Interest rates are rising dramatically, to the point where they may reach levels seen in the 1980s?
That’s nuts, but let’s think about it.
Interest rates were around 16% to 17% at the time. What does that mean if interest rates go up that high now? (Which I don’t think they will, by the way.)
I don’t think it is possible. First, in the 1980s, median home prices were around $47,000. Home prices are way higher than that now, so interest rates at that point (like in the 80s) would mean we would have an economic collapse.
I don’t usually reference Zillow, because they often get some things wrong, but to be fair, this Zillow article is pretty good.
The title is “A Change in the Wind: Higher Mortgage Rates, Inventory Rebound Could Be First Steps Toward a More Balanced Market (March 2022 Market Report).” I don't know who's writing their titles, but it almost sounds like a book.
My first thought when reading this was “Whoa! They are calling it a "balanced market" instead of the usual "collapse" or "housing crash.”
I love that because they are getting it right.
They presented a lot of statistics here in the Zillow article. You can go and take a look.
But, I want to talk about what’s happening in the next few months with interest rates.
This article by Reuters is titled “Fed's Powell, half-point hike in view, completes hawkish pivot.”
Reuters says, “A half-point interest rate increase ‘will be on the table’ when the Federal Reserve meets on May 3-4...”
What does that mean? How is it tied to real estate and mortgage rates?
If you look at Bankrate’s article, they talk about what the Federal Reserve does.
Bankrate says, “The Federal Reserve sets borrowing costs for shorter-term loans in the U.S. by moving its federal funds' rate. […] Mortgages, on the other hand, track the 10-year Treasury rate.”
This is what they say about what influences mortgage rates: “Fixed-rate mortgages are tied to the 10-year Treasury rate. When that rate goes up, the popular 30-year fixed-rate mortgage tends to do the same and vice versa. […] Rates for fixed mortgages are also influenced by other factors, such as supply and demand.”
“Price inflation pushes on rates as well. When inflation is low, rates trend lower. When inflation picks up, so do fixed mortgage rates,” Bankrate continues.
I shared these excerpts with you because a lot of people don’t understand how the Fed rates are tied up to the mortgage rates.
That’s important to know.
According to Brookings, “Inflation fell short of the Fed’s 2 percent target for much of the past decade.” The Fed set the rule that if we keep close to the 2% target, then we are not in inflation.
Some people say the alternative to having to raise rates is to raise the target, so instead of 2%, the target should be raised to 3% or 4%, or have the target fluctuate depending on what is happening in the economy.
I thought that was an interesting line of thought.
According to an article by Pocket, titled “Existing home sales continue to fall.” This is what’s happening now: rates are going up.
Some people think that the market is going to crash. To you, I say, "No, it won't, so chill out a little bit."
Yes, it is affecting us. According to the article, “Existing home sales fell for the second consecutive month in March, dropping to 2.7% month over month.”
But it doesn’t mean we’re [the real estate market] going to tank.
However, “The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation, taking a hit on purchasing power,’ Lawrence Yun, NAR’s chief economist, said in a statement. "Still, homes are selling rapidly, and home price gains remain in the double-digits.”
Rates are going to continue to go up. Now consider what will be the possible scenarios for you.
If you are waiting on the sidelines, it’s probably best to go ahead and purchase right now, and lock in the rates before they climb even higher.
We are not going to see a collapse in the housing market; instead, we’re going to see it even out. That means people who used to think they were going to get multiple offers for homes might get fewer offers.
Multiple offers will still be seen in hot markets like Miami, but in other places, it will eventually return to normal.
I don’t know how long inflation is going to last. I just know that interest rates will rise.
To paint you a better picture, let’s use an example situation and compute the monthly dues with a mortgage calculator.
Let’s say the purchase price is $248,300 and you have a yearly household income of $57,000. Assuming you have monthly debts amounting to $250 and you have a down payment of $60,000 - with a good FICO score of 700, if you apply for a 30-year fixed mortgage rate, you will get a 5.998% interest rate.
Assuming the above is your financial circumstances or your budget, if your approved loan amount is $240,000 for a 30-year fixed loan term of 6% interest, your monthly payment is $1,449.
Let’s try going back three to four months when interest rates were at 3%. In similar circumstances, your monthly payment amounts to $1,020.
What happens if interest rates climb to 7%? Your monthly payment becomes $1,771. For 8% interest, it is $1,771.
Now, what happens if your FICO score is not as good? Because, even if the national average FICO score is 720, as inflation goes up, a lot more people will struggle to afford certain things, and credit scores will most likely take a hit.
Personally, I don’t believe interest rates will go back up to the 13% to 16% range like they were in the 80s. I believe they’ll end up at 7% to 8% at most, for FICO scores of 720, because our world is different right now; home prices are more expensive than they were in the 80s, and interest rates dramatically change what we can afford.
These are t scenarios we should be educating ourselves with. What happens when interest rates get to 7% or 8%? We need to anticipate those possibilities so we know what our next moves are going to be.
We should react with fear.
If you’re the consumer, what should you do?
If you must move, do so. Just be sure you understand your price point in the event that interest rates rise.
The sooner you can lock that rate in, the better. Don’t wait. The Fed said so because we are expecting interest rates to increase.
Even though they are not tied to mortgages, the news is putting fear into the minds of those people interested in investing or pulling out a loan.
If you are on the sidelines and you are one of those pushed out of the market, then it’s okay to wait. You can rent it for now, but guess what? The rent is up, too.
So, with rents and rates going up, at least you know if you buy a home, the housing market isn’t crashing. I’m saying buying a home is a safe bet.
If you’re a real estate agent, now that interest rates are going to continue to rise, your job is to give the consumer the ability to understand the market and know their options.
How can we better prepare? Take a look at markets with better affordability so that you can refer your buyers there.
And there is going to be some heavy competition in some markets. Not all markets will ease-out; others will continue to grow. What are those markets? What markets are better?
Real estate is regional, so certain markets are going to respond differently to interest rates going up.
If you are a consumer, find a good real estate agent, make sure they have knowledge and experience, and ask them the right questions.
