By Steven Thomas
Lower rates and a larger inventory have made now the time to buy.
Have you looked at interest rates lately? They plunged like the first drop on Colossus at Six Flags Magic Mountain. Fasten your seatbelts, raise your hands high in the air, and enjoy the ride. Interest rates dropped substantially just in time for housing’s Spring and Summer Markets.
From sea to shining sea, almost every economist, including me, thought that interest rates would be much higher than they are today. I know of only one economist who got it right. Predicting interest rates is a lot like weather forecasting. We know what the immediate future holds, but where will we be two weeks from now? A month from now? Six months from now? A lot can happen in six months, as all of us have learned.
That brings us to current rates, which are right around 4 percent, their lowest levels since January 2018. It is time for buyers who have been sitting on the fence to jump into the market and purchase. The gift of historically low interest rates is back!
No matter what your age, or what kind of music you like, you have listened to the lyrics of Kenny Rogers’s “The Gambler”: “You’ve got to know when to hold ’em. Know when to fold ’em. Know when to walk away. And know when to run.” The song is about a young man who receives advice about gambling—and, some would say, about living—from a veteran gambler he meets “on a train bound for nowhere.”
So many potential buyers are like that young man: they don’t know when they should walk away from the fence they are sitting on and cash in their chips. They are waiting to take the plunge into homeownership but are trying to “time the market.” Unfortunately, many of these buyers—and homeowners who are waiting to refinance—have already missed several opportunities to cash in on excellent interest rates. Fortunately for them, rates are excellent once again!
Since November 2018, interest rates have dropped dramatically from 5 percent to 4 percent by the end of March, a substantial difference that helps on the homebuyer affordability front (see Figure 1). What happened?
The United States economy is showing signs of slowing, there has been an international economic slowdown, they can’t figure out Brexit, China has slowed, the price of oil has dropped substantially, there is no end in sight to the trade war, and there has been tremendous stock market volatility. That is enough to cause investors around the world to park their money in long-term U.S. government bonds. When that happens, interest rates fall.
And in mid-March, the Federal Reserve stated that it was through raising the short-term rate and would not increase rates at all in 2019. A few economists and market experts are even predicting a cut later this year. As a result, interest rates have dropped to lows not seen in more than a year.
For buyers looking at a $500,000 mortgage, the drop has resulted in a savings of $297 per month compared with last November. That is an annual savings of $3,564, or $17,820 in five years. For a $750,000 mortgage, the savings is $445 per month, or $5,340 per year. For a $1 million mortgage, it is a savings of $594 per month, or $7,128 per year (see Figure 2).
Buyers need to understand that right now is an excellent time to cash in on today’s low interest rates. Waiting for interest rates to drop further is a lot like gambling. Reminiscing about the good ole days, when interest rates were in the mid-3 percent range, will not magically make it happen.
Could rates go down further? Perhaps. Could they go up again? Absolutely. The old saying “A bird in the hand is worth two in the bush” applies. It is better to cash in today than to risk losing out on this opportunity by hoping rates will fall further. There are plenty of stories about buyers who are still kicking themselves for waiting too long.
In taking a closer look at affordability, for buyers looking for a $3,000 mortgage payment, along with a 20 percent down payment, the decrease in interest rates has allowed them to afford a much larger home. Back in November 2018, they were looking at a $698,750 home with a 5 percent mortgage. That has improved dramatically. With today’s 4 percent interest rate, that buyer can now look at purchasing a $785,000 home, and the mortgage payment will remain the same! That is an amazing increase of $86,250 in purchasing power!
News Flash: Rates are low!
Homes are available Affordability is up! Stop gambling and sitting on the fence. Dive into the market now. Don’t kick yourself down the road because you did not act. The combination of improved housing affordability and substantially more inventory than in the past several spring selling seasons should lead to an increase in home-buyer demand. Buyers, what are you waiting for? It’s time to get off the fence and cash in your chips!
Steven Thomas has a degree in quantitative economics and decision sciences from the University of California, San Diego, and more than twenty years of experience in real estate. His bimonthly Orange County Housing Report is available by subscription and provides housing market analysis that is easy to understand and useful in setting the expectations of both buyers and sellers. His website is www.ReportsOnHousing.com.