Interest Rates, Inflation, and How They Affect YOU When Buying A Home Today
There is a lot of uncertainty out there in the Housing Market, so I wanted to write a quick blog for our clients and website users about the state of the housing market & buying a house right now.
Interest Rates and You
Just like the value of homes & the value of stocks – interest rates fluctuate over time. (Homes are typically much less volatile, however, historically speaking). Right now rates are fluctuating somewhere between 6-7% – fluctuating rapidly. It seems like that is high considering the past few years of unusually low-interest rates, but HISTORICALLY SPEAKING – these rates are still low in relation to the past. (Read about historical rates here.)
– Rates in the 1980’s were up to 18%
– Rates in the 1990’s were roughly 9%
– Rates in the 2000’s were between 5 & 7%
– Rates in the 2010’s were around 3.5 – 4.8%
Over the past decade, the low rates we’ve encountered were purposely and artificially kept low. The FED forced interest rates lower to stimulate the economy to pull us out of the Great Recession after 2008 and the FED again dropped them even lower in 2020-2021 to boost the economy and prevent a crash during the height of the Pandemic.
Now the FED is raising interest rates because it is one of the only tools it has for combatting inflation!
Rates Today & Moving Forward
This rise in interest rates really affects a home buyer’s monthly mortgage payment & affordability – which unfortunately has priced a large number of home buyers out of the market. But looking on the bright side, if you have good credit, money for a down payment and closing costs, and can afford a mortgage in the price range you are looking in – now might be a good time to buy because of the amount of competition from other buyers is shrinking.
Most economists and real estate experts I’ve read do not think prices will fall very far if they fall at all in the Boston Metro-Providence Area. But nobody has a crystal ball. There was an excellent FORTUNE magazine article about this you can read here. In fact, many believe the Real Estate market will continue to rise in value over the long term but at a slower pace in our area.
That is because demand for housing is still high because there are not enough homes for the number of buyers looking to purchase a home. (As a result of the 2008 crisis builders mostly stopped building new homes. As a result, they weren’t building the number of new homes needed to keep up with the increase of people looking to buy homes, for about 10 years!)
The Economic principle of Supply and Demand applies here. If the supply of homes is high, and demand is low (there are not a lot of buyers) – then prices decrease. If the supply of homes is LOW (like now), and there aren’t enough houses for the people trying to buy a home – prices go up.
Furthermore, it is likely that interest rates will continue to rise for the foreseeable future until inflation is under control. Buyers who are sitting on the sideline might want to consider the opportunity cost of rates now, versus higher rates moving forward for a while. One thing to keep an eye on though, is that interest rates tend to run opposite of home prices in general. So when rates go up, home prices either stabilize or go down. This fall and winter (2022) we may see home values decrease in some of the more overpriced areas. The higher demand areas like Boston Metro and surrounding areas still have a big shortage of housing.
How Can You Make The Right Decision About Buying A Home In This Market?
What are the fears we hear from some buyers?
- But what if I am overpaying right now? I don’t want to overpay for a house.
– One of the most important things to keep in mind when buying an investment, like a house, is your “time horizon”. This is one factor you must consider when determining the amount of risk you should take on an investment. Generally speaking the longer the time horizon the lower the risk, because you have time to ride out short-term drops in value or to wait out a recession. A home is a long-term investment in my opinion – and a place to live – so it is a little different than buying a stock or mutual fund. It serves a functional purpose in our lives other than making money. (If you are a Real Estate speculator or short-term investor this article is not for you.)
– First, home prices always fluctuate, but the historical average annual change in home values is roughly +4-5% growth per year since the 1960’s. Yes, there will be times when home values go down. Generally speaking, you simply want to avoid selling a home at the bottom of the market.
Basically, when you sell at a lower value you lock in your losses versus waiting until values go back up. Fortunately, real estate hasn’t been as volatile as the stock market and has been more stable over the last hundred years or so. Plus, keep in mind, that it is your home.
– Secondly, if you think about the difference between owning a home and renting – I believe you are far better off financially owning a home than renting. Why? If given the option to pay someone else $2000 a month, or pay yourself $2000 a month, which would you choose?
Most people would choose to pay themselves.
I like to think of owning a home like a forced savings account. Sure some of my payment goes to paying the bank interest, but every dime I pay toward principle is money in my pocket when I sell my house. And when the home’s value increases I am also making money. (As opposed to paying your landlord’s mortgage and losing every dime.)
Lastly, what are the chances that your home will be worth more when you go to sell it 30 years from now? Chances are, as long as you aren’t selling at a time when home values are depressed, you will make money if you view it from a historical lens.
2. Interest rates are so high, I don’t want to pay that!
Let’s go back to our Rent vs. Own analogy, when you pay rent you are basically giving away money to your landlord. When you own a home, sure you pay 6-7% interest, but the rest of the payment goes into your pocket for later when you sell. Every cent you pay on your mortgage toward your principal is equity ($) you are building in your home. Keep in mind, that when you get a mortgage you are borrowing somebody else’s money to buy a home. They are charging you interest on that money, but it is helping you build wealth for the future. It is a win-win in my opinion compared to burning the money you pay in rent.
Here is the key point right now – a lot of buyers have stopped looking for various reasons. So now might be the time to buy your home with less competition from other buyers. In the future, if interest rates go down, you can simply refinance into lower interest rates. (*Consult your lender for specifics on your situation)
There may never be a perfect time to buy or sell. There will always be fluctuations in the market. BUT if you put a good strategy together and have the right mindset you can make it work and capitalize on this moment in Real Estate.
If you are looking to BUY anytime soon, we are here to help! If you have any questions or would like to have a FREE consultation strategy session about your situation, give us a call, text, or email!
**Disclosure: The views and opinions expressed in this blog are those of the author alone and do not represent the views or opinions of Keller Williams or any other party. The contents of this blog are not meant to be interpreted as individualized advice. Please consult your tax advisor, attorney, broker, and/or financial advisor for specifics on your situation. Copyright © Eric Coury, Colonial Classic Realty LLC
