Continuing my series of “Things My Friends Say,” I had yet another thought-provoking conversation with a buddy about the current state of real estate.
I don’t recall how we got on the subject, but we were talking about real estate and property values in Los Angeles and at some point my friend said the following: “I wish I could buy a home while interest rates are so low.”
Those may have not been the exact words, but it was something to that effect.
Regardless, the point was very clear. He felt (or feels) that he is going to miss out on the low interest rates because he has no plans to buy a home anytime soon.
It was noteworthy because he’s not totally into real restate, more of a casual observer. But obviously at some point he heard about the low mortgage rates on offer and it enticed him.
Can’t Miss This Opportunity!
I suppose he has some level of FOMO, or fear of missing out. What made the conversation more interesting was the fact that I was talking about how expensive homes in LA were at the moment.
Despite that, he still seemed to be bummed that he wouldn’t be able to snag a 3% rate on a 30-year fixed mortgage.
I immediately said to him, you know that low rate doesn’t make that much of a difference right?
For example, on a $300,000 loan (which is a good sized loan), the monthly mortgage payment is $1,432.25 for a 4% rate and $1,610.46 for a 5% rate.
There’s a good chance mortgage rates won’t hit 5% this year, and maybe not even next year. There’s also a good possibility that they’ll hover around their current level for some time.
Even if they do climb to that higher level, the difference in monthly payment is less than $200. Sure, over time that adds up, and over 30 years it would amount to a ton of interest, assuming he actually held the loan to term.
But we know most people don’t hold onto their mortgages that long, in fact, most keep them for less than 10 years. And first-time home buyers probably keep them for even less time because they move up or switch from condo to house, etc.
In reality, he probably wouldn’t notice much of a change between 4% and 5% on his mortgage, though $200 is certainly nothing to sneeze at.
Real Estate Is No Longer on Sale
The bigger problem, in my eyes, is where home prices currently stand. Two years ago I would have said (and maybe I did) that it was a great opportunity to buy a home.
Most properties were on sale relative to recent prices and interest rates were also very low historically.
But one thing has changed. Real estate is no longer on sale. If anything, it might be at a premium right now. And you could even blame the low interest rates to some degree, which allow borrowers to purchase more home than they normally could.
Sure, mortgage rates are still on sale and a great deal, especially because they can be locked in for 30 years. But real estate isn’t anymore. At least not in Los Angeles and many other parts of the country.
I don’t know if I would buy something above its reasonable value just because I could obtain cheap financing. And I don’t know if I could recommend someone else do so either, unless they were just in love with the property.
My guess is you’re going to be hearing a lot more about unaffordable home prices, overheated housing markets, bubbles, and eventually declining prices. Not sure a low mortgage rate would eclipse all those scary headlines.
Read more: Is it better to rent or buy?
(photo: John Liu)