The Danger of Margin & The Housing Market.
Rising interest rates & loans
Good morning everyone,
If you don’t already own a house, you might not know that since the pandemic; The average price of a home has gone up 45%. Making affordable housing as unrealistic as it was in 2005-2007.
Recently, the median home price has surpassed $400,000 for the first time ever. And in this economic environment of tightening monetary policy. The outlook for many homeowners across America could look bleak.1
Why People Could Be In Trouble
If you have read any of my recent articles, then you already know that the federal reserve has been raining interest rates in an effort to combat inflation.
All in all, this can be a good thing for many Americans, as inflation has eaten a bigger and bigger chunk of their paychecks every month.
However, during the pandemic, when interest rates were at an all-time low of 0.25%, some people were inclined to take advantage of their current financial situation and leverage the equity in their house.
Basically, this means that over time, you build up “equity” in your house (basically how much % you own of the house), and over time it increases naturally with the price of real estate appreciation.
Then you can take the equity out of the house in the form of a low interest rate loan. Called a HELOC, or a Home Equity Line Of Credit.
This has been a very popular strategy for millions of Americans, but facing a margin call is one possibility they might not have considered.
Margin is Calling 📞
In this perfect storm of high inflation and rising interest rates, people have much less cash compared to the past two years when monetary accommodation was at its peak.
But, what happens when interest rates rise is that it affects the price of real estate by decreasing your purchasing power.
So let’s say you have $100,000 dollars in equity in your house. You can take out another $100,000 as a loan, but it’s a regulatory requirement that you keep at least 25% of the debt you acquired.
If your account dipped below $133,000 ( a 75% decline in the value of your assets.) you would be facing a margin call. This means the bank you own money to will sell your existing assets (like your house) to pay off the debt you acquired if you can’t make the payments.