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How low interest rates raise prices

 
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balor123



Joined: 08 Mar 2008
Posts: 1204

PostPosted: Tue Sep 01, 2009 5:52 am GMT    Post subject: How low interest rates raise prices Reply with quote

A person making $100k can buy a house worth $687k w/20%, 5.125% 30yr loan, and still be within 36% of income. That's 6.87x income! So much for the "Boston 4-5x" income rule, that would otherwise be considered very high.
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admin
Site Admin


Joined: 14 Jul 2005
Posts: 1825
Location: Greater Boston

PostPosted: Tue Sep 01, 2009 1:02 pm GMT    Post subject: Reply with quote

That rule of thumb is just a rule of thumb and maybe it should be changed for lower interest rates, but you're missing one big thing: risk. Focusing solely on the monthly payment ignores the risk of falling prices that you will take on, and that risk is much higher when interest rates are abnormally now. Would that $687K house be a good buy if you could pay all cash for it or would the risk of losing a large chunk of that cause you to seek a lower price for more safety? Borrowing the money doesn't decrease that risk, it amplifies it.

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balor123



Joined: 08 Mar 2008
Posts: 1204

PostPosted: Tue Sep 01, 2009 8:01 pm GMT    Post subject: Reply with quote

I know that was my point. Low interest rates provide the ability take on immense risk. In an ultra-competitive constrained market like Boston, the most aggressive investors can determine the price for everyone. I think it's no surprise that many cities have multipliers of around the same amount that the low interest rate allows. I'd like to see what the median household income of first time home buyers has been in Boston over the past 1-2 years relative to the prices of homes that they are buying. It'd also be interesting to know if that types of homes that FTHB can afford has also been changing (maybe people used to be able to afford 3br/2ba in Newton and now they are buying 2br/1ba in Roxybury for example).
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JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Fri Sep 04, 2009 5:06 pm GMT    Post subject: Reply with quote

Frankly, I don't know very many FTHBs making $100k who are buying $700k houses.

Those buyers are mostly the people who bought condos or starter homes between 1997 and 2003, sold for a large profit, and have rolled over their $100-$250k gains into a $700-$900k home.

The risk is less of an issue, at least mentally, because these people are spending "found" money, i.e., their earlier appreciation.

There's no question that Newton/Belmont/etc are terrible values right now. Even if prices drop 10 or 15%, I wouldn't consider buying in at those prices.

FTBs, on the whole, really have limited choices: (1) go small (e.g., condo in the city); (2) find a "second tier" suburb (Melrose, Quincy, Wakefield, etc.) where houses are half the price of Newton, Wellesley, or Winchester, (3) move out a bit farther from Boston (john p), or (4) continue to rent.
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balor123



Joined: 08 Mar 2008
Posts: 1204

PostPosted: Sat Sep 05, 2009 3:44 am GMT    Post subject: Reply with quote

JCK wrote:
Frankly, I don't know very many FTHBs making $100k who are buying $700k houses.


I don't know any either but watching HGTV I know that a small percentage of these people exist. Volume is low and prices aren't falling off a cliff so I figure this small amount of people are keeping the prices high.

JCK wrote:

Those buyers are mostly the people who bought condos or starter homes between 1997 and 2003, sold for a large profit, and have rolled over their $100-$250k gains into a $700-$900k home.


And that's why I told my wife that the best way for us to get the house we want is to invest a parallel universe where we already had a house that we purchased a few years ago.

JCK wrote:

(1) go small (e.g., condo in the city);


I think condos actually appreciated even more! You have to go really small - like studio or 1br, not an option for FTHB families.

JCK wrote:

(3) move out a bit farther from Boston (john p), or


But pay more in transportation and risk of another oil spike. Of course, great option if you like that kind of thing. At $600k for his house, though, for the middle of no where you'd expect to pay a lot less. I think the towns realize that they only need to charge a little less than slightly closer neighborhoods to Boston, even if they have infinite amounts of land.

JCK wrote:

(4) continue to rent.

[/quote]

Speaking of which, have you all checked out rental traffic on Google Insights? Then check out real estate traffic. We know at least some segment of market is buying. Lots of pressure on rents right now.
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SelmaAdam



Joined: 01 Jun 2021
Posts: 1

PostPosted: Tue Jun 01, 2021 1:31 pm GMT    Post subject: Reply with quote

People need to invest.COVID has taught a lot.The rule of thumb arguably should not apply for low interest rates
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