Why housing costs are rising. Yes, rising.

I'm fully aware that, in general, home prices are falling sharply. But the recent run-up in mortgage rates is driving up the cost of homeownership (Work with me; one sign of intelligence is the ability to hold in your head two opposing ideas). From Zillow.com this morning: "... the average Los Angeles area homeowner will pay $2,280 more on their mortgage per year with today’s interest rates vs. if they had bought just two months ago."

Here's how Zillow breaks that down: "Los Angeles area mortgage APR’s on a 30-year fixed loan, to a borrower with good or better credit (credit score of 680+), have risen from 5.75% in April to 6.51% in June. In real  dollars, this means a buyer in Los Angeles who purchased a $482,500 home (area median home value), with 20% down, would have paid $2,253/ month on a loan secured at this rate in April, vs. paying $2,442/month on a loan secured in June."

More, from Zillow: That’s a difference of $190 more per month -– which translates into $2,280/ year, or $68,400 over 30 years..."

Th   Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com. 

       Photo credit: Bloomberg News

Comments

[Nick]

Wouldn't it be more accurate to say housing loan payments are rising rather than costs? After all, if you pay in cash, your cost would still be falling, so your headline is only partially true at best. Another sign of intelligence is being able to see the whole picture, and evaluate hypotheses in multiple contexts...

[househunting]

Give me a break. Higher interest rates translates to home prices coming down that much more. People qualify for loans based on income and ability to pay now. Buyers will just wait for prices to come down to the level of payments.

This is the same reason prices went UP so much so fast, the easy loans, low rates, and teaser rates made payments "affordable" for people who really couldn't afford the homes.

By the same token, as interest rates rise prices will drop

[eprobert]

well, that oughta push priced down even more.

You know what really sucks? My rental situation is getting unbearable and I'm actually starting to look for a place to buy. I don't care how much money i lose as long as I can get away from the psycho landlord!!!

[the problemwithcaring]

Not to mention this assumes some sort of 30-year mortgage loan nazi scenario like, "No Refi EVER for you!!"

So, yea, over-pay 50 grand right now to save that $2300 bucks a year.

[househunting]

"Oh No! Buy now or be priced out of your home (by interest rates) forever!"

Sheesh, they never give up.

[150 multiple choice questions]

Peter, you're better than this. Even though it's Zillow, they're still realtors! And are shilll trying to get everyone to buy out of fear.

What they've touched on is the bubble in a nutshell: THE MONTHLY COST OF OWNING A PROPERTY IS BASICALLY UNCHANGED (~10%) FOR DECADES. (ie: Two years ago the payment on a 3/1 arm was the same per month as a 30yr used to be because the price had gone up accordingly to make the monthly cost similar)

If the rates are going up, the prices are coming down for same properties... now that stupid loans have been removed.

[Allan]

Housing prices should follow interest rates, but they may not, especially if the government gets involved. And while it's true that low rates got the housing bubble started, pure speculation is what kept it inflating.

Since the Fed hates deflation, they will try to keep interest rates low (to support house prices), which will cause high inflation and make cash worth less. So, unless they step back, the cost of a home purchase (with cash or a loan) may not drop. That's the government's goal because they are worried about the large investors (banks, Wall St., etc.) failing.

[mike]

i like the theory that it still costs more out of your bottem line. home prices are going up

[Inland Empire]

Zillow is out to make a buck because its a business. I look for them to get sued at some point for various things. One of them would be wrongly describing some homes despite having correct information. I know of at least one home that is described as being in a less-than-desirable area when in fact, its in a different area that is highly desirable. It shows this home as being worth less than its former twin next door to it. The house that is described as less has been totally updated and the twin has all the original 1970s features. Zillow also lumps in run of the mill, postwar housing with custom homes with custom features thus running the price of the customs down.

[IToldu2CashOut]

This is what I've been saying all along would happen. Sellers are going to be so screwed. This is not something buyers should be afraid of so much. Sellers are the ones who need to think about lowering their price. As a buyer what I am most afraid of is the value of my home going down, because if it does and I need to sell I'll lose my 80-100k. If interest rates go high enough I'll just put more down because the economics of buying a house will push prices down so low thats what people will start doing.

[dclogang]

I agree, house prices will fall even further.

Everyone must realize that until people can afford to buy these house they won't get sold. The bottom line is how much of a monthly payment the average wage earner in LA can afford.

The Median household income is what? $55,000 (or thereabouts).

Also, Zillow is only looking at a 2 month period. Things are going to change dramatically from this.

Look at the long term 1 to 2 years ago and 1 to 2 years into the future and look at the income and what's going on in the economy. Gas & Food prices are climbing income for housing will be less.

That means house prices will overshoot on the downside.

When I can afford the monthly payments on a 30 fixed is when I can buy.. plain and simple.

This article is hogwash...

[dontmatta]

All the more reason why housing prices will keep falling

[Nick]

"i like the theory that it still costs more out of your bottem line. home prices are going up"

See, this is the problem with articles in misleading verbiage like this one. The above statement is blatantly wrong, but the poster got this impression from the article.

To clarify:
- Prices (not to be confused with overall costs) are going down
- Costs, absent borrowing, are also going down
- Borrowing costs are going up as lenders curtail risk
- If you borrow, your overall cost of buying might be going up, because borrowing rate increases might make your monthly payments higher
- Increased borrowing costs will drive actual prices even lower (as they always do), because buyer potential payment amounts are relatively constant

The article could have more accurately been titled "Increased borrowing costs will decrease house prices further", imho. Less potential for confusion.

[Nelcisco]

which is why the prices need to continue to fall.

30 yrs ago you can get a 75k loan @14% for 30yrs fixed and paid $888.65/ mo, all one had to make was about $2000/ mo combined gross income, "14%" folks for 75k, thats less than what one would pay @ 6% for 400k which is $2398.20 just principle and interest no tax & insurance.

Point being its not about interest rate, its about home price and income!

people 30yrs ago had combined incomes of 25k to 30k a yr,
today they have combined incomes of about 60 to 80k
when in comparison to the prices now they need 150k to 250k.

[smrr]

I'm with Laker or is it Cal. Let me see 20% interest rates. Santa Monica Rent Control has been good for my savings.

[Maggie Knowles]

All the more reason to save your money.

Don't buy anything today unless you can pay cash and rent it out so you're getting a good return on the money you paid for it.

Less buying today means lower and more affordable prices tomorrow.

[jaded]

every time we think we might get serious about making an offer on something, we look at the interest rate and say, "we'll wait. There are PLENTY of nice houses on the market."

Yes, housing prices need to get more realistic, but so do the interest rates.

[sfvrealestate]

Peter, welcome back from vacation. I represent buyers on a negotiation for a particular piece of property. The offer/counter offer process has been going on since mid-April (obviously, nobody is in a big hurry here). Thanks to higher interest rates, my clients will now be paying $500 a month more on the same purchase price they offered in April. Yes, this is affecting the negotiation.

[Moral Hazard Drives A Big Wheel]

What are we saying here, that Laura Richardson has a deal with Zillow too?

[Laker]

Peter, out of respect to you, i "worked with you", and read the whole post & article.
There is a serious flaw in the argument and this is because:
1) if you track the monthly payment over the last 10 years, you will see realtivliy flat amount, maybe going up 3-5% per year. Sure not 30% up per year. That is because it follows income
2) The addition of NINJA loans and other crazy toxins gave people ability to buy double the house for same monthly...just compare 30 year fixed rate to Option ARM with teaser rate payments....
3) Today they check and verify incomes. That means, actual income has to pay the note, and debt to income rations are in effect. If interest rates are going up, Joe six pack still can pay X dollars as his income is not rising anytime soon, sure not overnight... That means he could qualify for less loan and as such, less house....
4) check last 30 years and especially last 20 years, when interest rates were low, price were high, and when rates were high, prices were low. That is simply because of the power of financing and the fact that most houses are bought with mortgages and not cash...

All this leads to the conclusion that house prices will decrease even more to compensate to higher rate, Helicopter Ben figured that out about last year, and as a blind horse decided to look only 1 day ahead and slashed rates to 2% when inflation is running at 4.2 (officially and about 15-20% actual inflation)
IF monthly nut is up $2000 per year, base on that, that home ($480,000) is now worth about 4% less base on 10% annual pay for a house. That is about $20,000 less or house now worth $460,000.
so, as smrr said, I'm waiting for 20% interest rates...houses will cost $100,000 again...I don't think it will happen, but 8,9 or 10% is reality soon. If not, expect inflation to hit 20% on annual basis for the next 5-10 years.

[nirad]

my prediction: inflation will rise to 6%, and interest rates will rise to 9%. this will reduce house prices 25%, on top of the 30% they already need to drop to be in-line with historical norms. the only buyers will be those who can pay in cash, and i expect that prices will "overshoot," as your article below puts it, on their way down. people who have real savings and no debt (including home debt) will benefit.

[Dog Bite Lawyer]

You can always refinance the loan/interest, but you cannot change the purchase price.

[Nelcisco]

Jaded: you're right that houses need to be more realistic but not interest rates, they've been unrealistally low. To keep the dollar strong rates will have to go up
or like Laker said, we could expect 20% rate of inflation on an annual basis which is scary.

[Red]

Zillow isn't even right in the short term dimwit mode.

With Calif housing prices dropping maybe 10% a year, the monthly drop in value on that place works out to about $4000 - so by delaying buying, you lose $190 a month on the rate, and gain $4000 per month on the price drop.
Just think, you could have bought a year ago and saved $2,280 for the year on the rate, and lost $48,000 on the value of the home.
Buy now???

[puckhead]

Per Laker

"so, as smrr said, I'm waiting for 20% interest rates...houses will cost $100,000 again...I don't think it will happen, but 8,9 or 10% is reality soon. If not, expect inflation to hit 20% on annual basis for the next 5-10 years"

So in 20 years I'll have to spend $1.3 million for my BMW. It's actually not too bad because my salary will be about $7 million.