What are interest rates, really? Why are they going up? And what does it all mean?
When you pay interest for borrowed money instead of paying cash, you’re really buying time. When you buy real estate with a mortgage, you’re generally buying 30 years to repay the debt.
What Does My Mortgage Cost Me?
Your mortgage is designed for repayment in the way which most-benefits the lender.
Conceptual Example:
- 1st payment of $1,000 principle and interest(P&I) – $999 to interest; $1 to buy down principle balance
- 180th payment of $1,000 P&I (15 years into a 30 year-mortgage) – $500 to interest; $500 to buy down principle balance
- 360th Payment of $1000 P&I (last payment on a 30-year mortgage) – $1 to interest; $999 to buy down principle balance
And buying that time is – obviously – not free.
Something Called the Federal Reserve Effects My Mortgage?
The Federal Reserve is our country’s central banking system. They monitor how much money is going into and out of our economy. It’s “Supply and Demand.” When money is easier for consumers to get, it’s cheaper. (www.newyorker.com/magazine/2009/06/29/angelos-ashes).
When money is harder for consumers to get, it’s more expensive.(www.pbs.org/newshour/economy/what-led-to-the-high-interest).
But, when rates are very low for a very long time (as has been the case recently,) The Fed can take action before that money starts to lose too much value. So the government has been raising the costs of acquiring mortgage money to the banks that sell mortgages to the consumer. This causes your lender to raise their rates when selling that money to you.
What’s the result? Those rates going up (plus the mass student loan debt, high rents, and flat income) has made housing across the country less affordable than at any time in the past decade (www.floridarealtors.org/NewsAndEvents/article.cfm?p=1&id=370955).
So, What’s Going to Happen?
For those of us who were hurt by the Great Recession, I don’t have to tell you how easy it is to start having flashbacks to a decade ago.
When our financial lives get very good, or very bad, it might be more difficult to maintain some perspective. People tend to think that whatever is happening is going to keep on happening. It was true in a bubble (from 2002 to 2005.) And it was true in a crash (from 2008 to 2012.) A consensus of “forever appreciation” was followed by a consensus of “forever crash.”
But, (not to get all existentially quantum on you) what’s happening never keeps on happening.
The real estate market has been on the rise – and now, in some markets, it’s rising more quickly. Prices have been high in California forever, and taxes are high. Prices in Seattle today look a whole lot like Manhattan. And people are moving to hot job markets like Austin, San Antonio, Minneapolis, Denver, and Colorado Springs.
Metro-area-sellers across the country are tied up in bidding wars, as prices skyrocket. This, I’m sorry to say, is not sustainable. With still-low, but rising rates, high rents, flat incomes, and high student debts, something has got to give. If the past is any indicator, prices have got to drop.
The Florida real estate market tends to move about 2-to-3 years ahead of the rest of the country.
There are a lot of reasons for this: an abundance of metro areas, international tourist dollars, a fairly transient population when compared to, say, Iowa, and pretty loose regulations surrounding real estate transactions. (For example, the Florida Association of Realtors supports the use of an AS-IS purchase contract.)
Cape Coral, for example, is a geographically giant space (120 square miles, actually.) Thus it makes up numerous markets. While transactions continue to happen, the entry-level housing re-sale market north of Pine Island Road, and east of Burnt Store Rd, is being hit with competition in the form of naked lots and custom homes. Names like Adams and Express and Quantico are up everywhere. And they have prices and incentives which challenge the re-sale market.
When the builders start to drop prices, and add incentives, the re-sales (individual sellers represented by Realtors) will “soon” follow. (“Soon,” in this case, probably means after about 6-to-12 months of the Realtor begging to drop the price, while the seller calls their Realtor “lazy.”)
Will Rents Come Down?
I’ve thought that rental rates have been far too high to be sustainable for years, but those high rents have persisted right across the country. The hourly, or salaried employee, (former known as the middle class) has suffered greatly as demand for quality rental housing has outstripped supply. This has kept those rates high.
The primary indicator for any forthcoming change will likely be vacancy rates. A building with no vacancy, for example, and with people lined up around the block waiting to pay, will make a landlord pretty happy.
Since everybody lives somewhere, a drop in rental rates is likely to come from (1) a lack of demand (meaning people buy instead), or (2) a glut of interested renters who cannot afford to pay (rental fees outstripping the market’s willingness or ability to pay.)
44 million millennials are strapped with $1.49 trillion in student debt, averaging $38,000 upon graduation. The average payment of $382 monthly hurts the ability to qualify for a mortgage and is generally against a flat income. So, the millennials are either renting or living with their parents.
What’s the Bottom Line?
Interest rates are rising, and pretty quickly. And they’re likely, if not outright guaranteed, to keep rising due to government policy designed to hedge inflation, keeping your food and gas prices reasonable.
Coupled with the massive student debts (which make it harder to qualify for a mortgage,) flat incomes in many (especially rural) areas, and very competitively priced custom homes in the area, prices for entry-level (150k-250k) resales in SWFL are likely to come down, even as properties continue to sell.
One thing that’s still clear: purchasing a property on a government-insured FHA loan, with 3.5% down-payment is far superior in every financial category (monthly expenses, income taxes, equity build-up) to paying rent, whether your purchase price goes up, down, or sideways, and whether your mortgage interest rate is 3%, 5%, or 8%.
