February 12, 2009

How Much Lower Will Interest Rates Really Go?

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For those of us who bought our first home in the 70s when mortgage interest rates were 12% or more, the current 5.5% rate looks like a real steal. However, Congress is trying to get rates even lower in the 4.5% to 4% range. The intent is to make homes more affordable and to assist those facing foreclosure.

If you look at the history of mortgage interest rates since 2000 you can see that we are in good shape. What I mean by that is that interest rates have a chance of going down just a little bit lower, but an even greater chance of returning to normal levels.

If the interest rate becomes a stimulus to encourage buyers to finally start buying then we could possibly see a natural increase in rates due to the change in supply and demand. With supply diminishing, the natural effect will be to see an increase in home prices… hopefully not enough to counter the effect of the lower interest rates.

Another market factor we must consider is what will be called “shadow inventory” in the news media. These are homes that will enter the market in the spring. These are sellers just waiting to list their homes, ARMs that are resetting, and many more foreclosures. These forces will all be pressing against sellers so that home values will continue to drop for awhile longer.

The moral of the story? If you need to sell now, adjust the price downward so that you are out of the market before the shadow inventory pushes prices even lower. Now is the time to lower the listing price and sell. In the end your net will be greater.

For buyers, you may want to wait for interest rates to go a little lower. I understand that, but if you wait too long, with all that is going on with supply and demand, you may look back and realize these rates at 5%-5.5% were very close to the bottom. The real risk is that they will return to normal rates (higher) as the market normalizes. I wish I could predict dates but the “turn” will take place when rates are low, inventory is high, and many buyers start to hit the market. We could say that now is that time. If you wait too long you may look back and say I should have bought a home a few months ago.

For me, I am buying now to beat the rush and not miss the opportunity to add to my real estate portfolio.

Posted By: Steve Randall