Historically Low Mortgage Rates and Things to Think About

Interest rates are a big topic. And, they are more important than ever for our real estate markets.

Since I am on vacation this week, although real estate never sleeps, my mind has been more focused on general topics like interest rates rather than local market action.

It has been almost a year since I have discussed interest rates on the blog, and it deserves far more coverage. This week, I plan to get a head start with some “vacation thoughts” on rates and follow-up with more information down the road.

Past Blogs

First and foremost, I think it is especially useful to look at some past blog posts I have written on interest rates.

It is amazing to see how fast rates move and the ever changing narrative around rates. If you try to predict mortgage rates (and I have), be prepared to be really wrong, often.

Foreign Country Interest Rates

In my last interest rate blog post, I focused on other countries and their various interest rate environments. Whether they were significantly lower or significantly higher than the United States, each real estate market had its own dynamics.

If you would like to read that past blog, click here.

Yes, the United Kingdom had lower interest rates pre-pandemic than we have today. And further, in Japan, you can get an interest rate below 1% despite that country having a terrible deflationary real estate market.

Low rates right now are a gift and are helping to drive South Bay real estate, but that does not always mean a healthy real estate market.

Interest Rates and Market Gains (or Losses)

In another past blog, I covered historical environments where rates were rising or falling in California. You might be wondering, how did they affect the market?

Well, you can find out here.

Personally, I believe this blog is a great refresher and deserves a re-read.

In a nutshell, there is no past historical data that proves interest rates have a direct effect on market prices.

Rising rate environments saw huge real estate gains in the past.

Falling rate environments saw real estate price weakness.

There are combinations of up markets, rising rates…up markets, falling rates…down markets, falling rates…down markets, rising rates.

Simply put, you cannot come to any conclusions!

However, this is super fascinating stuff and you need to take in a multitude of other economic factors (outside of mortgage costs) to figure out your local real estate market.

Complex Federal Reserve Balance Sheet Info

If you decide to skip one of the past posts, then this is the one. It is a little nerdy.

Essentially, I went through how the Fed’s balance sheet and mortgage-backed securities appetite can affect rates.

This post was inspired by the rise in rates we were seeing in 2018. A lot of us agents felt a slow down in the market that summer and it was as rates began to approach 5%, a shockingly high rate when you compare times of sub-3% today.

Historically Low Rates

For the first time ever, 30-year fixed mortgage rates fell below 3%. Here is the 10-year chart from the St. Louis FRED:

So, over the past 10 years, the median eyeball rate looks to be around 4% with highs hitting around 5%, and of course, the record lows seen today.

I want to look at mortgage rates and payments we have seen in just about three years. I am going to use a $1 million loan as an example, which I understand is a lot of money, but it is almost a fact of life for the beach cities and Palos Verdes if you put 20% down.

For this post, I am taking the easy way out with fewer details (i.e. taxes, insurance, etc.) and making up a number that your annual P&I payment should be 25% of your gross income. This is simply for example purposes and because I am trying to save some time on vacation.

From just a 25% gross income multiple, in 2018 a buyer would need to make $256,000 a year to afford a million-dollar mortgage.

Today, a buyer can make 20% less than the 2018 buyer, and still afford the million dollars in debt.

That increases buying power across the board significantly.

Some Light Thoughts

Going forward, I will dedicate a more detailed blog to this important topic, along with more examples and data.

For now, here are some light thoughts and questions to consider…

• Remember, from past blogs, history indicates that rates do not directly affect markets up or down in California.
• The buying power behind today’s buyers is unprecedented (I say this word every week) and the enthusiasm from it creates a wave of optimism for all of us.
• Can these lower rates with no end in sight for the next couple of years create a new wave of value creation for real estate? Is it so strong that rates could be a driver of value for years?
• What about if rates ever go back to 4%? Or, even 5%? Could the market handle it or would there be price destruction as a result?
• C.A.R. Affordability has been the best way to understand the overall market over the past decades. How will rates impact affordability? Higher affordability normally means the market has a lot of gas in the tank, while lower affordability tends to stunt price growth.

I want to leave you with those statements and questions while I am out of town.

In the next interest rate post, I will get into more detail with buying power and try to work on California affordability numbers in concert with ultra-low interest rates.

Essentially, we will find out if rates are making an outsized impact on affordability, or maybe not so much.

That is a big question worth further exploration.

I’ll be back full speed next week.

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