11/19/2022
Inflation, mortgage rates and history..
Right now is arguably the most different time for real estate buyers and sellers in the past 30 years. However, we did have inflation rage in the 70’s and 80’s between 15-20%. It was very common in the 80’s mortgage rates were 15% or higher, in the later stages as the cycle matured and inflation tamed. At that time mortgage rates emulated/mirrored the inflation rate. When this is discussed with millennials, gen x and gen z clients, their expression is between bewilderment, to total disbelief. We know this because the response is, “you mean the rates right now are not 2.5 to 3%”? However, this is quickly mitigated when they ask mom or dad, aunt or uncle what was their rate, only to discover their relatives verify the rate they got was 15% and or even higher.
Reality is, no one and I mean no one knows where mortgage rates will be next year and beyond; not the Federal Reserve, learned scholar economists and practitioners in the mortgage space, but predictions do abound. We do know a huge factor causing inflation - too much wasteful government spending (and very little productivity), as the definition is too much money chasing too few goods. Does anyone see this scenario changing in the next 2 years? If you say no, then here is the takeaway. If rates do keep rising, and rates move up to say 8.5 to 9% in year 2023/2024, and buyers who held off making a decision to purchase who could, might be regretful if they look back and say, “gosh, now our mortgage rate is 8.5% and we could have gotten a 6.5% rate in 2022, what the heck were we thinking?” We also learned in mid 2007, the Federal Reserve had no clue about the unfolding of the great recession, the cause and effect of easy money relative to real estate and real estate financing. (Ask me about a meeting we had with Richard Fisher, president of Federal Reserve in Dallas in April 2007, it was very disturbing to hear his responses to questions regarding this subject)
Financing is a means to an end. Financing allows buyers to leverage into the asset which has great potential to appreciate, while the liability/debt declines, not to mention some tax advantages along the way. The end is the prize, the home you own. You have to own the asset to have benefit. If rates do decline from here, do what everyone did who could after the high mortgage rates in the 80’s, refinance and be glad you acted when you did. And to use a quip from someone who knows history in the equity market, buy when the market is fearful, and sell when the market is greedy. So what is the lesson if we don’t learn from history.. and is there any mortgage company which would give a reduction in costs to refinance if you acted today. Gee aren’t you glad you read to the end, and are now going to ask me?
