I have a theory about a direct correlation between rising mortgage rates and increasing gentrification. I live in the 5 boroughs of NYC but I suspect this is happening in other areas as well.
First, I would like to address the definition of gentrification, Webster dictionary describes it as:
" a process in which a poor area (as of a city) experiences an influx of middle-class or wealthy people who renovate and rebuild homes and businesses and which often results in an increase in property values and the displacement of earlier, usually poorer residents."
I agree in this definition, I believe gentrification has little to do with race but more so income and coincidingly, class. Often when discussing gentrification, race is brought up. While I think there is definitely a racial component, this is a by-product of certain neighborhoods and their specific average income which is primarily effected by socio economic conditions. In my opinion, the racial component is a separate conversation on historic policy, resources (or lack there of) and other systematic factors affecting people of color. Gentrification at its core, is about money and wealth.
But going back to the specific topic, the theory goes as such:
With rising rates equals less affordability for potential 1st time and repeat buyers of all spectrums on the income scale. It has been reported that with an increase in 1% on a 30 year fixed mortgage rate, a buyer loses 11% of buying power. The monthly payment also rises on an average of $60 per month per $100k borrowed on a 30 year fixed loan. See the chart I put together below:
For reference, the monthly payment on a $100k 30 year fixed rate loan would be:
3.5% = $450* per month
4.5% =$507
5.5%= $568
6.5%=$632
7.0%= $665
7.5% =$700
8.5% =$769
*These estimates exclude, property tax payments and prime mortgage insurance (PMI) if that is required.
So let’s bring that back to my city of New York, if there was an above average income couple who rented in Bushwick, Brooklyn looking to buy in February 2022 a 3-4 bed 2 bath with a listing price of $1,200,000.00 and 10% down,their estimated monthly payment would have been roughly $4800 which is probably close to what they were paying in rent.
That same loan at a 7% rate will now be around $6700.
For those who live in NYC, you could argue that Bushwick has already for the most part been gentrified. That same couple who rents and probably makes income above the average New Yorker might now have some sticker shock for buying property in Bushwick when considering their monthly mortgage payment.
So instead of continuing to shop for $1.2M property with a $6700 monthly nut, to get back down their $4800 comfort zone, it’s feasible to think they might just go to the nearest neighborhood where prices are lower. In this case, a place like Cypress Hills, East New York or even Brownsville (yeah I said it). All of which are still close to subway lines.
So if they’re looking to keep their $4800 per month budget, at 7% rates (which they are at or above as of the writing of this post), that loan would need to be about $700k , add the 10% deposit that they were willing to put down and the purchase price would be about $800k, keep in mind that’s still substantially less than the 10% down payment ($120k) for the $1.2M property which makes this scenario even more attractive.
It’s not far fetched to see prices of similar sized properties in building and lot size to be significantly cheaper in the areas that have not (yet) fully experienced gentrification.
What’s also interesting to think about in this scenario is that the previous gentrifiers are now potentially being gentrified themselves. Think about it, if that above average income couple doesn’t not buy in Bushwick and moves to a lesser priced adjoining neighborhood, the higher threshold of affordability property in Bushwick will still likely get purchased by even more affluent/wealthy couples than came before them.
Going back to the Webster dictionary definition of gentrification which included …”the displacement of earlier, usually poorer residents”.
That definition is still valid but what could potentially now be said as well is “the displacement of earlier wealthy residents with even wealthier residents.”
If I’m right, which I believe is probably more fact than theory. It’s easy to see yet another acceleration of socio economic imbalances essentially stemming from COVID and inflation.
Thanks for reading.
Chris
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