effect of fed tightening on RE

B

billyjoerob

I realize that "Fed tightening" is right up there with "the benefits of flossing" as a topic of discussion, but I wonder what the effect on long term rates would be this time around. Would the market see the tightening as a reason to flatten, because the Fed is moving against inflation? Or would it see move longer term rates higher and maintain the usual curve?

I suspect any sort of move up in rates at this point would really put a big dent in RE prices and activity. The price momentum from 2011-2013 is over. More inventory is piling up at the current prices, even with super low rates.
 
Currently the demand for RE seems to be highly variable by region and even areas within a region - I live in a NYC suburb. As private sector hiring and job creation here has been robust in the past 2 years, so is the RE market.

In my region I think RE prices going forward will be more sensitive to stability/mobility of the workforce than any modest increases in rates.

But I believe there are other regions such as Florida that are currently in a mini bubble over the past couple of years which will likely be very sensitive to rate increases.
 
http://stockcharts.com/freecharts/yieldcurve.php

Select "animate" to see past cycles. For the last segment of the animation corresponding to
Qe 4 , i thought my ipad locked up and found myself tapping the glass.
Past curve behaviour does not seem to apply post fin-crisis.

That sp500 chart ends after 2012 but the interest rate data runs to present date.
 
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R1234 said:
Currently the demand for RE seems to be highly variable by region and even areas within a region - I live in a NYC suburb. As private sector hiring and job creation here has been robust in the past 2 years, so is the RE market.

In my region I think RE prices going forward will be more sensitive to stability/mobility of the workforce than any modest increases in rates.

But I believe there are other regions such as Florida that are currently in a mini bubble over the past couple of years which will likely be very sensitive to rate increases.
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From what I've read from real estate agents, buyers tend to be very keyed on the mortgage payment, and from this level, a small move in rates can have a big effect on the payment. If RE markets are anything like other markets, once housing prices start to decline, you might see a lot more inventory (although neighbors are often unwilling to sell below where the last comp sold).
 
eurusdzn said:
http://stockcharts.com/freecharts/yieldcurve.php

Select "animate" to see past cycles. For the last segment of the animation corresponding to
Qe 4 , i thought my ipad locked up and found myself tapping the glass.
Past curve behaviour does not seem to apply post fin-crisis.

That sp500 chart ends after 2012 but the interest rate data runs to present date.
More...

Interesting. That basically confirms my impression that tops defy the flat rate curve for years before rolling over. The current behavior could just mean that we have years to go before this market tops out.
 
the day mortgage rates dropped below 10% I went right to the bank and bought my first house. The lady offered me an adjustable and I said, "No, no, no. I've been through this, rates at 14% or worse. Just lock me in better than 10% for 30 years."

I've made some in my conservative account in bonds. About 6% a year for the last ten years, and that was all through that 2008/2009 fiasco in my stock account. I sold the last of my bonds today. Not because I fear they will go down, but just because I'd rather be in cash, than bonds. I have enough to worry about with my stocks being at an all time high, without also having to watch bonds.

Just because they trended hard up for the last 10 years doesn't mean they will trend down for the next ten years. My guess is the ten year will chop from 2% to 4% for a long time. On a 30 year mortgage on an average house, what is that? 20 or 30/mo? This idea that if and when the fed tightens, mortgage rates will skyrocket is just chicken little talk IMO.

You can't make people buy a house because rates are low, or because they fear rates will go higher. Not in 2014. But they sure did it to me in 1990.
 
loyek590 said:
the day mortgage rates dropped below 10% I went right to the bank and bought my first house. The lady offered me an adjustable and I said, "No, no, no. I've been through this, rates at 14% or worse. Just lock me in better than 10% for 30 years."

I've made some in my conservative account in bonds. About 6% a year for the last ten years, and that was all through that 2008/2009 fiasco in my stock account. I sold the last of my bonds today. Not because I fear they will go down, but just because I'd rather be in cash, than bonds. I have enough to worry about with my stocks being at an all time high, without also having to watch bonds.

Just because they trended hard up for the last 10 years doesn't mean they will trend down for the next ten years. My guess is the ten year will chop from 2% to 4% for a long time. On a 30 year mortgage on an average house, what is that? 20 or 30/mo? This idea that if and when the fed tightens, mortgage rates will skyrocket is just chicken little talk IMO.

You can't make people buy a house because rates are low, or because they fear rates will go higher. Not in 2014. But they sure did it to me in 1990.
More...

If the principal balance is $400,000, then a 200 basis points move in interest rates is $5160/year in the monthly payment.
 
Real estate involves a bit of game theory. In a low rate market, there are plenty of supporting bids below the market which a homeowner or real estate investor knows he can hit. They are invisible, but he knows they are there. Once rates start to go up, he knows the bids are going to get pulled. So people who are long the market know that if they want to sell, they need to do so in an attractive rate environment. Because that is where the liquidity is. So I definitely think higher rates will depress the market, however, I think rates are going lower, not higher. At least for the short term (12 months). In a low rate environment you get two things: leverage and liquidity. The cornerstone for any good trader. Take those two things away and you're broke. In the financial trading markets, these transitions happen gradually. Which is why many traders overstay their welcome and not realize it. But in real estate, this can happen abruptly. It can turn on a dime. And the leverage can go to zero overnight and the liquidity goes up in smoke. This has always kept me out of real estate investing. It's the mother of all short gamma trades.
 
http://www.redfin.com/research/reports/real-time-housing-market-tracker

percent_of_homes_for_sale_with_price_drops1.png


Inventory piling up and at record low rates. What happens money isn't as easy? It could get ugly.
 
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