(Higher Interest Rates and Buying at the Bottom: See associated video for this blog article)
On the fence?
- If I said that Interest Rates were going to increase tomorrow?
- If I said home prices were going to increase tomorrow?
- And if I said that both interest rates and home prices were going to increase tomorrow?
What would you do?
I wonder why people today are on the fence. The question is somewhat rhetorical because I’m pretty sure that it is because they are waiting for prices to hit bottom – but really – are we still kidding ourselves to think we can time the market? Even expert investors are kicking themselves for failing to spot the bubbles in both the housing and stock markets — Isn’t that indicator enough that we cannot?
So if we are on the fence because we are waiting for bottom – that begs the question of:
“What is the Bottom?”
I think that most people think of “The Bottom” as housing prices hitting bottom before they begin their upward climb. But, if we agree that we can’t time the market, then really, how do we assess a good time to buy? How do we know the bottom when we can’t predict the bottom?
To answer this question I use the “Housing V”
The V shows us that the “Bottom” is not solely determined by home prices hitting “Bottom”, which is what I think most people think the “Bottom” is. The V shows that the “Bottom” is where both Interest Rates & Home Prices are at, well, the bottom (of the V). So let’s take a look:
To explain, let’s look at 3 different situations.
Situation 1: 1980s:
- Where were IR’s?
- Where were prices?
- Where was your mortgage payment?
In the market crash of the 80s, prices were at an all time low. That was the good news if you were a qualified buyer. The bad news was that the Interest Rates (IR’s) were at a record high (18%).
So, despite prices being low, High IR’s limited your buying power.
Situation 2: 2000s:
- Where were IR’s?
- Where were prices?
- Where was your mortgage payment?
In the mid 2000’s, before our recent crash, IR’s were historically low, BUT prices were at record highs. Yet, buyers flooded the market pushing prices even higher.
So, despite IR’s being low, high prices limited your buying power. Most buyers could only buy because of sub-prime loan deals.
Situation 3: 2009!:
- Historically low interest rates AND Low home prices
Right now, we are in what I like to call the ‘Buying Zone’. Interest rates are at historical lows. AND, Austin home prices are lower than they have been in years. This combination of low rates and prices produces the perfect storm for buyers. Never, in my career, have we experienced this situation. I have only ever seen either one or the other of the two previous situations.
So let me ask you, do you really think interest rates will continue to go lower?
Do you really think prices are going to drop much more? Really?
How likely do you think it is that both dots will drop lower on the graph?
And, what happens if either dot jumps higher on the graph?
The Buying Zone
My interpretation and speculation: we are at a bottom. We are, in this moment, in a time where we can take advantage of both low interest rates and low prices meaning the ideal ‘buying zone’. What is important to note is that inflation equals higher IR’s. Interest rates are artificially low because the Fed is holding them down in order to stimulate the sluggish economy. Once the artificial hold is released, interest rates will climb. It is a matter of fundamental economics.
In addition to the perfect storm of a buying zone, in Austin we have noticed spikes in sales activity, higher asking prices, multiple offers, shorter marketing times, more construction starts, and fewer incentives. Yes, in my interpretation, now is a time to buy and if you wait much longer – you may have missed one of the best buying opportunities we have seen in a long time. Waiting will mean a higher mortgage payment. Even if prices were to drop a little more, if interest rates spike, you will have waited too long. Another instance of “bad timing”.
Here come higher interest rates … if that is true … what will you do?
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This is an excellent and simple way to describe the current status of the Austin real estate market to everyone….I applaud you in your ability to simplify a very complex marketplace and what it means for buyers to take advantage of the situation.
Well done.
This is what I’ve been telling my Silicon Valley buyers, but without the “V”. That’s a good visual aid! [I tend to think of the ratio between prices and interest rates as more of a "scale of justice" image - when one is down, the other is up - with the current situation pretty much being the anomaly that seldom happens.]
Your helpful diagram will make it easier for consumers to understand what a great opportunity we have today. Good job.
Well, another graph to look at would be the Case Shiller index which shows that houses are still more expensive now than they were at their peaks in previous decades. There is plenty of room for the “price” dot to go down. In fact, house prices will drop another $8K as soon as the government stops giving away tax payer money to prevent house prices from free-falling.
Not to mention, there are a HUGE number of loan resets coming up in Sept/Oct, (Alt-A, Option ARMS, Interest Only) all around the same time that people who have been unemployed for a year will no longer receive unemployment benefits.
Doesn’t matter what you think your house is worth if the houses across the street are a short sale and a foreclosure.
Nobody knows for certain, but that V graph is a bit misleading and arbitrary. Prices not only can fall, but have to in order to get back to historical norms. The government is just trying to slow the natural progression, but it will happen all the same.
Kristina, You not only were spot on with the psychology of the fence sitters, but the way you explained the once in a lifetime opportunity buyers currently have in this market was just brilliant. Great job!
I have you on my calendar for Tuesday morning. Are we still ok? Looking forward to it!
Sue
Sue — thanks! Yes, I will see you tomorrow morning — I believe Jack is going to pick you on his way to the office this morning.
Maury — Thank you for your comment to my “V” conversation. I appreciate your response.
To reply, I don’t think there is any argument that prices may go down more in many markets. This conversation centers around not speculating about when home prices will hit bottom (since without a crystal ball, none of us can probably predict) but recognizing that in today’s market both interest rates and prices are low as well as we have many ‘incentives’ — which means a unique buying opportunity that may not exist again in any near future.
This conversation is designed for people who want to buy but are ‘on the fence’ waiting for “the bottom”. My claim is that we are in one form of “a” bottom not necessarily “the” bottom.
For those wanting to buy but waiting to buy — maybe NOW is a good time b/c of the unique IR/P situation and incentives in the MP. In other words, the purpose of this blog was not to ‘convince’ people that we are at “the bottom” and as a result they should by. The purpose is to bring forth the unique opportunities in the market today that may not be obvious to those ‘on the fence waiting to buy –who may now have great reasons to finally buy the home they have been waiting for.
Thanks again for your thoughts!
kw