A lot of loan officers and Realtors are getting the question from their buyers, “Is it wise to buy when interest rates are rising?”
The answer is YES. YES as long as the numbers make sense.
People have been backing off from buying because it's expensive. So let's look at it
Don't forget, 30 years ago, when our parents bought their first property, they wondered if they could afford the mortgage payments. In hindsight, you look back 10-20-30 years ago and laugh at the payment because it's so small in today's terms. So we have to share this with our clients, everyone needs to keep that in mind, you have to have a long-term outlook when you buy real estate. That's an important rule that people have forgotten, especially over the past 5 years.
So let's take a look at interest rates, specifically mortgage rates. And the way we are going to do that is by looking at Freddie Mac.
Freddie Mac is the industry’s known source for tracking mortgage interest rates. They've been publishing and tracking since April, 1971. Let's look at the data for a few minutes because when we take a step back I believe it helps Loan Officers and Realtors educate their clients with data, rather than hunches and feelings.
Here’s what we know:
Mortgage rates actually rose pretty sharply in 2022, they surpassed 6% on Sept 15th. And this is the first time it happened since 2008. Even though that happened, historical averages are actually higher than what we see today. Granted, it's gone up fast over the last 12 months, but you have to keep these historical rates in mind.
During 2020 and 2021, during the COVID pandemic, the FED took emergency actions, they pushed interest rates and therefore mortgage rates down, below 3% for a very long time. But with inflation surging over the last couple of years, reaching a 41 years record, mortgage rates started to rise quickly. It's because the policy of the Fed tightening pushed these rates higher.
In fact, if you take the rate aver 30-yr mortgage rate and go back to 1971 when Freddie Mac started tracking it in 1971, the average since 1971 is 7.76 %.
So when you look at the 30 yr fixed today, today's rates, are, relatively speaking, still affordable.
Be objective, and rational, and have a long-term outlook. That is the best way to consult buyers today.
This is where you add value - educate clients and walk them through their qualifications and options so that they finance their home with confidence in the best manner possible
Let's compare the payments at 4%, 5%, 6%, and 7%, 8%
So with a 100,000 mortgage, 4% interest rate, 30 yr fixed, the principal and interest is $477 per month
If mortgage rates go up from 1%, to 5%, the payment goes up from 477 to $537. $60 more per month with a 1% jump in mortgage rate. So that's an increase of 12.6%
If it went up another point, so from 5 to 6%, the mortgage payment is $600 per month. It's an increase of $63 over the 5% rate, as a percentage, that's an 11.7% increase.
If it went from 6% to 7%, the 100,000 payment is now $665. A $65 increase. So you see how this works? You are looking at increases of 10 or 11% for every one-point increase in mortgage rate.
At 8%, it would be 734, which is a $69 jump from the 7% mortgage rate.
What is interesting is when you compare the 4% mortgage to the 8% mortgage, the mortgage rates have doubled, and your monthly payment would have gone up 54%, it didn't double.
Your mortgage payment went up by 54%, but the mortgage al rates went from 4 to 8%, which is double. So it's interesting to see how that monthly mortgage payment does not double, or increase proportionally to the increase in interest rates. And I think this is important to understand because if mortgage rates rose, sure your payment goes up, but it's not in lockstep, it's not a 1-1 increase.
So the bottom line is that you have to run your numbers and d your due diligence
It's more important than ever to have the right team surrounding you to ensure you have made the right decisions.
I say all that to say that there are 3 good reasons to share with your clients why is wise to buy when interest rates are rising.
1. When interest rates rise, fewer people can afford to buy a home and a lot of qualified buyers decide to wait and time the market. This large segment of people, therefore, stay in the rental pool looking for properties to rent or lease. That's advantageous for a home buyer because now they can get out of the rental housing stock and face less competition when buying. Less competition means buyers have more negotiation power.
2. When mortgage rates rise, occupancy rates increase on rentals and that is advantageous for landlords who can keep increasing rent. When landlords experience high demand it is not uncommon for rents to increase more than 5% per year. The flip side is that a home buyer can lock in their payment and experience all of the benefits of home ownership.
3. The long-term perspective always wins in real estate. Sometimes TIME is what you are working with. So if you want to be penny-wise and pound-foolish, you say, “I want to wait while values go down.” But if there is an opportunity with the right property in the right place, then move forward with the deal. Take advantage of loan amortization and appreciation - it will happen over time. Maybe not in 3 months or one year, but if you wait it out, you miss out on the amortization and the potential appreciation That is, in my opinion, being penny-wise and pound-foolish.
In conclusion, people have been investing in RE over the last 30-40-50 years in inflationary times, in times when rates are rising, or dropping. In fact, if you look at mortgage harts, you will see that interest has gone up many many times over many years in the past, not just come down. And people were getting into the market knowing they were getting into the market with the right perspective A long-term perspective and a perspective that has sound financial decisions. They were not looking short term. They make sure the numbers are something they can afford.