By Bob Barber, CWS®, CKA®
When COVID-19 hit, both the Federal Reserve and the government put trillions into the economy to stimulate it. This created massive inflation, especially in real estate. Now, the federal reserve is saying no more “Free Candy” as they pull back stimulus by the way of:
1. Higher interest rates over the next 18 months
2. Tampering bond-buying by the billions of mortgage-backed securities in the next few months
3. Reducing their balance sheet.
With present mortgage rates so low, raising them by just 1-2% over the next 18 months could lower real estate prices dramatically to compensate for the rise in rates.
Example: The payment for a $400,000 mortgage at a 3% present fixed interest rate for 30 years is approximately $1,686 for principal and interest. If rates go up by just 1%, the mortgage or price of the home would have to drop by $46,800 to equal the same payment at 3%. If rates go up by 2%, the mortgage or price of the home would have to drop by $86,000 to equal the same payment at today’s 3% average rate. It’s just math, and those that buy today at artificially low rates may find themselves in a bad upside-down equity position for years to come when everything resets at higher interest rates. The above example is just based on a $400,000 mortgage. Higher-priced homes could get hit even harder.
Anyone that lived and owned a home from around 1987-1993 can tell you how painful it was owing more on their home than it was worth. I remember this happening right in my hometown of New Braunfels, Texas. People who had to sell their homes during this time period had to come up with extra cash at closing to pay off their mortgage to sell it because they owed more on their home than it was worth. My advice, if you are thinking about buying or building a home today, is to be patient and possibly wait. I have a feeling you will be very glad you did. We are in a bigger bubble today than we were back in 2008 because rates have never been this low and even a slight increase is a large percentage.