Submitted an offer for a house with my GF

[alkemyst]

Not sure where you're getting your data for interest rates, but it's WAY off. Not even close.

Wiki: interest rates started climing some time before 2005

Federal Reserve: some time around 2004-2005

You probably remember hearing on the news how some people borrowed up to their ears with a floating interest rate. As the fed raised interest rates, people were suddenly drowning in debt. Some people saw their monthly payments jump by 20%,30%,40%.

You are talking about teaser rates and insane Adjustable mortgages. It wasn't about the Fed it was about people picking the wrong products for their home purchase.

 

[alkemyst]

Maybe it's different in your part of the world, but in Washington it works the way I said. My parents bought their house around 1981 for about $60,000 at an interest rate of something like 12%. Let's convert that to today's dollars using this CPI calculator. $60,000 in 1981 is $149,224 in 2012. One could say that was one hell of a good deal because it's currently worth about $330,000. When you factor in interest rates, you'll find that the two are a lot closer than they appear.
$149,224 at 12% over 30 years = $1,534.94/mo in today's dollars
BoA's posted fixed rate is 4.278%
$330,000 at 4.278% over 30 years = $1,628.82/mo in today's dollars

Do you see how that works? The cost of goods is based on how much money people have. If people in 1981 had the same budget as people today with the same job, they end up paying the same monthly rate for their mortgage. The difference is that high interest rates are much easier to pay off because the principal is significantly lower. My dad's single income was able to support a family of 4 and pay off the entire mortgage in less than 10 years. Today? Good luck with that.
When the interest rate is up around 12% and the principal of the loan in today's dollars is $149,224, what percentage of the principal are you paying off when you live as cheap as possible and pay an extra $10,000? 10000/149224 = 6.7%
Now let's try that at a lower interest rate. You're in the same house, still living as cheap as possible, you still saved an extra $10,000 to pay off the mortgage, but now you're looking at $330,000 of principal. 10000/330000 = 3.0%

This simple math demonstrates how low interest rates have destroyed the middle class. My parents got a killer deal. Every dollar they saved and paid toward the mortgage actually made a huge difference because the principal was so low. Now that interest rates are super low and people can borrow 10x their yearly income, it takes forever to pay anything off.

I know that a lot of people don't understand this very simple concept, and I really don't know why. People go to a poor place like Mexico and they see that everything is way cheaper. Did they ever ask why? A lot of charities work this angle to guilt people into giving donations. They'll say something like "did you know half the world lives on less than $1 per day?" and they never explain what the cost of living is in those areas. When people make $1 per day, the cost of food might only be $0.50. It's not like people need to work 3 days to buy 1 meal. That's not how the free market works.

You are clueless.

If your parent's paid that $60k mortgage off they paid $384,360.84 plus tax and interest. They did not do so well.

I am sure they refinanced.

Your simple parents didn't really influence the economy. You are taking a layman's approach at this.

We are sort of under a monopoly, or worse since the 1900s.

BTW, I was conceived in Seattle while my dad was protecting missile silos there as a K9 leader. My mom was freezing her ass off in barracks with other military women while even their dogs teeth chattered (no heat).

 

[EagleKeeper]

Both of you are showing how the interest rates affect the value of the house and money being paid.

One is showing how much house can be bought with a fixed amount of $$; as the rates go up; the amount of house goes down.

The other is saying that for a given value of the house; the amount of interest affects the overall sum of $$ pumped into the house.

Both are correct; just you are on different roads.

 

[alkemyst]

Both of you are showing how the interest rates affect the value of the house and money being paid.

One is showing how much house can be bought with a fixed amount of $$; as the rates go up; the amount of house goes down.

The other is saying that for a given value of the house; the amount of interest affects the overall sum of $$ pumped into the house.

Both are correct; just you are on different roads.

I think I was more comprehensive. It's not a mutually exclusive road. However; in these endeavors the banks look at the interest potential and that sort of keeps housing down a bit when rate it high.

 

[Spungo]

You are clueless.

I don't know why you're not grasping this. Using the incredibly broken logic you're trying to use, half the world would be dead right now because the price of things like food or housing would never go down to account for the amount of money people have. More money in circulation = price of everything goes up. Do you not understand why the land in a place with lots of money would cost more than land in a place that has very little money? Do I need to draw a diagram or something?
Luckily someone else already made one:

While trying to find someone else's explaination, I found this interest bit that approaches the situation from a landlord point of view. I was looking at it from a home buyer point of view - people will buy as much home as their budget allows.
interest rates and asset prices (PDF)
"An increase in interest rates lowers asset prices
because it lowers the present value of the stream of income paid by the asset."
That makes a lot of sense. Cash flow is the difference between the revenue and the cost of capital, so increase cost of capital reduces cash flow, making the asset worth less. A common investment rule of thumb is price should be 10x cash flow or cheaper.

I'm not sure how else I can put this across. Suppose there was a town, and every person in this town has the ability to borrow 1 million dollars. According to what I'm saying, this would cause housing prices to go through the roof because a greater amount of money is chasing the same amount of tangible assets. According to your model of how real estate works, this increase in the money supply would have no effect on asset prices. If your theory is correct, why is land in America so god damn expensive? A house in Thailand probably cost less than a used car in the US. According to your theory, the amount of income and credit we have in America should have no impact on asset prices.

If your parent's paid that $60k mortgage off they paid $384,360.84 plus tax and interest. They did not do so well.

I can tell math was your forte. Let's use some simple numbers to demonstrate what I'm trying to say. 5% interest vs 10% interest, normalized to what a family can afford based on a 30 year loan. Let's use a simple number like $1000/month.
5% interest with $1000/month payments --> $187,000 principal
10% interest with $1000/month payments --> $114,000 principal (this is why houses were way cheaper in the past)

With our two loans in place, what happens if you get a raise and suddenly you can pay $2000 per month? The principal stays the same, interest stays the same, but change the years in the calculator until the monthly payment is $2000.
5% interest at $2000/month on a $187,000 property --> 9 to 10 years to pay off
10% interest at $2000/month on a $114,000 property --> 6 to 7 years to pay off

How did my parents buy a house in less than 10 years when interest rates were crazy high? Because math.

 

[alkemyst]

I don't know why you're not grasping this. Using the incredibly broken logic you're trying to use, half the world would be dead right now because the price of things like food or housing would never go down to account for the amount of money people have. More money in circulation = price of everything goes up. Do you not understand why the land in a place with lots of money would cost more than land in a place that has very little money? Do I need to draw a diagram or something?
Luckily someone else already made one:

While trying to find someone else's explaination, I found this interest bit that approaches the situation from a landlord point of view. I was looking at it from a home buyer point of view - people will buy as much home as their budget allows.
interest rates and asset prices (PDF)
"An increase in interest rates lowers asset prices
because it lowers the present value of the stream of income paid by the asset."
That makes a lot of sense. Cash flow is the difference between the revenue and the cost of capital, so increase cost of capital reduces cash flow, making the asset worth less. A common investment rule of thumb is price should be 10x cash flow or cheaper.

I'm not sure how else I can put this across. Suppose there was a town, and every person in this town has the ability to borrow 1 million dollars. According to what I'm saying, this would cause housing prices to go through the roof because a greater amount of money is chasing the same amount of tangible assets. According to your model of how real estate works, this increase in the money supply would have no effect on asset prices. If your theory is correct, why is land in America so god damn expensive? A house in Thailand probably cost less than a used car in the US. According to your theory, the amount of income and credit we have in America should have no impact on asset prices.


I can tell math was your forte. Let's use some simple numbers to demonstrate what I'm trying to say. 5% interest vs 10% interest, normalized to what a family can afford based on a 30 year loan. Let's use a simple number like $1000/month.
5% interest with $1000/month payments --> $187,000 principal
10% interest with $1000/month payments --> $114,000 principal (this is why houses were way cheaper in the past)

With our two loans in place, what happens if you get a raise and suddenly you can pay $2000 per month? The principal stays the same, interest stays the same, but change the years in the calculator until the monthly payment is $2000.
5% interest at $2000/month on a $187,000 property --> 9 to 10 years to pay off
10% interest at $2000/month on a $114,000 property --> 6 to 7 years to pay off

How did my parents buy a house in less than 10 years when interest rates were crazy high? Because math.

You are missing the big picture. My parents bought a house more than $60k in the 80's. Their starter home that was a gift was worth about half that in 1970.

You are talking about one's salary increasing during a loan term.

I am just talking the cost.