Over the last few weeks, we’ve had several conversations with clients (past, present, and future), and colleagues in the real estate industry about the current economic state and how that could impact the real estate market. I figured it would be good to put these thoughts into an email and share them with everyone.
Marry the Home - Date the Rate
When you’re looking for a home to buy, you’re going to make the decision because it’s the home you love, not the rate you love. Rates fluctuate all the time, and with that, you can refinance your home. When Mimi and I bought our first home in 2018, it was at the height of the last interest rate peak, the highest interest rates we had seen in years. We locked our mortgage in at 4.5% for a 30-year fixed. And we didn’t think twice about that. Why? Because it was the home that we loved and could see ourselves starting our family in. We were certain that, regardless of the rate, the property would increase in value over time and we no longer wanted to be throwing money away on rent but rather invest in our future.
When rates lowered, we refinanced (multiple times). By the time we sold last month, we were locked in at a 30-year fixed rate of 2.79%. Had we waited until rates lowered to that point, we would have lost out on all of that equity appreciation and would have had to pay for it out of pocket instead as home values had risen. Not to mention possibly never living, and making memories, in that home that we loved in the first place.
Another thought on interest rates - compared to last year, they seem astronomically high, but over the long run, they’re actually pretty normal rates (see the graph below of the avg rates over time). And while the news will say rates are now over 6%, we’re seeing clients get options still in the 4’s, with some potential of even getting under 4%. The sad truth is we’ve been spoiled - rates in the 2’s are far from ordinary, and who knows when/if we’ll see rates that low again. I hear from plenty of people who are saying “I think we’ll wait until we can lock something in back around 3%” and the honest truth is we don’t know when that will happen. What if it doesn’t happen for another 2-3 years? And during that time home values have continued to climb and now your $750,000 home is worth $900,000, while you waited for rates to dip again? What if rates never get back down to 3% and you wait forever?
Look, I’m not trying to say I know what will happen with interest rates, nobody really does, but find the home you love, and refinance whenever the rates are more attractive.
Inflation, Inflation, Inflation
Inflation has been everywhere in the news this year as it has hit a 40-year high. Gas prices, cost of goods, everything feels so much more expensive right now. And yes, this includes the cost of housing. Owning your home can often be a good hedge against inflation.
When you buy, you’re locking yourself into a fixed mortgage that will keep your housing cost the same, no matter what inflation is doing (unless you refinance, of course). You’re locking in what is likely your largest monthly expense. So while other prices may continue to rise around you, your housing cost, now a fixed cost, will remain the same. The same can’t be said for when you rent.
On top of that, you’re investing in an asset that historically competes well against inflation rates (see the graph below).
Recession
Lastly, we have the big R word: Recession. Everywhere you turn, people are warning of a pending recession, and it is important to understand that recession does not mean a housing crisis. I know a lot of people immediately think of the housing crisis in 2008 when the word recession comes up. But this housing market isn’t a bubble that’s about to burst like in 2008 (which, by the way, was a recession caused by a housing crisis, not the other way around).
Below is a graph showing the avg home price changes during the last 6 recessions.
Finally, on why this potential recession won’t be the same for housing as the last big recession, I’ll leave you with these notes from a recent CNBC article:
1. New lending regulations that resulted from that meltdown put today’s borrowers on far firmer footing. Of the 53.5 million first lien home mortgages in the USA today, the average borrower FICO credit score is a record high 751. It was 699 in 2010, 2 years after the financial sector’s meltdown. Lenders have been much more strict about lending, much of that reflected in credit quality.
2. Today’s homeowners have record amounts of home equity. Tappable equity hit a record high of $11 trillion collectively this year, a 34% increase from 2021.
3. Mortgage debt in the US is now less than 43% of current home values, the lowest on record. Negative equity is virtually nonexistent. 25% of borrowers who were under water in 2011. Now just 2.5% of borrowers have less than 10% equity in their homes.
4. There are currently 2.5 million adjustable-rate mortgages outstanding today...about 8% of active mortgages, the lowest volume on record. In 2007, just before the housing market crash, there were 13.1 million ARMs, representing 36% of all mortgages. More than 80% of today’s ARM originations also operate under a fixed rate for the first 7-10 years.
5. While 1.4 million ARMs are currently facing higher rate resets, those borrowers will have to make higher monthly payments. In 2007, about 10 million ARMs were facing higher resets.
6. Mortgage delinquencies are now at a record low, with just under 3% of mortgages past due.