Interest rates are at or near record lows. For years, the real estate industry has prayed for low interest rates. Low interest rates let you afford more house because mortgage payments are lower. In most scenarios as we saw in starting in 2003, a lengthy period of low interest rates starts driving up housing prices which makes everyone in the real estate industry from home builders to real estate agents giddy. So with interest rates plunging to all time lows, does that mean we are going to see another jump in prices? Don't count on it. Here's 5 reasons prices won't be rising due to lower interest rates:
Unemployment is High:
Unemployment is high. 17% of the country is either unemployed are seriously underemployed and many, including me, feel that the real rate of unemployment is likely over 20%. With that many people unemployed you have fewer potential buyers and many more distressed sellers. Unemployed people don't buy houses and people that are worried about losing their job aren't likely to either. Low interest rates are only good if you have a job to take advantage of them.
Qualifying is Hard:
Gone are the days of fogging a mirror to qualify for a loan. If you have a 20% down payment (which you should), great credit and good income, you'll get a loan. But what percent of potential buyers fit that criteria? If your income is anything but from a W-2, get ready for a long process to secure a loan.
Property Taxes Mute Interest Rate Drops:
One of the biggest factors that becomes increasingly important at lower interest rates are all the other costs of owning a home. Chief amongst them are property taxes which in some locales can exceed 2% or more. If the interest rate on a 30 year loan drops from 5.0% to 4.0%, your payment will be 11% lower and therefore significantly cheaper. However, if you are saddled with 2% property taxes, the savings are only 8.5%. Unlike your fixed rate mortgage, property taxes increase over time. After 10 years of 4 percent annual increases, property taxes are a stunning 50% of your mortgage payment. When you retire your mortgage, your property taxes could be as much as your original mortgage payment was.
Most People Already Bought:
Between 2004 to 2007, home ownership increased dramatically. People that normally would wait to buy a house accelerated their purchasing decisions due to cheap interest rates, zero down payments, and a host of "affordability" programs. In essence, we borrowed future demand. The down Federal home buyer credits did much of the same to try to further get the last few people of the fence. Alas, there are few people now in the market for a home and without demand and with plenty of sellers, prices will continue to slide unless the government comes up with some other program to once again borrow future demand.
Negative Housing Stigma:
A few years ago, housing was a smart investment. Now everyone thinks its the worst investment ever. Of course, in both cases, people have it backwards, but it's hard to change sentiment. There are people with great credit, cash, and strong income. But many of them aren't going to buy, not yet at least. First off, many people are happy renting and with falling rents, there is little reason to leave a comfortable apartment. Second, many people just want to hold cash in bad times, a fairly prudent decision that is hard to fault. That 20% down payment in many places makes one heck of an emergency fund. Last, few people think that 6 months from now, housing prices are going to be higher, so there is little downside to waiting it all out.
Now if you think that we're just a few years away from another rise in prices, you might want to look at Japan for a sobering example. Property prices in Japan's 6 largest cities are still 60% below what they were.... in 1990. 20 years after their peak, prices are less than half of what they were. Over 30 years the prices are roughly the same. Japan tried everything including setting interest rates at zero and prices are still near the lowest level since their peak.
So if you are banking on your home's price going up because of low interest rates, you might be sorely disappointed.
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