Posted by: Timothy Ellis (The Tim)

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

36 responses to “How Would 636 Mortage Rates Affect Affordability?”

  1. Nick

    Bernanke said he will keep rates low until employment recovers. This bodes well for affordability in the foreseeable future.

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  2. Pegasus

    RE: Nick @ 1 – Bernanke also said that he never saw the crisis coming , that we’ve never had a decline in house prices on a nationwide basis and that the sub-prime mortgage issue was contained. Putting your faith in liars and idiots can be hazardous to your financial health. Predicting that by the time mortgage rates get back to 6% incomes will be higher can also be. Kind of like smoking hopium.

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  3. Kary L. Krismer

    Tim wrote:

    Eventually they will go up, but it will probably be a gradual climb, and by the time they get to 6%, incomes will also be higher.

    Not sure I’d agree with either of those claims as being all that certain. I do agree everyone was predicting rates would go up.

    Which gets me to my second point–FHA loans are assumable. If rates go up having an FHA loan will be a benefit when selling. I wrote a blog piece about that a couple of years ago, which now seems really out of place since interest rates have dropped so much since then. They were about 5% at the time.

    http://blog.seattlepi.com/realestate/2010/06/02/should-a-buyer-with-20-down-get-an-fha-loan/

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  4. David Losh

    “by the time they get to 6%, incomes will also be higher”

    This is the problem with the assumptions about the interest rates. Interest rates are declining to increase employment, which isn’t happening. A rise in interest rates will be an added cost burden to business so that will also depress employment.

    Businesses would need to deleverage positions they currently have because those loans are for short term like five, seven, or ten years.

    I don’t understand this discussion about rates going to 6% when that doesn’t seem remotely possible.

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  5. Nick

    RE: Pegasus @ 2

    “Hopium?” How old are you? Try to talk like an adult.

    The recent comments from the Fed are not predictions, they are statement of policy. It is disingenuous of you to compare the two.

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  6. Erik

    Thank you Tim. I this graph helps indicate when its safe to invest in real estate. I think when the affordability at 6% are in the pre-bubble range, we have achieved a healthy housing market. Investing in real estate after that point at that point is a safe bet.

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  7. Ray pepper

    RE: Erik @ 6 – and just when u think it’s safe to invest in RE your neighbor gets 3 dogs, starts working on cars, get a job transfer, it goes on and on. Its never “safe” . Plus the cost to unload your “safe” bet is very expensive in this State. 10 percent baby!

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  8. corndogs

    For those of you who bought at the top of the affordability index… congratulations. If you were able to buy something for half the 2007 price and locked in the new interest rate your P&I is about 1/3rd what it would have been if you bought in 2007…. awesome affordability… relatively speaking.

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  9. Kary L. Krismer

    By Ray pepper @ 7:

    RE: Erik @ 6 – and just when u think it’s safe to invest in RE your neighbor gets 3 dogs, starts working on cars, . . .

    Two words: Homeowner’s Association.

    Plus the cost to unload your “safe” bet is very expensive in this State. 10 percent baby!

    Actually it’s less than 9, but whatever. 9% is a good number for people to use when they are estimating their net proceeds.

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  10. Ray pepper

    Nice try at 9 Kary. Factor in cost of concessions, insane people who are willing to pay 7 percent in commissions, and don’t forget all the work orders associated wirh a sale. Plan on a minimum of 10 percent sellers no matter what anyone tells u.

    Sorry Kary I would much rather buy without an HOA then with. The risk is still very high with an HOA to a buyer on barking dogs, working on cars, etc. The more limitations you place on your purchase (HOA) the less freedoms you have with your property and this could hinder your sale down the road.

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  11. corndogs

    RE: corndogs @ 8 – What i also found to be beneficial of the lower interest rates of today…. is it only takes 5 years to pay your loan down by 10%, it took 7 years to do the same with the 6.5% rate…. so you are also building equity quicker even though your payment is smaller….

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  12. Kary L. Krismer

    RE: Ray pepper @ 10 – Seller concessions? They’re just a reduction to the net price, but you’re right in a very slight sense. You do need to pay excise tax on that amount, and often real estate commissions. Still doesn’t get you to 10%. Again, sellers should use 9% as an approximation. Bankruptcy trustees use 10% because they have to pay an attorney to file a motion and get an order, etc.

    But yes, at 7% for a commission and the costs of sale would be 10%. At 8% they would be 11%, and at 100% they would be 109%.

    As to the HOA, no the risk is not still very high with an HOA as to cars and dogs, although it could depend on the HOA. Our association fines people $100 for each incident, which tends to keep people in control of their dogs. Try to do anything about that if you have to rely on a government entity. And an HOA would be all over car repair as a business. That’s almost always specifically mentioned in their rules.

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  13. sofwarenginer

    Old Rules and History Mean Nothing Anymore

    Welcome to the new paradigm where old rules are contradicted, like a 100% up stock market and a -30% real estate market from 2009 to today.

    Where lies and untruths are passed on as policy.

    I will advise this, if ya got a big enough cash bag saved and ya need a big purchase….no matter what our future is, at least the purchase is no mortgage noose what-so-ever. But most people don’t play the roulette wheel like a mathematician, they bet it big, hoping to win big [they get greedy]. When I bet at a casino [rarely BTW] I bet the minimum at the lowest allowed bet on like near 50/50 odds, then double my subsequent bet everytime I lose, until I win….then go back to the lowest allowed bet again, etc, etc. My odds of winning over time are way in my favor [not the house's].

    But go on ahead and bet big on your livelihood to live in your Taj Mahal, best of luck and let’s hope it doesn’t transform into tent city for you.

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  14. corndogs

    RE: sofwarenginer @ 13 – Even starting with 5 dollars you’d get up to the table maximum bet after a very small number of iterations.. maybe 5 or 6. At that point you’ll be losing 300 bucks a pop and no more doubling effect… it’s a good way to make a short night of it and walk away broke. It’s much better to bet consistently, and quit when you’re ahead. A streak of 5 to 10 losers is very very common in roulette.

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  15. sofwarenginer

    RE: corndogs @ 14

    Your Odds of Losing 5-6 Times in Row Flipping a Coin is Less Than 5%

    I like them odds.

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  16. HappyRenter

    RE: Ray pepper @ 7
    It’s “safe” to buy only once you have been elected senator for life ;)

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  17. Seattle Bubble • King County “Affordable” Home Price 21% Higher than Current Median Price Thanks to Low Rates

    [...] If interest rates were at levels more like they were pre-bust, the necessary income to buy a median-priced home would be slightly higher than the current median household income (which is just another way of saying that the affordability index would be below 100, as detailed in yesterday’s post). [...]

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  18. blurtman

    “Of course, everyone has been predicting that interest rates will rise for at least the last three years, all while they have continued to drop. Eventually they will go up, but it will probably be a gradual climb, and by the time they get to 6%, incomes will also be higher.”

    The higher income statement ain’t necssarily true. Especially in this age of race to the bottom, where the average Chinese wage earner and American wage earner may meet.

    The trend is for falling wages, but more importantly, a falling standard of living. There is absolutely no reason why wages have to rise in an inflationary environment. Pure hokum.

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  19. corndogs

    RE: blurtman @ 18 – I personally don’t know anyone who has a job who’s wages are going down, do you? What source do you have that shows wages going down…. I think is one of those ‘mix’ issues again. Only 48% of Seattlites own homes… Were not necessarily worried about the bottom 3rd of wage earners and their stumbles. I know my household income is about triple the Seattle median and I’m in Pierce County… I’d say the typical home owning family in Seattle is earning 100K+.

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  20. redmondjp

    By corndogs @ 19:

    RE: blurtman @ 18 – I personally don’t know anyone who has a job who’s wages are going down, do you? What source do you have that shows wages going down…. I think is one of those ‘mix’ issues again. Only 48% of Seattlites own homes… Were not necessarily worried about the bottom 3rd of wage earners and their stumbles. I know my household income is about triple the Seattle median and I’m in Pierce County… I’d say the typical home owning family in Seattle is earning 100K+.

    You must work in the software industry.

    I just turned down a job at an Eastside engineering consulting firm because it would have meant a 20% base pay CUT. They are paying their senior EEs with 20+ years’ of experience and a PE license about the same as computer science graduates are making right out of school without a lick of experience. Not even in the 6 figures. I was shocked!

    The race to the bottom is indeed on! But I have noticed, having lived on the Eastside since 1995, the tendency for high-paid tech workers to assume that everybody else around them is just like them (I mean, EVERYBODY on the Eastside works at M$, right?) pulling in fat salaries and easily affording $800K houses and brand-new cars every five years.

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  21. Kary L. Krismer

    By redmondjp @ 20:

    But I have noticed, having lived on the Eastside since 1995, the tendency for high-paid tech workers to assume that everybody else around them is just like them. . ..

    I’ve noticed that a lot here on a lot of different topics. People assume everyone has their same sense of relatively values, their same ability to pay or not pay 20% down, etc. Different people are different. If prices are higher in an area than what you think is reasonable, it’s because a lot of people disagree with you and like that area a lot, and/or they have a lot more income/wealth than you do.

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  22. blurtman

    RE: corndogs @ 19 – It is quite well establsihed that earnings are dropping in the USA in the 00′s. Ditto standard of living.

    And yes, I do know folks who are making less than they were before the crash in 2008. I know a few long term unemployed folks, folks trying to make it as no benefit contractors, etc. It is terrible if you are over 50.

    http://www.thestreet.com/story/11480568/1/us-standard-of-living-has-fallen-more-than-50-opinion.html

    http://en.wikipedia.org/wiki/File:United_States_Income_Distribution_1967-2003.svg

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  23. Kary L. Krismer

    RE: blurtman @ 22 – How do you related income and standard of living? Lots of electronics are not a low cheaper or better for the same price. Wouldn’t that tend to increase the standard of living without a corresponding increase in income?

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  24. corndogs

    RE: Kary L. Krismer @ 23 – Well we’ve already established that home affordability is at an all time high… we also know that food costs as a percentage of income has dropped dramatically over the decades…. the social safety net is at an all time high… the work requirement for food stamps has been lifted and are available for almost everyone… we also know that where starvation used to be a sign of poverty, obesity is now the problem for our poor… so, I’m not sure how the standard of living can get much better….. People keep comparing this to a great depression.. Here’s a reminder of what that looked like.

    http://upload.wikimedia.org/wikipedia/commons/a/a7/Poor_mother_and_children%2C_California_1936_by_Dorothea_Lange.jpg

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  25. blurtman

    RE: Kary L. Krismer @ 23 – I don’t have to. Independent analysts have.

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  26. blurtman

    “….real incomes are more than 10% lower today than they were over a decade ago.”

    http://blogs.reuters.com/felix-salmon/2011/10/10/chart-of-the-day-median-income-edition/

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  27. redmondjp

    By blurtman @ 26:

    “….real incomes are more than 10% lower today than they were over a decade ago.”

    http://blogs.reuters.com/felix-salmon/2011/10/10/chart-of-the-day-median-income-edition/

    And I was in Walmart tonight shopping for automotive supplies and WHOA! Car batteries that were $60 not more than two years ago are now $80. The formerly-$80-ones are now $100. Prestone that was $10/gallon is now $12/gallon. “Half-quart” bottles of brake fluid, formerly 16 fl. oz., are now 12 fl. oz. and more expensive to boot.

    The inflation rate on the items mentioned above is in the double-digits, far above any “official” rate. And far outstripping any pay raises that I am getting!

    Oh, and I noticed that the 100W incandescent bulbs are now no longer on the shelves there as well (good thing I have stocked up on them – I used them for keeping pipes from freezing in the winter).

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  28. blurtman

    Tim, I am calling you out for bullshat.

    “Eventually they will go up, but it will probably be a gradual climb, and by the time they get to 6%, incomes will also be higher.”

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  29. Lo Ball Jones

    When people say “market rates” they usually mean something that will benefit them (and possibly hurt others). It falls into the same category as “fair price”.

    All rates and prices are “market” when summed over the whole economy.

    Demand for capital is low because capital intensive businesses are declining. Population is stagnant or possibly shrinking. The Fed has actually considered negative interest rates to spur borrowing. But why would anyone borrow money if 99 out 100 investments are losing money?

    I guess a real risk taker would have borrowed a million dollars and invested it in AAPL stock a month ago and then cashed out making a cool $100,000.

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  30. wreckingbull

    By corndogs @ 19:

    I personally don’t know anyone who has a job who’s wages are going down, do you?

    Wow, sounds like a fascinating research project. How did you conduct this complex study?

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  31. corndogs

    RE: wreckingbull @ 30 – Thanks, brainiac… Try to say something substantial, so I can tear you a new one like a normally do…. I notice you get a little timid with your opinions when I’m online…..

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  32. Shoeguy

    RE: Kary L. Krismer @ 23

    No, because the price drop of those non essential luxury goods are offset by the rise in price of necessities like food and fuel.

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  33. Kary L. Krismer

    By Shoeguy @ 32:

    RE: Kary L. Krismer @ 23 – No, because the price drop of those non essential luxury goods are offset by the rise in price of necessities like food and fuel.

    Those would be countering factors. But in 1991 a rather basic computer cost $3,000 or so. And I don’t even know that you could buy a 40″ TV.

    As to your point about food and gas, the overall impact, positive or negative, would most likely depend on income level. For lower income people those would overwhelm any increase due to cheaper electronics. For higher income people it would be the opposite. Similar reasoning is why a sales tax on food is regressive.

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  34. MRMRMRMR

    What’s with the pocketbook economists around here? Feds playing ‘funny money’? By that you mean manipulating the economy through monetary policy such as EVERY central bank of every first world country does? Ahh, yeah, that’s ‘funny money’. I’m sure Mr. Internet blogger knows best.

    To everyone else, you might want to take some courses in economics before you start mumbling about interest rates. The fed isn’t going to raise anything right now given the weakness in the US economy and the mess in Europe. Until you see strong growth here and inflationary pressure, you won’t see interest rates rise. Does that mean housing is more affordable? To a degree, it’s a misnomer as lower rates just means more competition and higher prices.

    People using examples of things such as 1990′s computers are being more than a little silly. Making comparisons of newer products early in their product lifecycle is really not relevant. Also, batteries at Walmart? Do we have those here? I’m not a billionaire so I can’t afford to shop at places like Walmart where everything you buy is cheap junk that falls apart.

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  35. Kary L. Krismer

    By MRMRMRMR @ 34:

    To everyone else, you might want to take some courses in economics before you start mumbling about interest rates. The fed isn’t going to raise anything right now given the weakness in the US economy and the mess in Europe. Until you see strong growth here and inflationary pressure, you won’t see interest rates rise.

    If there’s stagflation again, then you would see interest rates rise, even without the Fed raising rates. I’m not saying it’s likely, but if inflation is running at 10% you’re not likely going to be able to borrow money at 4%.

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  36. Seattle Bubble • Will Local Incomes Climb or Fall in the Coming Years?

    [...] few of you took issue with the assertion I made in Thursday’s post: Eventually [mortgage interest rates] will go up, but it will probably be a gradual climb, and by [...]

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