So far the tailwind of historically-low mortgage rates are prevailing over Wall Street and COVID-19 concerns.
Buyers are still active. Properties are still closing. Moving trucks are still showing up at people’s homes.
Open house traffic has declined, but we notice plenty of buyers looking for property. (one of our open houses last weekend had over 40 visitors)
For many, the interest rates are just too good to pass up.
We even see instances of multiple-offer situations for properties priced right in high-demand locations.
Rates today, compared to 4%, equate to not only a monthly savings for those refinancing but also equates to tens of thousands in additional purchase power.
For the average price of a home on the Front Range, the savings is $171 per month and the increased purchase power is $35,811.
Here’s what we expect to happen over the coming months. Listing inventory and transaction volume will both decline. We will no doubt see lower activity compared to a year ago.
But thoughts of the market “coming to a screeching halt” can’t be validated because of the historical performance of our market and because of the inherent fundamentals in place.
We will continue to track the numbers and communicate the facts so that you remain well-informed.
Here is our interest rate Forecast for the next year.
Our Chief Economist, Matthew Gardner, predicts that rates for a 30-year fixed mortgage will stay between 3.8% and 3.9% for 2020.
He doesn’t see rates going above 4.0% until at least the first quarter of 2021.
This is obviously great news for buyers as their payments will stay much lower as compared to having a rate at the long-term average of 7.5%.
If you would like to see the slides from Matthew Gardner’s Forecast presentation, we would be happy to get those in your hands. Just let us know if we can help!
It’s true, certain parts of our market are cooling off. We are seeing fewer multiple offers, fewer bidding wars, and fewer inspection concessions.
However, homes that are priced right and in great condition are selling, and in many cases, selling quickly.
As buyers feel the market cool a bit, it may cause them to want to wait. They sometimes feel like it’s a better choice to ‘wait and see what happens.’
The reality is, there is a real cost to waiting given two specific facts.
1. Interest rates will continue to rise
2. Prices will continue to rise
Interest rates are a little more than 0.5% higher than a year ago and experts predict them to be another 0.5% higher by this time next year.
Prices have been appreciating at roughly 10% per year for the last four years. Based on the numbers, we see that appreciation could be 5% per year for the next two years.
So, let’s look at a house priced at $450,000 today. If prices go up “only” 5% for the next 12 months, that home will cost $22,500 more in a year.
And, if rates go up another half percent, the monthly payment will be $206 higher. That’s an 11% increase!
In an environment of rising prices and rising rates, there is a real cost to “wait and see.”
With interest rates so low, one could argue that money is essentially on sale.
It’s actually half off.
30-year mortgage rates hit 3.75% which is exactly half of their long term average.
Rates have averaged 7.5% over the last 40 years so today buyers are getting half of that rate.
The “sale” on mortgage rates creates a significant savings in monthly payment because of the 1%/10% rule.
For every 1% change in interest rate, the monthly payment will change roughly 10%.
So when rates go up to 4.75%, a buyer’s payment will be 10% higher.
For example, the principal and interest payment on a $400,000 home with a 20% down payment at today’s rates is $1,482.
If rates were 1% higher, the payments jump up to $1,669.
The real estate market keeps chugging along.
Here’s news from the Mortgage Banker’s Association…
Last week, applications to purchase a home hit their highest level since April 2010. This is clearly a sign that the spring selling season is starting off in full swing.
You may remember that the reason why April 2010 was so active is because of the Home Buyer Tax Credit that was in effect. In order to get a special income tax incentive, buyers had to go under contract in April 2010 and close by June 30, 2010.
Today, purchase applications are at their highest level in 9 years and are up 14% over last year. Interest rates are roughly 0.5% lower than 6 months ago and roughly 3.0% below their long-term average.
Let the Spring Selling Season begin!
Photo Credit: Rawpixel via Unsplash
Few topics cause more division among economists than the age-old debate of whether you’re better off paying off your mortgage earlier, or investing that money instead. And there’s a good reason why that debate continues; both sides make compelling arguments.
For many people, their mortgage is the largest expense they will ever incur in their lives. So if given the chance, it only makes logical sense you would want to pay it off as quickly as possible. On the other hand, a mortgage is also the cheapest money you will ever borrow, and it’s generally considered good debt. Any extra money you obtain could be definitely be put to good use elsewhere.
The reality is, however, a little less cut and clear. For some homeowners, paying off their mortgage earlier is the right answer. While for others, it would be far more advantageous to invest their money.
Advantages of paying off your mortgage earlier
- You’ll pay less interest: Each time you make a mortgage payment, a portion is dedicated towards interest, and another towards principal (we’ll ignore other costs for now). Interest is calculated monthly by taking your remaining balance, the length of your amortization period, and the interest rate agreed upon with your lending institution.
If you have a $300,000 mortgage, at a 4% fixed rate over 30 years, your monthly payment would be around $1,432.25. By the time you finish paying off your mortgage, you would have paid a total of $515,609, of which $215,609 were interest.
If you wanted to lower the total amount you pay on interest, you don’t need to make a large lump sum to make a difference. If you were to increase your monthly mortgage payment to $1,632.25 (a $200 a month increase), you would be saving $50,298 in interest, and you’ll pay off your mortgage 6 years and 3 months earlier.
Though this is an oversimplified example, it shows how even a small increase in monthly payments makes a big difference in the long run.
- Every additional dollar towards your principal has a guaranteed return on investment: Every additional payment you make towards your mortgage has a direct effect in lowering the amount you pay in interest. In fact, each additional payment is, in fact, an investment. And unlike stocks, bonds, and other investment vehicles, you are guaranteed to have a return on your investment.
- Enforced discipline: It takes real commitment to invest your money wisely each month instead of spending it elsewhere.
Your monthly mortgage payments are a form of enforced discipline since you know you can’t afford to miss them. It’s far easier to set a higher monthly payment towards your mortgage and stick to it than making regular investments on your own.
Besides, once your home is completely paid off, you can dedicate a larger portion of your income towards investments, your children or grandchildren’s education, or simply cut down on your working hours.
Advantages of investing your money
- A greater return on your investment: The biggest reason why you should invest your money instead comes down to a simple, green truth: there’s more money to be made in investments.
Suppose that instead of dedicating an additional $200 towards your monthly mortgage payment, you decide to invest it in a conservative index fund which tracks S&P 500’s index. You start your investment today with $200 and add an additional $200 each month for the next 30 years. By the end of the term, if the index fund had a modest yield of 5% per year, you will have earned $91,739 in interest, and the total value of your investment would be $163,939.
If you think that 5% per year is a little too optimistic, all we have to do is see the S&P 500 performance between December 2002 and December 2012, which averaged an annual yield of 7.10%.
- A greater level of diversification: Real estate has historically been one of the safest vehicles of investment available, but it’s still subject to market forces and changes in government policies. The forces that affect the stock and bonds markets are not always the same that affect real estate, because the former are subject to their issuer’s economic performance, while property values could change due to local events.
By putting your extra money towards investments, you are diversifying your investment portfolio and spreading out your risk. If you are relying exclusively on the value of your home, you are in essence putting all your eggs in one basket.
- Greater liquidity: Homes are a great investment, but it takes time to sell a home even in the best of circumstances. So if you need emergency funds now, it’s a lot easier to sell stocks and bonds than a home.
Misael Lizarraga is a real estate writer with a passion for teaching real estate concepts to first time buyers and investors. He runs realestatecontentguy.com and is a contributing writer for several leading real estate blogs in North America.