Rising Interest Rate Environment: Good or Bad for Real Estate and the Economy?

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It seems as though we are getting a lot of attention in the media lately about interest rates going up and whether or not this is a good or bad thing.  In fact, I was listening to a radio ad in the car earlier that made it sound like if you didn’t act now, all would be lost as rates on a 30 year mortgage have risen to a whopping 4.25%.  I certainly hope anybody reading this hasn’t fallen for these cheap and tasteless tactics, as in my view interest rates NEED to go up and have needed to do so for quite some time.  I remember when I bought my first house in 1999, I think I was paying 8.5% interest on a 30 year mortgage and at the time that was reasonable and well accepted.  Spending almost 15 years of my career in the financial services industry, I have a great background for shedding some light on this matter and will do my best to give you my perspective on how this might impact our real estate market and the economy overall.

Hopefully, the financial fallout of 2008 is still somewhat fresh in our minds.  At that time, we were in the midst of a financial calamity that was in part caused by the questionable lending tactics used to fuel the real estate bubble in the 2000’s.  Luckily, the Denver market wasn’t as highly impacted as other areas like Florida, Las Vegas, and California just to name a few.  This prompted the Federal Reserve to move into unchartered waters that not only kept interest rates well below their historical norm for well over a decade now, but also caused them to embark on what was termed “quantitative easing”.  While not the official definition, quantitative easing was essentially bulking up the Federal Reserve balance sheet so they would be able to buy back US debt in addition to keeping the Fed Funds rate low in a strong effort to keep a lid on interest rates from popping up.

The traditional thought behind keeping interest rates low is that is should spur on borrowing since the cost of funds is so cheap.  In theory this should create demand, jobs, spending, and on down the line that would have a ripple effect through the economy.  While the actions of the Fed might have kept us out of another depression in 2008 as many feared, the rebound in the economy has been lackluster to say the least.  It’s true that the stock market is now back to all-time highs and housing market has recovered, but wage growth has been stagnant for decades now and the job creation has been somewhat misleading, as the higher paying jobs have been scarce to say the least.

Now the question comes; how does this potential interest rate increase impact me, the value of my home, and so forth?  The average interest rate on the 30 year treasury since February of 1977 is 6.99%.  The current interest rate on the 30 year treasury as of June 30th 2015 is at 3.099%!  We are less than half of the long term interest rate average since 1977, and every time interest rates creep up a ¼% or ½% you would think the world is ending by the media and lenders who advertise.

Note: US Treasury rates reflect what the government pays on their debt, and mortgage rates will have a higher risk premium attached to them, so make sure you don’t correlate government rates with mortgage rates.  Mortgage rates will always be higher; I was just using the US Treasuries rate to illustrate a point.

Higher rates will also help put a cap on real estate prices from continuing to head higher and higher without the wage growth to justify these higher real estate prices.  The good news is in the Denver market, while inventories are slowly building back up they are still below their historical norm, so the building boom we are seeing should continue for a while.  People are upgrading from their existing homes, new people moving to the state, people moving for various reasons, and on down the line.  However, perhaps it is time to start capping off these prices, get our economy back to more historical norms with interest rates, and provide overall longer term health to the economy.  While the markets would undoubtedly have a negative short term reaction to these moves, maybe it’s time to start weening the crack addict, i.e. the stock market off the crack.  (Don’t you love metaphors?)

As for real estate and whether it’s time to buy or sell, as long as you keep a longer term time horizon with the purchase of a home for whatever reason you may be buying, you will likely be just fine.  If you are doing some moves in the hopes of short term financial gains, I would be extremely cautious as we still have yet to see how this will play out.  If you are looking to sell, now is as good of a time as any to lock in your gains as inventories should steadily continue to increase and prices might be starting to plateau some.  Speculation can be a dangerous game and especially in this environment, so as long as you aren’t engaging in that activity when it comes to your real estate needs, you should be just fine.

As always, if any of you are looking for any help with your real estate needs; whether it is buying, selling, or a combination of both; please keep us in mind!!  You can call me at 303-332-8093 or reach me directly at mark@fullerhomeoptions.com.  Look for articles like these 1-2 times per month on our website under the blog section.  Thanks and I hope you found this useful!

Note:  This blog is for commentary purposes only and is not intended to provide financial advice.  You should seek out the advice of your financial advisor or investment counselor if you should have any questions regarding this commentary and form your own opinion.  Source: www.yahoofinance.com and Denver Metro Association of Realtors.

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