Typically I write informative posts trying to educate my readership on personal finances, investment strategies, and methods but today I’m doing the complete opposite. I have a question for you as my reader.
Am I Crazy?!
Call me crazy, but when looking at basic math and economics I believe housing prices will significantly decrease once interest rates inevitably rise. My theory behind this is simple. The typical American family does not fathom the amount of money they are borrowing to purchase a home. Instead they focus solely on the monthly payment and determine based on their income if they will be able to afford that payment. Let’s take a look at some quick points of reference below:
- $200,000 30yr fixed loan at 3.5% would result in a mortgage payment of approximately $900/month.
- $200,000 30yr fixed loan at 5% would result in mortgage payment of approximately $1,075/month.
- $200,000 30yr fixed loan at 7% would result in a mortgage payment of approximately $1,325/month.
Now with those numbers in mind, it becomes quite apparent to me that American families will be able to afford less house as interest rates rise, therefore one of two outcomes are possible. Home prices have to come down in order to meet demand or the standard of living for American households will significantly decrease. My bet is the prices of homes will come down, but whenever I bring this idea up to friends they call me crazy! To date I’ve only read one post that was on my side of the line over at My Alternate Life.
Once In a Lifetime Opportunity
Now I do believe if you plan to stay in your home for 20 years or forever, now is the perfect time to buy. However based on my analysis if you are purchasing a home because you think it’s “the right thing to do” with interest rates so low I believe you might find yourself stuck in a home or worse off lose money once interest rates rise.
When we purchased our home we were able to get a 30yr fixed rate at 3.25% I have to admit I was not crazy about having our home built and incurring a mortgage but sometimes in a marriage you have to compromise. If it were up to me we would be in a 3 bedroom condo that was paid off and aggressively adding capital to our dividend growth portfolio. But I digress.
Interest rates are at an all-time low. These rates are the lowest in the history of the United States. Take a look at a 40+ year chart of 30yr fixed interest rates in the US. You will notice that up until about 2001 interest rates didn’t fall below 5%. Common sense and knowledge of economics would assume what goes up must come down, while conversely what goes down must come up. This is likely referred to as the economic cycle.
The Federal Reserve has already announced they plan to keep rates where they are until unemployment drops which isn’t expected until late 2015.
Although these low rates will likely spur another boom in stocks and real estate one has to wonder what will happen when rates inevitably have to rise in order to curb inflation.
My Questions To You
I couldn’t tell you if I’ve ever met an honest Realtor because every time I ask them a question, it always seems like “A great time to buy.” You know what I’m talking, we’ve all known a Realtor that has no reservations about selling their clients down the river and collecting the commission, hence why I am posting this open letter.
- Is there something I am not getting? – I follow multiple investment newsletters and podcasts on a daily basis and their overwhelming advice is now is the time to get into real estate. I obviously have some reservations with this advice.
- What economic factors support strong growth? – Did I overlook a prediction of a growing population boom that will increase demand?
- Do you agree with me?
Some of you may not know me personally but I have very thick skin. I don’t get offended easily especially if someone produces sound information backed by reason and/or facts. Give it to me straight, I’m 100% sincere in my questions. I believe if you are not learning every single day then you are falling behind.
I appreciate the feedback in advance.