Thread

1. bwb · 1789586180 · focus · HN ↗

   Get ready for a fun ride my friends :)

   Fun ride =

   Oil is going up, possibly for a long time, which will have a big inflationary effect on everything. And it appears the USA government has lost the conflict it started and effectively given control over key oil delivery channels to Iran. Not to mention Saudia facing real issues from rebel groups / Yemen (simplification).

   Government debt is high in several key economies, and the bond market is being saturated with AI-related bonds, as well as possibly people finally tired of lending the USA/France/UK money at low rates and demanding higher ones. And with higher interest rates and bonds rolling over it means more and more money going to pay for the debt, rather than core services.

   Wild cards lurking in the bushes... AI, AGI, RSI.

   And yonder you have a nuclear power floundering; its only source of hard currency is being rightfully degraded, and its leadership delusional.

   And the one to watch IMO... Russian wheat export ability: wheat prices are up considerably, and combined with inflation from oil, this is the kind of stuff that creates waves of political change like the Arab Spring.

   1. leptons · 1789586770 · focus · HN ↗

      This comment isn't helpful. Please explain for those of us without a degree in economics.

      1. iamnothere · 1789587523 · focus · HN ↗

         Higher rates means financing/borrowing is more expensive. Mortgage rates will go up, possibly pushing home prices down. This is neutral for buyers because of higher rates, but bad for sellers. Loans (personal or business) will be harder to come by. Layoffs, or at least hiring freezes, are more likely. Companies will move into a defensive rather than an growth mode. Higher unemployment will lead to more desperation, and possibly consumer defaults on loans and mortgages.

         Government interest payments, which are already high, will become higher after future bond sales. This will compound future budgetary problems and could eventually lead to cuts in entitlements. If so, expect crime and political instability (already a problem) to rise in the future. This will take a while, though.

         Normally rates are increased to lower inflation by reducing the supply of money. Given the multiple concurrent problems with energy (Hormuz, Red Sea/Yanbu, Russia/Ukraine, possibly Libya as problems are starting there, China is buying aggressively) then higher rates may not be enough to stop inflation. This would create a situation where both borrowing is harder and inflation continues to rage. This is very bad and will lead to demand destruction (nobody’s buying anything because it’s too expensive and they can’t finance it anyway). This results in a severe recession at the minimum.

         Edit: wow, I really set off a discussion with this. See replies below for clarification on mortgage rates, which is the least important part anyways. Also, I should note that a lot of the above is a worst case scenario, if energy isn’t solved soon and especially if bonds don’t respond to the hike, leading to further hikes.

         1. tossandthrow · 1789588477 · focus · HN ↗

            Neutral for buyers? Absolutely not.

            As a buyer you rather want to take out a loan in a high interest rate environment than a low interest rate environment, given that the monthly payment is the same.

            1000 usd extra paid towards your mortgage actually makes a difference when the rate is 15% compared to when it is 1.5%

            1. EPWN3D · 1789589660 · focus · HN ↗

               There's also "date the rate, marry the price". If you're a buyer and think that rates are going to come down within a couple of years, you can lock in the lower price of your home for property tax purposes and then refinance when rates are lower.

               But a lot of people bought in 2024 expecting that to happen.

            2. iamflimflam1 · 1789589788 · focus · HN ↗

               This really doesn’t make sense.

               Higher interest rates mean the monthly payment is higher. You need to pay back the principal + the interest.

               1. bluGill · 1789591041 · focus · HN ↗

                  He assumed that the payment is the same meaning the principal for the same house went down and so this is neutral. If your payment is the same it doesn't matter what is principal vs interest. In the best cases rates go down in the future and then you refinance and your payment goes way down.

                  House prices tend to be "sticky", so that assumption is probably wrong. People who own a house often cannot afford to sell for the current value since it won't pay off their loan and leave enough money left over for a replacement house so they avoid moving. Eventually things get bad enough that they "sell short", but that takes a credit hit so you don't want to do that until the loss is large (and in turn you gain more).

                  1. iamflimflam1 · 1789635503 · focus · HN ↗

                     Maybe the mortgage system is different in the US.

                     But if you have a 25 year term on a loan for a $500,000

                     Approx numbers:

                     5%: $2922 monthly, total paid: $876,885

                     10%: $4543 monthly, total paid: $1,353,000.

                     1. tossandthrow · 1789639704 · focus · HN ↗

                        Yes, so the 500k is not fixed - that should be obvious from these calculations.

                        1. iamflimflam1 · 1789645774 · focus · HN ↗

                           [dead]

                     2. bluGill · 1789653711 · focus · HN ↗

                        You didn't do the same math.

                        Given a $1500 monthly payment and a 30 year loan (30 year is most common in the US), at 5% loan is $279,400; at 10% the loan is for 170,900.

                        1. maattdd · 1789653835 · focus · HN ↗

                           How is 10% less than 5% ?
            3. iamnothere · 1789590436 · focus · HN ↗

               Only if you expect rates to come down in the future. If the monthly payment is the same, I guess you have a slightly bigger mortgage interest deduction for tax purposes, but you’re still paying the same amount each month.

               If you expect rates to come down soon, you can plan to refinance in the future, but that’s a gamble. Rates may not go down, or the value of the house could go down before you refinance, which may make refinancing more expensive depending on how much you owe.

               1. tossandthrow · 1789619049 · focus · HN ↗

                  No?

                  Paying down a high interest mortgage will always have bigger impact on the dollar than paying down a low interest mortgage.

                  1. iamnothere · 1789632444 · focus · HN ↗

                     If you’re paying the same amount monthly, your cash flow is the same. Are we not comparing apples to apples here? I mean a traditional fixed mortgage.

                     I’m comparing a mortgage with a high rate and lower principal to one with a lower rate and high principal, where the minimum monthly payments are the same and the owner pays the minimum.

                     A high interest mortgage just means that you pay more total interest over the life of the mortgage. In any case traditional mortgages are front-loaded, so you pay more towards interest up front than you do principal.

                     1. tossandthrow · 1789636081 · focus · HN ↗

                        I said that the monthly payment is the same. Not that you pay the same amount towards your loan.

                        An optional extra payment is worth more when interest rates are higher.

                        Ie. An optional extra payment of 1000$ will pay your 150$ a year in saved interest when the rate is 15% and only 15$ when the rate is 1.5%.

                        Everything else being equal, optional payments has a higher value, which represent value to the buyer.

                        1. iamnothere · 1789649208 · focus · HN ↗

                           This is true, but I was not assuming extra payments and I don’t know where you got that assumption from. Many people can’t afford to make extra payments given the already high cost of housing and the rising cost of everything else.

                           1. tossandthrow · 1789659915 · focus · HN ↗

                              My initial complaint was merely that the interest rate it not neutral to buyers.

                              1. iamnothere · 1789665335 · focus · HN ↗

                                 I guess I was just referring to average buyers, who don’t often pay extra.
            4. bluGill · 1789590496 · focus · HN ↗

               The question is what will rates do in the future. If rates go down you refinance, if they go up even more you hold your rates. Either way so you are fine long term, but it can be 10 years before it pays off.

               Note that the US mostly does fixed rate for life of the loan. Many countries only have ARM (adjustable rates), and those exist in the US as well. If you have an ARM that changes things greatly.

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