bostonbubble.com

[balor123]

We haven't really seen sustained rising interest rates in a long time in this country, maybe never with "too big to fail" levels of debt. It makes me wonder whether a new solution will appear to make it possible for interest rates to rise, at least for housing. Perhaps someone will invent a new product that allows a seller to keep their loan at that rate and let a buyer create a chained loan to pay it off so that a new loan doesn't need to be taken out at a much higher interest rate?

[Arlingtonian]

Balor,

You are an eternal optimist or way smarter than I am.......keep in mind I'll probably be wrong.

But, when Interest Rates rise House values dropped. Look at what happened in the last two weeks because the Fed said it was going to slow down Bond buying. Mortgage rates are well on their way to 5% for a 30 year fixed.

The absolute best time to buy a home is when interest rates have peaked or are pretty darn close.

When the cost of borrowing Goes Up - things that are purchased with borrowed money go down - unless some other source of Income enters the world to mitigate the impact of the rising cost of borrowing Money.

I expect in the shorter term the Fed will break out the artillery to bring rates down a wee bit....but, this can only go on for so long.

Regards

[balor123]

Eternal optimist? First time I've been called that Anyway, I was just speculating that reformulating mortgages could alleviate much of the interest rate risk, with virtually no downsides. Two different ways it could be devised:

(a) mortgage attached to home and transfers to new homeowner, who then gets an adjusted rate based on their personal risk
(b) mortgage attached to borrower, who then gets an adjusted rate based on property purchased

There's not really any risk of inflation since the money is already in circulation. It mitigates some impact on home prices but mostly promotes mobility. I suspect the current model exists merely for simplicity (excluding the mess added in the last decade of course).

[mpr]

Couple of reasons this will not happen.

The reason that MBS prices and hence mortgage rates currently roughly track the 10 year tsy is that MBS investors know that people keep their home for 7 years on average. So even when you have a 30 year mortgage, you're not really paying to lock in the rate for 30 years because the investor knows that, statistically, the length of the mortgage will be much shorter.

If you had a mortgage with some kind of transferability feature built in then investors would know that the average duration would be longer. Moreover you'd be more likely to exercise that option when rates were higher than the one on your mortgage, which is exactly when the investor wants you to refinance.

So the upshot is that the rate on this product would be significantly higher.
Home buyers would be faced with the choice of taking a lower rate up front or taking a higher rate with the embedded transfer feature, with the hope that this would be attractive to potential buyers if and when they sold. I think most would take the lower rate up front. People seldom pay more for extra complexity and risk.

Even if this was somehow attractive to some people getting a new product like this off the ground is very difficult. You have to price it, get investors interested and create a liquid enough market.

[balor123]

Yeah you make a good point. Tracking the 30-yr treasury would add about 1% to mortgage rates right now - a large amount of money on a conforming loan. It would have to come from public policy then.

[Arlingotnian]

Balor,,,

I don't think any of us appreciate the impact of rising rates - again, I'm likely to be wrong. But, consider public policy efforts will be thwarted in a World where borrowing money becomes More expensive.

Look at how quickly Mortgage Rates have moved in two weeks - not that two weeks makes a trend. Here is a great analysis by MHanson where he puts the recent move in Rates in historical context. The last time interest rates moved this much was 1993 - and that move took an entire year!

http://mhanson.com/archives/1370

public policy during the last 30-40 years has been easy as Interest rates have been falling - now that we are at a 50-60 year low - what does the world look like as interest rates rise for who knows how lone.

I was at a Barbecue last night - and everyone was talking about how much the value of their home had increased in the last twelve months- I wanted to scream INTEREST RATES-

Think of how Interest rates have influence wages in public schools - you can increase spending while interest rates are falling , tax payers can refinance and lower the cost of their Mortgage - Home prices rise as interest rates drop, the home owners become convinced the fine schools are the source of value for their Real Estate.

Regards.

[admin]

[Arlingtonian]

Admin,

I'm struck everyday how unaware people are of the importance of Interest Rates. I guess its the result of the longest Bull Market in Bonds - ever. But, no one seems worried what happens to the value of their home as interest rates rise. No for many who have a great job or guaranteed stream of income its fine to be clueless.

MHanson did a great job framing the sixe of this recent move - thank you for maintaining a site where we can discuss these topics. Someday the masses will understand - or not.

PS: on a recent trip I was blown away by the number of tear downs just starting on in progress - especially in the Winchester-MA area. Its surely going to be an interesting few years.

Regards,