Interest Rates, HELOCs, & 401ks

Today I had some fun recording portfolio rescue with Ben and Duncan. They always do a great job (I pop in around the 17-minute mark).

We talk a bit about real estate and what the 70 million retiring boomers will do to the markets. Both questions are a fascinating reveal of how a common understanding of complex subjects barely scratches the surface of the rich complexities that lay beneath. All too often, the superficial narrative fails to capture the reality beneath.

The first question I joined in on was on rates and home prices:

“I feel like housing is in a weird spot where if interest rates go up no one can afford a house & supply won’t increase. But when interest rates go down there will be a huge demand so the actual price goes up. Curious about your thoughts on this.”

We all tend to see the world from our own unique vantage points, and sometimes that prevents us from seeing the full picture.

First, recall the old RE agent line is “Location. location, location” — while that still is true, the reality of residential real estate is more complex. Location yes, including geography, and specific locales within those geographies. But it’s also home types — good luck selling a dated style that has fallen out of favor; the price point at which you are looking – they all add up to an extremely varied housing market.

Rising interest rates do matter – but mostly for the starter home (under $500k) and the move-up homes ($500-1m); note these pricier east coast examples and will be lower elsewhere. Typical higher-priced houses ($3M+) are paid for with cash, not a mortgage. Manhattan for instance is a 50% cash (no mortgage) market. So rates matter less in that market.

Not all geographies are the same – NY is soft, California is falling, South Florida is rising, as are other warmer, low-tax states. Not all price points are the same: Starter homes behave differently than bigger “Move up” homes; the $5m+ are their own universe.

So, to answer the question: Rising interest rates will bite but the shortfall in supply is even more important – that’s what has prevented prices from falling substantially. Then there is population growth, new household formation, etc.

One other thing to keep in mind about mortgage rates: They are up from abnormally low levels but STILL ARE LOWER than they were during Great Financial Crisis.

I have no clue where rates will be in 5-10 years but I can tell you a few things that are likely to be true: In the USA, the population will be even larger than it is today, but the land mass will more or less be the same. And, we are all going to need some place to live.



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