Semi-annually I like to touch on the perpetually hot topic in residential real estate – interest rates.
Past Blog Post and Conclusions
The last time I wrote a blog post on interest rates was back in March titled “California Interest Rates are Rising – Should You Buy Now?”
I highly encourage you to read that last post because it debunks the myth that when interest rates go up, prices go down. And, vice versa.
Essentially, per the data, interest rate movement does not dictate whether we go up or down in price. They are a potential contributor to a multitude of factors, but you can never “bet the house” on interest rate moves correlating directly with housing prices.
If you have not read the past interest rates blog post, then read it here now!
I get a good chuckle when looking back at that post based on the title. “Rates are rising!” was the talk of the town (actually, the entire country) just six months ago. In fact, 30-year mortgage rates reached their highest point in almost eight years back in November/December.
Of course, when I wrote that blog, rates were beginning to fall and have since come crashing down to some of the lowest rates in our country’s history.
Look at the humor below in just a nine month period:
- December 2018: Rates are rising, time to buy!
- August 2019: Rates are at an all-time low, time to buy!
It is funny how the headlines change. And change very, very quickly.
You have heard this from me many times before: “Do not let interest rates dictate your real estate decision making.” Interest rates should only be one factor in your analysis of buying and selling real estate.
Some Global Perspective
Since all of us are so focused on the United States, California, Greater Los Angeles, and South Bay news, I thought it might be useful to share with our readers what is going on in the global market. How often do you focus on housing markets outside of the United States? Probably not often.
So, let’s look!
The United Kingdom
The United Kingdom (U.K.), along with the rest of EuroZone, has been widely reported that their economy is weakening. Rates are low in the U.K. with 5-year fixed mortgage rates around 2.5%. Really…?
Think about how much more home you could buy with another percent off of your rate. And, even with substantially lower rates than us, London’s housing market has been in the house of pain over the last year or so with weakening housing prices throughout the city.
Japanese bonds and monetary policy is in negative yielding territory. That has definitely had an effect on mortgage rates. I am not kidding when I tell you that a 10-year fixed mortgage in Japan can be had for about 0.65%.
Would that make you bullish on Japanese real estate? What if we got those insanely low rates in the United States?
While Japan is enjoying a small rebound in residential housing prices, the country’s home prices as a whole are just 38% of their 1991 levels after the Japan’s market bubble burst nearly three decades ago. Yikes!
This is a country that is selling more adult diapers than baby diapers. Over 13% of homes in the country are vacant and it’s continuing to rise. Japan clearly has a declining growth problem that is a much greater factor in housing prices than their ultra-low interest rates.
South Africa has a high inflation when compared to the United States. Their prime lending rate is around 10% where mortgage borrowers can pay plus or minus this rate.
After inflation, from 2008 to 2018, housing prices in South Africa have fallen about 4.8% in total during the 10-year period. This is just an example of a different set of rates and a different housing market than we are used to compared to our country.
The Australia housing market has been on a tear higher over the last decade. However, over the last year or so, there have been signs of weakness.
After a couple of rates cuts and easing of lending standards, Australia’s market is bouncing back with interest rates just under 5%. It will be interesting to see how this housing market progresses over the next year or two.
All in all, you can see that in some countries rates are higher than ours. In some cases, those higher rate markets are doing well while others are doing poorly.
In the case of the United Kingdom and Japan, rates are breathtakingly low and those housing market are quite depressing.
Be careful what you wish for with lower rates.
What Should You Focus On?
With all of this information, you may be wondering what you should be focusing on when making real estate decisions. Of course rates are one factor, but definitely not the only factor as some people might lead you to believe.
For me, in the local markets, I look at job growth/centers, transportation initiatives (like Light Rails), and areas where cities are making zoning laws denser.
The bigger picture macro numbers I like to follow on a state and city basis are:
- Median Income and Affordability
- Sales Numbers and Inventory
- Median Price Movements
If you want more information on Median Income and Affordability on our local South Bay markets, then I would suggest reading my post from last year titled, “South Bay Real Estate: 2018 Data for Homeowners.”
Other factors to consider, although with less weight:
- Lending Standards
- Geo-Political happenings
- Others local and/or relevant factors determined by your real estate agent to have an effect on the market you are considering
Interest rates are just one line item within a larger list that you should be considering with regards to your real state decisions.
If you go outside of the United States, interest rates are unfathomably lower in some places. So, tell me why our rates cannot go lower?
With the strength of our market compared to the rest of the world, perhaps conversely, rates could go higher and still support steady price growth. Or, it might put a chill on a market that has run a bit too far.
Any market happenings are likely a result of forces much greater than just mortgage rates.
All in all don’t read the interest rate headlines as they will change at a moment’s notice. Just look back nine months ago. Do your homework, trust your instincts, and make decisions with the best information at hand.