Interest rates are a topic I normally write about semi-annually, but it has been 13 months since my last rates blog because, well…2020. Thank you all for being patient, I know I have been promising this topic for quite some time now.
Over the years, I have found that trying to predict interest rates is a fool’s game. You can end up looking silly and believe me, I have looked very, very silly in the past.
Wild Rate Swings
In all seriousness, good luck trying to predict rates over the past few years. The movements have been so wild, and incredibly unpredictable.
Below is just a glimpse of 30-year fixed mortgage rates over the last five years for perspective:
- 4.01% – December 2015
- 3.42% – October 2016
- 4.32% – December 2016
- 3.78% – September 2017
- 4.94% – November 2018
- 4.06% – March 2019
- 2.90% – September 2020
Those are some dramatic swings if you really look at it.
In 2015, we were seeing rates at 4%. Fast forward three years, and rates jumped to a high of about 5%, and now, they are sitting at a low of 2.90%.
The Narrative Changes Quickly
The interest rate narrative changes very quickly based on what is convenient for Realtors to say in hopes of making a sale.
If you look back at my March 2019 blog post here, I talk about a quote en vogue at the time: “Interest rates are rising – go out and buy now!”
At that time, interest rates touched a seven-year high in November of 2018 and agents were discussing how you needed to buy ASAP to avoid higher buying costs.
That “buy now before rates go up” was woefully incorrect.
Not only does that March 2019 blog debunk prices having a correlation to rising or falling rates, but we proceeded to see rates precipitously fall to 2.9% today.
Currently the new narrative predictably, is: “Rates are historically low – go out and buy now!”
It is funny how just 18 months later, the narrative is still to buy, but for the exact opposite reason than before.
The “buy now as rates are historically low” will likely prove to be incorrect again. And it is irresponsible for agents to market solely to buy a home based on interest rates. There are far too many factors that need to be considered when buying a home.
Please remember this when it comes to interest rates:
- There is no historical correlation between prices and interest rates (re-read that March 2019 post for reference).
- No matter if rates are rising or historically low, it seems (according to others) that your best interest is to always buy. Buyers, beware.
The Impact is Significant
Although there is no historical correlation with interest rates and home prices in California, it is hard to ignore the idea that low interest rates are potentially having a huge impact on prices.
At the end of the year, 30-year fixed mortgage we are hovering around 3.75%, according to numbers provided by the St. Louis FRED.
Today, 30-year fixed rates are sitting at 2.90%.
According to our clients, they are getting their hands on 2.0% 10-year fixed rates, and one client even landed a loan as low as 1.65% for 10-year debt.
That is simply incredible.
Let us look at some numbers to see how the significant drop to ultra-low rates change things for a buyer.
*Based on a $2 million purchase price, 30% down, principal and interest
- $1,400,000 loan at 3.75%
- Payment = $6,484 per month
- $1,400,000 loan at 2.90%
- Payment = $5,827 per month
- $1,400,000 loan at 1.75%
- Payment = $5,001 per month
Those are big decreases in payments. And when a buyer can feel those effects quickly (in under 12 months), it makes a difference.
Without getting too detailed on perfect calculations, here is the “rough” increased buying power we are seeing:
- $200,000 increased buying power at 2.90% (when compared to 3.75% rate)
- $400,000 increased buying power at 1.75% (when compared to 3.75% rate)
Let that sink in.
With rates today at 2.90% compared to the end of 2019 at 3.75%, buyers can easily afford paying 10% more in price.
If you are lucky enough to have banking connections and can land a 1.75% 10-year fixed rate, then you can afford to pay 20% higher on price.
Dare I talk about the interest-only route? Buying power gets even better.
Sure, property taxes will increase, and buyers would have to put more money down, but you get the idea of how powerful these interest rate moves have been.
It is hard to deny rates NOT having an impact on prices thanks to the precipitous drop in such a short amount of time.
The market is efficient, and we are seeing a strong reaction as a result in pricing, among other things thanks to the pandemic. This powerful tailwind may very well continue until prices jump 10% or even 20% to accommodate buyers’ newfound purchasing power.
“Don’t fight the Fed” is the old adage and according to the numbers above it might be silly to bet against the impact of low interest rates on the home market.
Remember Global and Fundamentals
I find myself feeling pressure to recommend clients to buy solely based on low interest rates and the powerful market forces that come with it.
Even personally, I question whether it is the right call to aggressively pursue property acquisitions right now.
But, if you refer to my August 2019 blog, it helps give perspective on interest rates across the globe, along with analyzing fundamentals.
Pre-Pandemic Rates & Other Factors
Pre-pandemic, Japan was issuing 0.65% 10-year fixed rate mortgages. The country’s housing prices are just 38% of where they were in 1991.
The United Kingdom was issuing 2.5% 5-year fixed rates before Coronavirus and London was in the midst of a housing correction.
We are in different times now with the pandemic and current state of affairs, but rates are not everything.
You need to consider other major factors like:
- Affordability
- Median Income and Employment
- Sales and Inventory Numbers
There are a whole host of other factors that I list in the past blog that should be considered when making real estate decision.
Conclusion
What I can tell you is that I have no idea where interest rates are going, or how they will affect prices over the long term.
That said, if I were a betting man in the short term, I think the significant, immediate drop in rates increases buying power so substantially that you have to think prices will continue to rise in a very strong way.
But, what if rates rise? Once the market fully prices in low rates, what’s next?
To heck if I know.
The only thing for sure is it is a fool’s game to make long-term decisions over something that has been so unpredictable over the last five years. With rate sup or down, the market has moved due to a multitude of other forces that have to be considered.
But, in the short term, you should not fight these rates.
In the end, the only advice I can give is to buy when you are ready and can absolutely afford it. Rates are a secondary consideration.
Focus on making good, solid long-term decisions when practicing your real estate moves…and the rest will take care of itself.