Thursday, July 26, 2018

Will $120 a Month Make the Deal on a $1,000,000 Home Purchase – Interest Rate Facts

Cartoon of two people carring the words interest rates up a steep hill

Morgage interest rates are way down. We have returned to the amazing and historically unique time when mortgage interest rates on 30-year fixed mortgages hovered under 4%, even dropping to under 3.5% in March 2020. This aberration did not result In a massive influx of new home purchases in 2018 or in new home building. The reasons for this are many and varied, but while the US enjoyed these rates, the main benefactors were existing homeowners who refinanced.

Simultaneously, the lack of new residential construction and the inclination for seniors to age-in-place, created shortages in available homes and apartments to buy or rent, driving prices and rents up rapidly.

Now we are back to crazy low rates. To give you some historical perspective, check this chart.

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From 1900 – 1967 rates were narrowly confined between 5% and 6%, except for a brief time at the end of WWII.

From 1967 – 2007 Rates ran up starting in 1967 all the way through the housing bubble bust of 2007. During this period rates were well above 6%, climbing as high as 17% in the credit crisis of 1982.

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2007 – 2018. The housing bust, bank debacle, great recession combination drove mortgage interest rates to unimagined lows for over a decade. With the economy getting stronger, the Fed has seen fit to increase Fed Funds Rates and is starting to sell off assets purchased to keep the economy from crashing. The net intended affect is to send all interest rates higher to stave off potential inflation above the Fed goal of 2% annually.

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But, the COVID 19 has caused the market to make many adjustments. One of those is to send mortgage interest rates back to under 4% on 30-year fixed mortgages.

Will we have extenuating circumstances? Who can know? The primary driver of mortgage interest rates is bond interest rates and Federal Reserve rates. Some would argue that we have a bond bubble caused by massive borrowing in the government and public spheres. If that we to bust, we could see bond rates go much higher. Very few are expecting that in the near term.

The economy could accelerate out of control after COVID 19, creating inflation, and Federal Reserve efforts to slow the economy down using higher interest rates. It is hard to find anyone predicting economic growth above 4%, and most seem to agree that the economy could grow quite a bit without serious inflation.

What does all this mean to the average citizen who owns a home or is contemplating purchasing a home?

As noted in the headline, each decrease in the interest rate of 0.25%, from say 4.0% to 3.75% will decrease the payment on a $500,000 home by $60 a month or about 0.025% of the payment of $2450 (including property tax, insurance, etc.) Another way to look at it is that the decrease of an entire 1% will decrease the payment by $240.
If this buyer was maxed out on their ability to pay, either by their own budgeting or by the mortgage underwriting, they might now qualify easily or even increase their expectations to a home of about $550,000. For the first time homebuyer this could be an issue and could drive up prices by some amount.

However, a huge part of the market right now is all cash deals, high-roller tech employees, and homeowners looking to move up or down. The first group has high incomes, the second group has flexibility regarding down payments. So you need to be prepared to fight against the high down payment or all cash offers.

The mitigating forces that are likely to keep home prices moving up

Demand was high, before COVID, increasing, and likely to continue to increase.
Supply is low, decreasing, and unlikely to increase compared to supply
Current home prices have not retaken 2007 levels in many neighborhoods when adjusting for inflation.

If you’d like to review the details of those three assertions, please go here.

Assuming those three statements to be true, the upward force on prices has been at the rate of about 7% per year. A ballpark guess might be that the interest rate increases might slow that in half for a couple of years. But there’s one more mitigating force that needs to be considered.

People tend to panic, and the panic in this case would cause folks to try and get the today rate at 3.5% before it goes back to 5%, and under one theory of investing, they would be correct. This theory assumes that to the extent that you wish to own, and that you intend to own for many years into the future, even if you sell and buy one or more times in your life, what you pay to make your initial purchase will not be that consequential.

Final recommendation

If you want to own your own home, or if you want to buy a different residence, don’t fret the price or the interest rate. Make the wisest decision regarding your needs, the neighborhood, and your ability to pay. The rest will sort itself out over time.

In order to be fully equipped to win bidding wars, you will want to have a fully underwritten pre-approved mortgage when you go house shopping. Not just a pre-approval letter. To learn more about the difference, give Bill Rayman a call at 310-453-4016

To learn more about current rates or to arrange for a fully underwritten mortgage prior to looking for a home, call Bill Rayman today at 310-453-4016


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