Should you buy with interest rates up?
The big question clients are asking. With changes in the mortgage industry and rates going up. People turn to the internet and are not really getting the full picture. Clients are asking why interest rates are moving up so quickly.
Should I buy real estate right now?
People are looking for answers on the web, places like quicken.com. That is not giving the full picture.
The mortgage bond market shows that the lower we go on the bond market chart, the higher the interest rate.
From January to today February 3, it is a big drop off in the past 30 days. We can see that from January the bond market has a pretty fast downward trend
The lower we go on the bond chart the higher the interest rates,
Looking at September 5th over the past 45 days. It has been a fast downward trend. What is driving this?
Looking at the treasuries chart it’s like the mortgage bond chart, only reverse. As mortgage-backed bonds go down, the treasuries chart goes up. Treasuries are an alternative for investors. The higher the yield on that, it pulls money out of bonds and into treasuries.
It shows a very strong acceleration from the beginning of January, identical to the bond chart in reverse. Since September Treasuries have been moving up. As treasuries go up interest rates go up.
As mortgage-backed securities go down, interest rates go up.
Why? Why are interest rates suddenly moving up? What is driving this?
A couple reasons behind that.
The tax refund bill we went through at the end of last year is now put in place. It’s causing the stock market to accelerate, with that it’s taking the treasuries and moving them up.
The tax reform bill has been received favorably by Wall Street. That is causing these industries to get stronger.
As the stock market accelerates it typically will take money out of bonds and into stock.
That is one element.
The other thing that is causing rates to go up is that the Feds had a big shift in their policy as to what they do with mortgage-backed securities.
Over the last few years during the Obama administration and into the early part of the Trump administration, the Fed has been buying mortgage-backed securities to the tune of over 35 billion dollars per month.
They currently have about 1.7 trillion mortgage-backed securities on the books, and they want to unload that.
They want to get rid of that debt. So, in doing so they’re basically tapering their mortgage purchase program and by the end of this year, they want that to be down to zero.
So, if they are buying 35 billion per month and they are going to zero, the question is. Who is going to buy these mortgages backed securities?
It basically falls back on to the private sector.
The private sector basically has no interest in buying mortgage-backed securities unless there is enough yield or enough value, in other words for them to do so. Because otherwise, they’ll put their money into stocks or into other things.
So that’s another big factor as to why we see rates moving up in 2018.
The third component is that we are starting to see some signs of inflation. Specifically, what we call wage pressured inflation. As we see the unemployment numbers getting stronger in this country we are also seeing wages picking up a bit and in doing so that can also trigger inflation.
So, all three of these items, the tax reform bill, the stock market rallying, the Fed tapering of mortgage-backed securities and inflation, these are all things that cause interest rates to go up.
What does it mean for you? Why should you be buying real estate in 2018?
A lot of people may think that rising interest rates may cause house prices to come back down a bit or get softer.
I disagree with that, I feel we have a very stable housing market, we are seeing some steady growth going on in housing. Part of that is driven by the fact that we have very low inventory.
It is still not uncommon to put a sign in a yard and have that house sold in less than three months. That is a normal and strong market.
Because we have a very strong demand and still very low supply for supply for housing, it’s causing housing prices to stay strong.
So, we may find that certain parts of the market may take a breather and certain houses may come down in price here and there. Overall across the nation, we still see stead appreciation in housing. And that is the number one reason why people should continue to look at buying housing in 2018.
It’s not uncommon to buy a home a $500,000. Home and three or four years later that house is now worth $550,000.
They’ve just picked up $55,000 in equity.
It doesn’t matter what the interest rate is, you got$55,000 in equity.
Sure, the cost of that money might be a little bit more but eventually, interest rates will come back down and you can refinance into a lower rate, and guess what, you still have your $55,00 equity and then some. Because housing prices will continue to go up.
As inventory continues to be low not just in California but across the nation.
The only solution to get more inventory is to build more houses. To get builders to bring in more inventory they need to hire workers and that is where they are having trouble hiring.
There is a shortage of labor. Who builds the houses? It is no surprise to us that many of our workers are undocumented workers. Not getting political here, whether they are, or they are not.
31% of our carpenters are migrant workers.
39% of our brick masons are migrant workers. Almost half of the drywall installers 49% are migrant workers. These are all foreign-born people.
There is a huge shortage of these labor positions. We know if we go on a job site these workers are El Salvadorian, Mexican, Nicaraguan, all coming up from
Regardless of political opinion, the reality is that our home builders are migrant workers and we have a huge shortage. With the political climate, this is rising.
If we continue to lose these migrant workers, we are not going to bring housing supplies back up.
Because supply is forecast to remain low, I don’t see that we are going to have a housing price drop off.
I feel we are going to see a steady climb in housing prices, despite rising interest rates.
Buying a home is still the way to gain big equity.
I don’t see that because interest rates are going up that it is going to cause a trend reversal in housing.
If your renting and you are worried about interest rates. The cost AKA the rate on the rent is 100% because 100% of the money they spend on rent goes to someone else and it does nothing for them.
So, if you want to argue about an interest rate of 4% versus 4.5%, remember if you're paying a 100% of rent, you got nothing working for you.
People should continue to buy housing, first time home buyers, and current homeowners. It still makes sense to buy a home as opposed to giving all your money to someone else.