @Brad S.:

Quote from @David Ramirez:

Hey @Brad S.,

 Thanks for sharing those charts and matrices. It's crazy to see how much of an impact rising interest rates can have on monthly payments and affordability. I mean, a 45% increase in payment or a 31% decrease in borrowing power is no joke! Your analysis really puts things into perspective. And I totally get what you're saying about the housing market being fueled by low rates and that it might take some time for things to stabilize. It'll be interesting to see what happens in the future. Thanks again for sharing !

I'm glad you found them interesting. In my years of experience and talking with many RE investors, many like to offer their opinion based on general facts and feeling, but things get somewhat clearer when you see actual data. 

 We knew this. There's just two schools of thoughts that these rates will cause.

As house prices don't grow as much, rents will pick up steam due to new underlying costs of owning homes. Closing the RTP.

Unemployment will hit hard making tenants not paying rent and forcing investors to liquidate. 

Then there's two schools of thoughts as the pivot takes place.

House prices will sky rocket. Making rents move up a lot, still keeping a wide RTP.

Recovering from a recession, and a lack of home investors---rents shrink and home prices flatten to decline. At a ratio to tighten the RTP.