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Low Interest Rates Won’t Last Forever

Published on Tuesday - March 25, 2014

Any investor who has been in the business under 10 years must think that getting an interest rate under 6% is the norm. However, we are operating in an unprecedented time. We have been spoiled with interest rates under 5% and in most cases much lower. It hasn’t always been this way and it surely won’t continue forever. These low interest rates are a reflection of the time and the economic period which we have still not fully recovered from. All it takes is one bad jobs report or one small shift in the economy to send rates right back up again. The rug could get pulled out from under many buyers just like that. In other words, low interest rates will not last forever.

It may seem like a lifetime ago, but interest rates before 9/11 were over 7 % on a 30-year fixed-mortgage. Considering they were just coming down from 8%, it seemed like a pretty good rate. However, buyers will adjust to whatever the interest rates are. Obviously, a buyer’s interest rate has a huge impact on home affordability, but buyers have always adjusted over the years. When interest rates inevitably go up, they will be forced to do just that. Mind you, this may happen in the not so distant future.

Over the past few years interest rates have remained low for a number of reasons, but primarily for lenders to induce buyers and to get loans on their portfolios. It is no secret that lenders took a huge hit during the short sale and foreclosure crisis and needed to earn that interest money back. What is somewhat alarming for lenders is that even with record low interest rates and rock bottom home prices, the real estate market did not take off like it should have. The concern is that with rising home values if interest rates rise accordingly even more buyers will not be able to buy and the market will stall.

Interest rates will start to creep up over the course of the year. By the end, we should be over 5%. This may seem like a loss for buyers, but it was bound to happen. Even at 5 or 6%, they are still getting a great interest rate.

The monthly payment for a $200,000 loan will increase just under $200 a month. Are buyers stable enough in their employment to handle this increase or will it cripple many buyers and lead them to continue to rent. The answer to this question will determine exactly how far the market has recovered and how much work is left. If buyers come out in spite of rising rates and home prices, the market will be recovered and volume will increase. If these changes lead to further slowdown among buyers, it could be a sign that the market still has a long way to go.

It is inevitable that interest rates cannot and probably should not stay this low forever. It could be in the next six weeks or the next six months, but rates will start to creep up. How the market responds when they do will say a lot about how far the real estate market has to go.

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