You don’t start from scratch. You sell your existing house, which has benefited from inflation, then buy somewhere with the same mortgage payment over the same remaining duration you had if you choose not to trade up.
Yes there are significant transaction costs but it isn’t as though you are starting again with your housing equity.
Interest rates doubling over the past year change the math on this. For instance, to keep my same mortgage payment, even with significant equity, i could only afford what I paid for the house originally, which would be a significant downgrade in today's market.
Yep, and if you fell for one of your lender's incessant pitches on borrowing on your equity or refinancing and taking equity out, you're really locked in to your situation. I'm very convinced that most people doing home equity loans or refis with cash out don't understand how much they are backsliding when they do that.
I think that depends on what they did with the cash. If they invested it in the S&P 500, that was generally a very good trade. If they turned it into new cars and expensive vacations, well, that was hopefully something that they really enjoyed, because those are things that are even more expensive when financed.
That assumes you started your mortgage in roughly the last 10-15 years in the US or somewhere else with the same rate history. Average rates before then were consistently higher. https://fred.stlouisfed.org/series/MORTGAGE30US
If you started your mortgage before then its a neutral to positive rate-wise.
agree, what really makes me upset is how housing prices in certain areas has not gone down at all given that rates are double what they were a year or 2 ago. The un-affordability is beyond reason.
Lots of people have made that point, but I’ll respond here.
Yes this is true, but only at this point in time when interest rates have shot up from historically low. Most of the time this won’t be the case, and soon this effect could work in the other way in that you could move to a house of similar value for a lower cost if interest rates come down.
And the 30 year fixed rate mortgage is unique to the US. Here in the UK, we only fix for 2-5 years typically.
It is actually pretty much the case for most US homeowners. Everyone I know refinanced their mortgages when interest rates were lower. I got a 2.874% 30 year fixed rate mortgage in 2021 which was a great deal, but now I am essentially stuck here. There's no way I can afford to move. Existing home sales volume is way down.
You are lucky to win the housing lottery. Congrats! Can you imagine being a young couple (20s 30s) trying to buy your first home the US right now? Hopeless. Wait a few years as an oppressed renter!
Yes, I am lucky in many ways. But the US home ownership rate is 65%, so it's hardly a lottery. Many young couples are buying homes in lower cost states like Utah, Minnesota, and Ohio. HN users focusing on California often have a distorted perspective on the situation out in the real world.
I am very symphathetic to this issue for UK borrowers. They face way too much interest rate volatility. There is a gambling effect in the UK about housing.
Are you aware that 30-fixed in the US is essentially gov't backed via three mega pseudo-gov't guaranteed orgs called Fannie, Freddie, Ginnie Mae? It is great for increasing home ownership and utterly oppressive to low income people renting. It is tough.
I cannot believe that more countries do not (politically) prioritise a similar system: Cheap, fixed 30-year'ish home mortgages. To be clear, I'm not saying this is economically ideal, but it is great for your political party!
Do people expect interest rates to lower again any time soon? Inflation just recently started trending down.
Right now US supply has shrunk so prices don’t seem to be declining enough to offset the rise in interest rates; the monthly payments for anything in the market are still eye-watering even factoring in price declines.
> You don’t start from scratch. You sell your existing house, which has benefited from inflation, then buy somewhere with the same mortgage payment over the same remaining duration you had if you choose not to trade up.
In California, Prop 13 means that property taxes are essentially fixed and nonincreasing at the time you purchase your house.
This is sometimes used as a defense of Prop 13, but all it really means is that any increase in total tax burden has to fall disproportionately (in fact, almost exclusively) on new purchasers and their tenants.
Forcing someone to relocate means giving up that privileged tax status and starting over "from scratch".
Wouldn't that be priced into the relocation package you negotiate? It is a problem but no different than buying a home in a flood plain, if it's something you have to do.
Or maybe not, I have never negotiated relocation and the only industry I have to base an example off of is oil and gas and they pay ridiculous amounts of money so you get a comparable house/mortgage to your old one
> Wouldn't that be priced into the relocation package you negotiate? It is a problem but no different than buying a home in a flood plain, if it's something you have to do.
I can't imagine a relocation package pricing in foregone tax benefits.
But even if it did, that's a one-time payment in exchange for giving up a benefit that exists in perpetuity. There are ways in accounting to discount the benefit of indefinite/perpetual annuities and compare them against current cash value, and in practice they almost always undervalue the former, often by limiting the future time window.
California is only one state, I would also be upset to lose my 3% interest rate. Oil and gas companies will price that in and goes 1-2% over what you would lose. So maybe I just have a skewed perspective of relocation packages since I only have o&g to compare to
There is one limited exception: once you’re 55, you can transfer your existing property tax base (but only if the county you’re moving to allows it), but only once.
This is a ridiculous system, and there really needs to be property tax reform in CA, but it needs to be done in such a way that it doesn’t fuck over existing property owners, which is really difficult.
> but it needs to be done in such a way that it doesn’t fuck over existing property owners
This is impossible. The current system is such an extreme and unsustainable transfer of wealth towards property owners that there's no way to create a sustainable (let alone equitable) system that doesn't involve current property owners giving something up.
End Prop 13 protections for all property purchases. Stop grandfathering in existing property when it's inherited. It'll really fuck over new buyers in the short-term. But it's one way to get less resistance from existing owners - who are largely voters. And the skyrocketing property taxes on new purchases might put a damper on prices.
One of the main reasons behind Proposition 13 was to constrain rapid growth of local government expenses, and it has been effective in that. We do need to reform it so that the tax burden is distributed more fairly, but I won't vote for ending it without some guarantees on limiting government spending.
How do places without something like Prop 13 constrain the rapid growth of local government expenses?
Why is limiting government expenditure a goal in and of itself? If the government is able to raise enough tax money to support that spending, and voters agree with it, why shouldn't the government spend more?
> You sell your existing house, which has benefited from inflation
Your new interest rate is going to absolutely demolish any inflation benefit your current house has. I don't think people really understand how bad higher interest rates are when there's a housing shortage.
- A $500k house at 3% is $2,100/month.
- A $500k house at 7.5% is $3,500/month
- That's a difference of nearly $17,000/year
The house that was $500k at 3% in 2021 is still $500k at 7.5% in 2023. Housing prices haven't budged. We'd need to see a 20-40% reduction in prices across the board to stabilize affordability, but that won't happen because there's too much demand.
If the prices have significantly risen since you purchased (as they have for most buyers) then moving even to the same quality of house makes you a net buyer because you need to take on more financing.
Remember, the day you buy a house, you are no richer. This is because the asset (house) is offset by the liability (the mortgage).
I buy a house with a $300k mortgage. The price rises to $500k. I then sell the house and buy another for $500k, rolling my $200k equity and $300k mortgage for no net change.
If you are trading up then yes, the more expensive house rose faster than your house. But that’s the case anytime you move and not unique to a job relocation.
In addition to the other great comment about rates affecting prices, don't forget deep cleaning the house, staging it, paying a 'licensed professional' to fix what the buyer inspection may find, then 6% in realtor fees, then taxes, potentially a lot if you haven't been there two years. In no event will you be rolling $200k equity over in that scenario.
What you're missing is that the after (optimistically) netting 200k from a 300k house, is that the next house is really a lateral move to another 300k house being sold for 500k, but with higher property taxes (At least in states like CA).
This would only theoretically work going from a HCOL area to a lower one, and then moving again becomes even harder.
Nope, there is a huge net change because interest rates have increased. Mortgage rates bottomed out in 2020 at about 2.65%, so the monthly payment on a $300K mortgage was only $1209. Now at 5.87% the payment would be $1774.
Why are you comparing to the absolute minimum? Didn't people use to have mortgages before 2020? My first house was close to $300K, mortgage was 6.5%. No one was crying about this back then.
I am comparing to the absolute minimum because most homeowners with decent credit ratings refinanced their loans a couple years ago near the minimum. Now they can't afford to sell their current homes and buy in a different area because the monthly payments would be unaffordable (unless they buy in a much cheaper area or a much smaller home).
I don't think anyone is crying about it but this is reducing labor mobility and slowing down economic growth. It's one of the unintended consequences of the Federal Reserve raising interest rates due to inflation.
Wait a second. They were able to pay that mortgage before they refinanced, right? And the rates 5 years ago were close to 5% (according to your chart). Suddenly rate get close to what was normal just five years ago and we are talking about most people not able to move.
I will not argue about someone's ability to buy a new house in the current environment. But in this thread discussion is focused on existing homeowners moving to a new house.
In your case (assuming $300K original house price) you will sell it for $600K, net $264K profits after commissions. Use profits plus $60K of original downpayment and any additional equity in the old house as a downpayment for a similar house at $600K. The new mortgage will be similar to one you had in 2007. Same rate and most likely smaller principal. Not a big difference.
All true (except multiply all those dollar figures by a factor of 4).
The problem is that I'd be taking on a new 30-year mortgage while being about 10 years away from retirement rather than ~26 years away from retirement, which has certain implications on my ability to afford that mortgage over its full term.
When you are retired you don't need to live at the same place. World is your oyster. The capital gains from your house ($1.2M already, more in 10 years) will allow you to pick new house almost anywhere without worrying about mortgagees. You won't care about schools or extra bedrooms for kids, for instance.
Statistically very few people stay at the same house for 30+ years, most move within eight.
Why didn't you refinance in 2020-2022 when interest rates were so much lower? If the prevailing rate is 3%, you're leaving money on the table by sticking with your original mortgage (unless it's almost paid off)
My point was that paying 6.5% on a $300K mortgage was a normal thing just 15 years ago. In fact it did not stop anyone from buying in the run to the great recession (aka "subprime mortgage crisis").
I don't have mortgage now, so no, I am not leaving money on the table.
You are generally right, but currently most homeowners have mortgage debt at rates far below market, so they could afford much less house than before (if they need financing).
> You sell your existing house, which has benefited from inflation, then buy somewhere with the same mortgage payment over the same remaining duration you had if you choose not to trade up
Are you living under a rock? Mortgage rates going up make that impossible.
Yes there are significant transaction costs but it isn’t as though you are starting again with your housing equity.