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birb_cromble  4d ago (text post)   959 thread views

Qeekly Finance Thread - 2026-11-07

A weekly thread to discuss financial matters - from personal all the way up to global.

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The affordability crisis just got worse. 10-year yields are up bigly today and are back above 5% as a bad CPI print has made a 50% hike more likely.

What are these Fed chairs even thinking?

High rates are a major cause of the affordability crisis. At 3%, inflation is honestly no big deal. But 8% mortgage rates absolutely are a big deal for people who are trying to buy a house.

High rates are a major cause of the affordability crisis. At 3%, inflation is honestly no big deal. But 8% mortgage rates absolutely are a big deal for people who are trying to buy a house.

But perhaps people bid based on what the bank will lend which in turn is based on what monthly payment they can afford? I'm not an economist, but it seems to me that high interest rates should make housing prices lower than they otherwise would be, especially for first home type properties.

You hear stories about Boomers who bought houses dirt cheap back in the 60s and 70s -- perhaps part of the reason was that mortgage rates were relatively high back then.

It's not a free lunch, but lower rates will increase affordability.

Consider the boomer who pays cash. He is not affected by the interest rate so a lower interest rate does not cause him to buy a more expensive house. These buyers are actually a large segment of the market.

Furthermore, housing is not a static commodity in every place. Lower rates will make construction of new houses more viable.

So, yes, lowering rates will increase cost, but also increase affordability.

We're measuring raw inflation. What we should be measuring is the "true feel" of inflation which includes interest rates. If inflation were 4% and mortgages were 4% that would "feel" a lot more affordable than 3% inflation and 7% mortgages like we have now. This is what I am claiming the Fed gets wrong.

Consider the boomer who pays cash. He is not affected by the interest rate so a lower interest rate does not cause him to buy a more expensive house. These buyers are actually a large segment of the market.

I'm kinda skeptical of this. Maybe if we are talking about vacation houses or houses in retirement communities? Do you happen to have a source?

housing is not a static commodity in every place. Lower rates will make construction of new houses more viable.

I think you may have a point here. I was thinking about where I live (Northeastern United States) where housing prices are heavily driven by the value of the underlying land. If there is an affordability crisis in some area with lots of land (Georgia? Texas? I don't know), then yeah, I agree that higher interest rates would tend to make the problem worse. From what I hear, there is a housing glut in those types of places but I don't follow it very carefully.

We're measuring raw inflation. What we should be measuring is the "true feel" of inflation which includes interest rates. If inflation were 4% and mortgages were 4% that would "feel" a lot more affordable than 3% inflation and 7% mortgages like we have now. This is what I am claiming the Fed gets wrong.

To reiterate, I'm not an economist, but it seems to me that mortgage rates will necessarily be higher than the rate of inflation. Because otherwise, the banks are facing a high likelihood that their loans will be paid back with dollars worth significantly less than what's necessary to make a profit. Do you agree?

According to ChatGPT, about 27% of home purchases are all cash.

I'm not an economist, but it seems to me that mortgage rates will necessarily be higher than the rate of inflation.

Yes, over the long term I would expect that's true. But not in the short term. In 2022, going by memory here, you could still get a mortgage for like 3% while inflation was hitting 9%.

Right now we have the opposite situation where the real yield of bonds is the highest it has been since the 1990s.

Yes, over the long term, I would expect that's true. But not in the short term. In 2022, going by memory here, you could still get a mortgage for like 3% while inflation was hitting 9%.

This is roughly correct.

I'm sure the professional econometricists have more sophisticated models that include more factors and lags, but I think the rough picture is "supposed to" be like this: Higher core inflation affects investor and consumer expectations for long-term inflation. The Fed, trying to implement its dual mandate, tries to contain this by adjusting the federal funds rate.

The funds rate, however, acts most directly on the front end of the yield curve, while the long end responds to expectations of future short-term rates and the term premium. So the effect on the long end can be muted, and it doesn't necessarily move in lockstep with the funds rate. Eventually, if they pull hard enough and long enough with the curve inverted, the long end will also move.

Investors then trade agency MBS at a spread over Treasuries, based on current expectations for the risk premia required to compensate for interest-rate, prepayment, and liquidity risks (and those spreads aren't necessarily always positive). People's actual mortgages are then quoted at an additional spread that accounts for origination and servicing costs, lender margin, your personal risk, percent down, the local market, etc. (plus whatever policy shenanigans are going on at Fannie and Freddie with guarantee fees).

According to ChatGPT, about 27% of home purchases are all cash.

Is this broken down by type of purchase (e.g. vacation house; multi-unit investment properties; etc.?) My guess is that for your typical modest home in the suburbs of a large city, the percentage of buyers who finance is significantly higher than 73%.

But not in the short term. In 2022, going by memory here, you could still get a mortgage for like 3% while inflation was hitting 9%.

Right, so it seems to me that raising interest rates might effect mortgage interest rates one way in the short term but another way in the long term, right?

My guess is that for your typical modest home in the suburbs of a large city, the percentage of buyers who finance is significantly higher than 73%.

The average home buyer if 58 years old. 💀 If anything, 27% all cash seems low.

High interest rates help the old at the expense of the young.

The average home buyer if 58 years old.

Again, I would like to see this broken down. Anecdotally, I am in my 50s and I just bought a vacation house in a beach resort area. Which brings up the average age but I'm not really competing with the sort of people who need to borrow money to buy a house.

High interest rates help the old at the expense of the young.

If you mean mortgage interest rates and you are strictly looking at buyers, then I agree, although I am not sure as to the size of the effect. With interest rates as set by the central bank, it's not as clear. And of course a lot of sellers are older people. For them, higher mortgage interest rates are arguably bad.

Isnt this basically selling A for cash, buying B using that cash? If youre moving from owned house to owned house, or downsizing, theres no reason to take on debt.

Isnt this basically selling A for cash, buying B using that cash? If youre moving from owned house to owned house, or downsizing, theres no reason to take on debt.

I'm not sure I understand your point here. Are you suggesting that a lot of cash buyers for houses are getting the cash from the sale of their previous property?

I think so? A significant number of transactions are retired couples selling their expensive "growing family sized" house in a large city's suburbs to either move to a house better sized (and easier to take care of) for an aging couple, or moving to a nice place further away from the city to enjoy a quiet retirement. The second house is presumably more than covered in cash by the first one, since it's either smaller or further away from the city. The difference in price funds their retirement activities.

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Yes.

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On the one hand, lower mortgage rates can create housing demand and increase prices as a result. On the other hand, a high-rate market might decrease homebuying demand and cause home prices to rise slowly or stay mostly flat, depending on the national or regional housing market.

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