Today, I am diving into everyone’s favorite topic…interest rates!
National U.S. mortgage rates can go much lower over the long term, which in turn means, South Bay interest rates can head lower as well.
Do I believe rates will go lower in the near-term? Absolutely not.
The residential real estate market right now is insane, but there is far too much “bubble talk” that makes things confusing for your average buyer or seller in our local South Bay market.
Combining an insatiable appetite for homes with low supply, along with generationally low interest rates, there are many saying this is a bubble or a top that cannot last.
The massive price increases we have seen throughout the South Bay and state of California are not sustainable long-term, but it does not mean the current price action is irrational. For reference, I have written/spoken about what is supporting prices in these past blogs/podcast channel linked below:
- Affordability current sits at 27% statewide, far from bubble numbers.
- Plummeting interest rates alone afford buyers 10% more purchasing power.
- All-time low inventory in many sub-markets.
- My Podcast: The Richard Haynes Real Estate Show
Prices do seem rational right now, however, it does not come without risks in the years of 2022 and 2023. Sure, the economy can change in an instant, inflation can rise, and the real estate market could go soft.
That said, it is unlikely to see a real estate bubble forming and bursting of epic proportions like what happened during the Great Recession.
Again, it goes back to the title of this blog that interest rates can go much lower over the long-term. And, I believe they eventually will.
Old Blog on UK Interest Rates
If you have been an avid reader, you might remember my August 2019 post titled: “How are Interest Rates Affecting the Housing Market?”
In that blog, I talked about global interest rates in different markets throughout the world.
I want to highlight the United Kingdom, which in pre-pandemic 2019, had 5-year fixed mortgage rates that were around 2.5%. That was a mind-blowing to us Americans before the Coronavirus!
In 2019, our 5-year fixed rates were around 3.5% and 30-year fixed rates fell between 3.75% and 4%.
No one here in the South Bay could have imagined obtaining a 2.5% rate at that time, and oh boy, can you believe what that would allow someone to buy at the time? (Probably the much higher prices you are seeing today)
Presently, our U.S. 5-year rates are now hovering at 2.5%. Unreal.
So where are United Kingdom rates today?
According to the U.K.’s HSBC Bank, an introductory rate fixed for 5-years is around 1.25%.
Interest are lower elsewhere, which means they can go lower here over the long term.
Interest Rates Fall Further with Future Recessions
No, I do no believe rates are going lower in the near-term.
But, I do believe prices at some point down the road could decline, however, there will not be a bubble bursting like we saw during the Great Recession.
The Fed and international monetary institutions across the world have the power to keep mortgage rates low. If the United Kingdom rates at 2.5% seemed crazy in 2019, well now they are a reality. If The Fed wants to keep the housing market on solid ground, what keeps them from going to 1.25% in the future?
At the end of the day, there will be future recessions. Maybe one next year or maybe one in the next decade. Those recessions will drive interest rates lower, and likely much lower, than what we see today.
The housing market is far too important and a massive storage of wealth to millions of American families. If there was a bubble or a recession around the corner, The Fed could influence rates to drop to 1.25% 5-year fixed rates without mush trouble. And as a result, buying power will come right back to support prices long-term.
It is by no means healthy to have a race to the bottom in interest rates, but there is more fire power to prevent a crash in housing prices.
And, because of future recessions, we can expect interest rates to go much lower in the future.
Don’t be surprised if we are sitting at 1.25% mortgage rates in 2030…
That said, I hope you have a Happy Memorial Day Weekend!
We are forever indebted to our troops who have died serving this great country.