Yes, interest rates are at historical lows … again. And buyers are hearing talk of them having nowhere to go but up … again. But seriously, now: we can’t foresee them going much lower (ergo the calls on Wall Street that the bond rally may be coming to an end), and apparently other sources would agree.
What does this mean in terms of purchasing power, for those of you waiting out the market for an extra 10% price drop in housing? Take a $1mm property with a $750k mortgage:
4.4% interest rate = $3,755 mortgage
5.0% interest rate = $4,026 mortgage (equivalent to a 6% difference)
5.5% interest rate = $4,258 mortgage (a 13% difference)
This means that it would take a 6% drop in housing prices by mid-2011 to make your monthly payments the same as they would be today at a 4.4% interest rate, or a 13% drop in prices by the end of 2011. This doesn’t even take into account the compounding effect of the interest payments over 30 years, keeping in mind that there may not be another attractive refinancing opportunity down the road. … not too shabby a reason to pull the trigger, perhaps.
{ 8 comments… read them below or add one }
I think I read this article about a year ago when the 30yr fixed rate was 5.5% , and brokers kept telling me “Rates are the lowest ever!” “Buy something before they start going up!” I am so glad I didn’t listen to that broker babble. Why can’t rates go below 4%? There’s virtually no inflation and the Fed ain’t in no hurry to raise rates, knowing that with all the shadow inventory out there, it will just crush the prices even more. Recession is not officially over until the NYC real estate goes down another 15%.
Vance – I don’t blame you for your post – this is why the beginning of ours noted that we’ve been there, done that … and yet, here we are again, with historically low rates tempting buyers. Broker babble or not, it happens to be true. Broker babble or not, the likelihood of rates going much lower is slim (not impossible, but slim), not just according to the brokerage community but to bond giants like PIMCO and economists, alike. I’m sure you’ve read that the recession was actually over last year, though it certainly doesn’t feel like it to the majority of the country. Despite us being in positive growth territory economically, we’re not arguing that NY real estate prices will go up, rather crunching the numbers out for people expecting a further downturn what a rate increase would mean in terms of the price drop equivalent to help them make a grounded decision, whether that be to buy or not. We will be publishing a bull vs bear post shortly, in which we thoroughly outline both camps’ perspectives: looking forward to your comments
Yes, pull the trigger and get trapped for ever as the interest rates go up.
People buy based on affordability. If they can afford to pay $4K/mon they will buy what fits their budget. As interest rates go up, demand goes down, as people that rely on mortgages can afford less. As demand goes down, well you guessed it: Prices go down.
Yankee … so are you saying that the optimal purchase time (with respect to rates) is when they’re high? (because prices are likely to therefore increase?)
Again, people don’t realize how abnormal the appreciation in real estate was during the 3-4 years before the crisis, when affordability was thrown totally out the window as credit was so cheap and free, since the risk was passed on to the capital market investors with ferocious appetite for these products. If we didn’t have the home buyer credit to artificially support the market, we might have hit the bottom by now and maybe prices might even start to creep up!? Now the bottom has only been delayed and only the so call “all cash” buyers can really buy, as these low rates are NOT available to everyone because banks don’t want to take risk anymore. We’ll see how this post Labor Day season turns out until the holidays, but I won’t rule out the prices dropping some more, so smart buyers should sit on the sideline, as rates are not going to go up as long as the Fed fears deflation and double dip than a return to inflation.
Anyway, I question the impartiality of this site, which is being run and managed by brokers. Would any broker tell someone not to buy or sell in ANY economic environment? There ARE times when it’s okay to rent than jumping in to buy because of more broker babble.
… and, again, we don’t rule out the view that prices may drop more. In fact, if you look at the piece we just published for sellers, we cite lower housing prices as a great reason to list now versus later. Further, I would agree 100% that government intervention has served to artificially prop up or stabilize the market – few would disagree.
As for the question of “why would any broker tell someone not to buy or sell in any economic environment”, we would argue “because you believe that to be the best course of action”. We have consulted many buyers against a purchase decision, despite the immediate impact on our pay, precisely because we stand behind our values of transparency, empowerment and professionalism. If you look through our site, you will find that we have, in fact, dissuaded buyers from purchasing decisions based on what we believed to be faulty assumptions; we have warned against the old mentality of quick profit expectations, or against purchasing at the higher end of the market in the first half of this crisis precisely because we felt the higher end would have more to fall. We have underlined the pitfalls of a double dip precisely with the prudent buyer in mind.
Further, we have tackled topics that we hope empower people (such as deciphering housing data, making sense of Shiller reports, understanding the impact of policy stimuli, etc.). Yet we also realize that, as in any market, there are two sides to every transaction. As such, NO ONE has a crystal ball and there is always someone for whom the transaction makes sense. To believe otherwise is to paint anyone who has made a purchase decision in the last year with one sweeping brush-stroke and the view that they are foolish, a rather dogmatic perspective … as is, we would argue, questioning the impartiality of a site based on the profession of the authors versus the content at hand. We invite you to take a look through our archives and judge our partiality or impartiality through our work.
I never said in my comments that buyers who bought from the lows of 2008 to 2009 were foolish, in fact given that they are mostly cash buyers and stable leverage they made good choices to pick up distressed real estate. My point is simply that I think it’s a wait and see period than jumping in head on as the article seems to have suggested, for both buyers and sellers as it’s not the best course of action. But I do ultimately place the consequences of the decisions to buy or sell on the principals’ heads. Heck, I don’t even blame brokers for trying to push transactions along, they have bills to pay as well.
In reference to the latest article, I don’t get the logic that if a seller believes a double dip is coming and prices will drop some more, he should list and sell immediately for purely economic reason (not counting being forced to sell from job lose, relocation, etc.). If I were a seller I will also wait it out until the market and most importantly, the demand to start picking up before listing. More sellers rushing to list would only drive the prices down some more if demand hasn’t picked up. We have seen obviously that historically low rates hasn’t made much dent in lifting demand, and rates will most likely stay low or level until probably mid of next year. Demand needs to stem from a better and consistent economic environment, job security and growth, and consumer confidence.
As for the impartiality claim, I do want to comment that the other process related articles I have read are quite informative and helpful, but some do jump out as pushing the “broker babble” envelop (ie this one, and even more so the “stars aligning for sellers” above). I admit I was not a frequent reader of this blog, and there are broker run blogs such as Malcolm Carter’s that I find very informative, impartial and fun to read, which is how I was linked to here in the first place. Again, purely from personal experience above, as someone who has bought, sold and now watching the NYC RE market, I find it hard to extract some solid advices from brokers without them being sugar-coated or ambiguous. But ultimately the decisions and blames should fall on the buyers/sellers themselves, and brokers are just a part of the market.
I look forward to other articles coming up on the state of the market, as I do want to hear from both sides of the argument, and ultimately make some hopefully well-informed decisions.
Nice response
So a few things: with respect to jumping in, we are speaking to those buyers who are waiting on the sidelines almost ready to pull the trigger but not quite, those buyers who are waiting for that extra 10% drop in prices. We thought it would it would be informative to calculate the interest rate part of the equation to take in to consideration.
I was a double-dipper back in 2001 (never materialized) and am one now. I constantly battle with myself to try to look at the other side and portray things as objectively as possible (my previous comment of “the transaction always makes sense for SOMEone” applies just as much to me and my perspective). As such, I have to recognize that, in down times, it’s all to easy to report on and write about the pessimistic side of things, while the same goes for optimism during good times. My slightly contrarian side will always look to shed light on the less-favored side of the equation under the assumption that it’s the least talked about.
keep the great comments coming and … talk to you soon!
With respect to sellers, similarly, many are looking to get out but are not sure whether they should list now or a few months from now … I would still argue that if you’re a seller needing to sell, fundamentally, waiting to ride out a potential double dip storm may, in fact take too long. (Mind you, I have the benefit of knowing upcoming articles as they stem from a newsletter we send out ahead of time; therefore there’s also a post that will come on in the next week or so outlining (for underwater borrowers) why in may make sense to go the short sale route versus hang on for dear life and then opt for a foreclosure.)
Lastly, with respect to the impartiality – I hear you. By virtue of us trying to be a bit funny and a bit catchy, we succumb to phrases such as “stars aligning” and others to make it a bit less dry of a read.
On a more personal note, I am somewhat of a perma-bear, believe it or not (more by nature than nurture) … as such, I can relate to your “wait and see” advice more than you can know via a few responses on a blog
In any case, welcome to our site