Real Estate Mortgage Interest Rates just hit 8-year highs and began passing 5%…here’s what I think this means for the future of real estate values. Enjoy! Add me on Snapchat/Instagram: GPStephan
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Within recent weeks, the FED increased interest rates WAY faster than I expected they would; This is the HIGHEST mortgage rate we’ve seen in 8 years, since real estate hit its bottom in 2010. Now the reasons WHY the FED raised rates seems fairly logical to me – for the last few years, interest rates were pretty much in NEGATIVE territory, meaning they’re losing money just by loaning out money.
First, cheap rates are meant to help the economy. Lowering interest rates made money cheaper to borrow, which meant more money could flow freely through the economy through cheap lending, and that in turn, meant more money in our pockets, which means more money we can spend. This works in the short term, and there’s nothing wrong with doing this for a little while…but eventually we battle fears of inflation, which means our money, over time, continues to have less and less purchasing power.
Secondly, interest rates are only raised in a healthy economy. It’s these types of markets that can handle a rate increase like we’ve seen.
Third, the new tax plan caused businesses and individuals to keep a LOT more money, and by doing so, it became that much more profitable. In return, stock prices soared knowing that companies would have a lot more profit at the end of the day.
So lets talk about how this specifically relates to real estate.
First point, inflation…from a real estate person’s perspective, we LOVE inflation. This is because the value of your asset or property generally goes UP, while the amount of debt you have stays the exact same and the AMOUNT of that debt actually goes down. But this is bad for everything else.
Second point, the higher the interest rate, the more expensive it becomes to own real estate or borrow money.
Third point, I should break down into three thoughts:
People can’t bid as aggressively as they once were able to.
Second, over the last year, many of the buyers were buying because they had a sense of urgency to lock in an interest rate before they went up.
Third, we’ll continue to see a lack of inventory which will keep prices from falling too dramatically. Most people who bought real estate did so with a significant amount of money down, with great credit, and sufficient income…the variable here is that most of these people took out an interest rate much lower than they’d pay now, and because of that, if they sold, they’d give up a historically low mortgage.
This leads me to think that a few things are likely to happen. Mainly that this is a GOOD thing for landlords and the rental market. I think we’ll see a lot of buyers sitting on the sidelines just waiting to see what happens and if affordability gets better. I think we’ll get a bigger selection of tenants from the buyers that aren’t buying.
I think we may also see more landlords deciding to RENT their homes out instead of sell. This means we’ll continue to see less inventory on the market, as selling just doesn’t make sense for people with 30-year mortgages.
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