Why WAITING for 3.5% is FOLLY and Financially Naive.

$$SignsThe link below will take you to a Fannie Mae history of 30 year fixed rate loans. The reason I’m bringing HISTORY into the argument of lower interest rates is to show Buyers and Sellers why NOT to “wait it out”. These folks mistakenly think they will see 3.5% again.  It is wise to  understand the dynamics OF interest rate fluctuations and to study past rate increases. For instance,   In April of 1971 the interest rate was 7.31%–(42 YEARS AGO!) it would NOT fall under that rate again until July of 1993 when it hit 7.21%! Oh, and during that time frame it hit a high of 18.45%  in October of 1981!

30 Year Fixed Rates since 1971. Waiting for 3.5% again? Good luck!

The first 11 years of my real estate career we had double digit interest rates with that big high I mentioned above. We STILL sold homes. Sure they were lower but so were wages and salaries. Fast forward to today and we see rates soaring from April to today by one full percentage point or what they say in banking as 100 “basis” points. And this is WITH the Fed taking a long term support measure for keeping interest rates “low”.  What bothers me is the consumer balking at rates exceeding 5% as if THIS is a high rate!

The truth is we didn’t HIT 5% until September of 2009 when it was 5.10%. A 40 year low. The first sub-4% rate was November of 2011. It stayed at sub 4% for approx. a year and a half. It became the new “norm”. folks who got in at that time have outstanding, historically LOW rates. BUT don’t be seduced by feeling you absolutely MUST have a sub 4% loan. With homes in our area going up 34% in the course of two years “waiting” for a sub 3% loan could cost you a ton of money and just might be an exercise in futility and FOLLY! Why? Our median home price in Sonoma County is up 27% over this time last year. Remember, the “medium” is simply an indicator of market activity. A high median means the sales “action” has moved UP market. Half of the properties are ABOVE the median and half below. It is NOT appreciation.

That being said–we just closed a home where a year ago the appraised value was $334,000. We just closed this home a year later for $439,900. That’s a 24% increase! But I feel that is an anomaly and reflective of a “surging” market driven by those low interest rates. I think THIS year a more sane 8% appreciation would be more in keeping with the general cooling off of the market lately. With all that said let’s look at an example:

$360,000 purchase price, 20% down or $60,000, Loan amount of $300,000.

If we DO meet 8% appreciation as I predict the home will be worth $28,800 more a year from now. But YOU wish to “wait” for 3.5% again. Why? Your payment would be $1,347.13 PI.

I’m also going to predict 5% will be the lay of the land for next year. So that same payment is NOW $1,610.56.  Or an increase of $263.33 per month or $3,159.96 for the year. So by waiting you are “saving” this amount (but what are you paying for rent? With NO Tax Deduction!?). BUT if you bought you’d come out ahead $25,640!! BEFORE the tax write-offs!  So WHY wait?

Lastly, have your accountant show you the “after tax” cost of your monthly house payments if you buy today. It’s VERY favorable! In conclusion–waiting for the fabled 3.5% rate again will cost you a TON if you wait AND if you look at the historical nature of rates–could NEVER happen again.


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