Delving into housing market and interest rates
CONTRA COSTA COUNTY, CA (May 23, 2022) — Q. I am so confused about the housing market and interest rates. Can you clarify?
A. The real estate market and interest rates go hand in hand.
My favorite lender, Jay Voorhees of JVM Lending, makes the case for much higher home prices – despite higher interest rates. He quotes MBS Highway founder Barry Habib and famous real estate investor Ken McElroy. Responding to fears of a housing bubble, they all believe that housing prices will double in six years.
It’s really all about inventory. Habib is emphatic about the lack of a bubble, comparing the 2008 meltdown to today. He points out that there were 3 million homes for sale in the country in 2008, compared to only 1 million now. And, we have 14 million more households today.
According to these experts, we are now short 5.5 million homes and that is why inventory will only get tighter. They believe inflation and higher building costs will make it harder for builders and investors to pencil out cash flow positive projects, so they will build less. A lot less.
Meanwhile, interest rates are back at 2009 levels and are 2% higher than when they bottomed out after COVID hit. Thirty-year fixed-rate mortgages climbed to an average of 5.37%. That is up 1.5% over the last three months.
One way to combat the rise in rates is to take an adjustable rate mortgage (ARM) instead of a 30- year fixed loan. These are 5- and 7-year fixed loans that then go to an ARM that can adjust every six months. Anytime during that period, you can refinance if rates go down.
But despite recent increases, today’s interest isn’t “high” when we look over the last 50 years. In 1971, the average rate was more than 7%; in 1979, it was more than 15%; and in 1981, it was more than 18%, as every Boomer likes to remind the younger generations.
Rates hovered in the 10% range throughout the 1980s as the economy boomed. They were in the 8% range for most of the 1990s, dropping below 7% only on rare occasions.
Prior to the 2008 meltdown, rates stayed in the 6%-7% range, only dropping into the 5% range when the economy collapsed.
I hope this puts today’s rates in proper perspective.
I will end by saying that rates are likely to fall if we have a recession, so today’s rates will probably not last that long.
Contact Lynne French at lynne@lynnefrench.com or 925-672-8787.
Lynne French
Lynne French is a Realtor with Compass Real Estate and captain of the Lynne French Team. Originally from Chicago, Lynne French came to San Francisco at the height of the 1960 and started a boutique at age 21. She went on to open two other shops. As industries shifted, Lynne took off on an adventure as a truck driver. For 10 years Lynne owned, operated and drove her big rig throughout the 48 states. One day, her truck broke down for the last time, and it was time to move on. In 1993 an ad for real estate training caught her eye and she began her real estate career as an assistant. Eventually she struck out on her own and had to hire her assistant to handle the volume of work. Lynne's decision to become an office in 2005 came from a sincere alignment with three basic principles: hire the best people, give them the best tools, create thriving communities. When not helping her clients, Lynne and her husband Danny enjoy country living within the foothills of Mt. Diablo.