With fixed mortgage rates still in the 5.5% to 6.5% range, it has never been a better time to try to obtain a mortgage. Housing prices have started the slow recovery process, which could take years to fully complete. Expect mortgage rates to increase as the economy recovers.
Real Estate Prices and Mortgage Rates
Mortgage rates typically follow the economic recovery because they generally follow the Federal Funds rate. As the economy recovers, the Federal Funds rate generally increases to ensure that inflation stays low. As the Federal Funds rates increases, mortgage rates increase, making loans and loan payments more expensive.
A 1% change in interest rates could mean thousands of additional dollars in interest expense. It will also mean a higher monthly payment for a loan. This means that as interest rates increase, the size of the loan that can be obtained decreases. Combining all of this suggests that when real estate prices are low and interest rates are low, a buyer will be able to obtain the best value for their money and a more expensive property, all for the same cost.
But what about the potential for loss? The current economy recovery mitigates additional major real estate losses. The government has committed to supporting consumer mortgage workouts and jobs appear to be coming back in many cities. Additionally, overbuilt and overpriced cities have seen real estate prices drop by 30-50%. There does not appear to be much downside left.
While it is unreasonable to expect a real estate recovery overnight, interest rates could shoot up at any moment. As the economy recovers and inflation rises, interest rates will do the same. These rates depend more on economic data and will not necessarily move as slowly as real estate prices.
The problem with waiting for a real estate price recovery is twofold. First, rates move up and down in a mostly unrelated fashion to real estate. As real estate begins it slow climb higher, rates could shoot up or down depending on what the economy is doing. Second, by the time real estate gets to any semblance of a recovery, interest rates will have already increased because the demand for mortgages will be higher.
Don’t get caught up in the waiting game. Mortgage rates and real estate prices are at a historical low. Combined, now is the best time to get real value for money invested in real estate.
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