The biggest real estate change in 2022 has been the surge in interest rates with the 30 year mortgage rate gaining over 2 points in the first 90 days of the year, jumping up from the low 3’s to the low 5’s.
So I’m sure you might be wondering why the title asks if mortgage rates are cheaper, when I just told you they jumped up. Well, I think much like a bond trader you need to look at it in the context of inflation.
Fig. 1. “Charts Related to the Latest ‘Consumer Price Index’ News Release | More Chart Packages.” U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm.
Fig. 2. “30 Year Fixed Mortgage Rates.” Mortgage News Daily, https://www.mortgagenewsdaily.com/mortgage-rates/30-year-fixed.
So what does that have to do with the 30 year mortgage?
Well, a year ago you could borrow money at 3.25% which at the time was 0.65% higher than inflation. Now you can borrow at 5.25%, which is 3.25% below inflation (see fig.2.).
So in terms of real dollars, borrowing is cheaper than it was a year ago.
Now I know it’s not just as simple as this framework and there are other implications.
First, no one (at least I think) believes inflation will continue at this pace for 30 years the length you could be locked into the loan. To that point consider the following:
- 5.25% is still historically a very low rate for mortgages and there have only been a few years in the last century with rates that low (They have been well into the double digits before)
- If rates come down as inflation stops or a recession occurs you could refinance
- Most people won’t be in their home for 30 years.
Second, many people will unfortunately realize that while theoretically being able to borrow at a lower real rate might be nice, it will also be a lot harder for people to qualify for a loan. This is a very real point. Less people will get approved for a loan with 5.25% rates compared to 3.25%. This difference in rates now makes the payment a little over 30% higher. At the higher rates affordability will go down. Here are some points to consider:
- As a buyer you can expect to have less competition although demand is expected to far outpace supply.
- 10, 7 and 5 year ARMs (adjustable rate mortgages) might be really good options to consider as you will get a much lower rate (especially if you don’t think you will be in that house for that long)
- We might see the return or growth of lending options that create more affordability (longer terms, interest only)
Where does it go from here and what I am doing
Here are a few things to remember right now.
- The US underbuilt homes for a decade prior to the pandemic which created a housing gap of over 3M
- Since the pandemic the housing gap has grown to over 6M
- If the current rate of building tripled (unlikely given the supply chain and labor issues) it would take 5 to 6 years to close the housing gap if household formations remained constant
- The national vacancy rate is under one percent, the lowest it has ever been
- Long term debt is still nominally cheap
I’ve heard people calling for a crash to happen in real estate since 2013. Most of them have sat on the sidelines and lost out. I’m going to continue to buy more real estate to live in, flip and hold for monthly recurring income.
What can you do if you want to continue to invest in real estate and be protected if the market cools down or reverse course? Keep buying smart. Don’t do deals assuming future appreciation. Make sure you can cash flow everything, even if your plan is to flip.
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