I Wish I Could Buy a Home While Interest Rates Are So Low

September 15, 2015 8 Comments »
I Wish I Could Buy a Home While Interest Rates Are So Low

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)

8 Comments

  1. Sam Burnett September 16, 2015 at 11:35 am -

    I guess it comes down to whether you’re going to save more on the finance over the fixed term than you’re losing by paying a premium price.

  2. Geoffrey Jones September 17, 2015 at 5:34 pm -

    I agree to the act that real estate is at a premium. However this is only the case in some states. In other states prices for real estate still haven’t budged at all. If you are still looking for a home I suggest to move someplace where the market is still hot for buyers and get out of those seller markets.

  3. Colin Robertson September 22, 2015 at 12:21 pm -

    Geoffrey,

    True, there are better/worse places than others. So I suppose getting a low rate in a city that’s still cheap is a good move.

  4. Steve Williamson September 23, 2015 at 10:30 am -

    My gut is telling me as rates rise, property values will lower. The thing about real estate is that it has to be affordable to buyers. Most people can only afford a certain amount per month. So whatever that amount is, the real estate market will reflect that, thus lowering values to make up for the premium paid on the higher interest rate.

    Steve Williamson

  5. Colin Robertson September 23, 2015 at 10:43 pm -

    Steve,

    That sounds right except when the economy improves, interest rates rise, and if the economy is improving, people have more money, and thus prices can continue to rise.

  6. Dave Rogers October 23, 2015 at 10:17 pm -

    Colin,
    I wanted to get your opinion and I think your article basically says it. I’m living in LA right now, renting. Rent is expensive and I have been wanting to buy house for the last few years. I’ve finally saved enough to where I can put down 20% on a entry level house in my neighborhood. I don’t really love the houses in this price range and I noticed a few years back the same value could have gotten me something I would have been more proud of.
    Do you think I should hold off for now? I’m hoping the prices will come down or at least more options will come on the market in my price range. I’m just getting antsy throwing money away on rent.

  7. Colin Robertson October 26, 2015 at 4:13 pm -

    Hey Dave,

    It’s a tough, personal decision, but I too live in LA and don’t like where home prices currently stand. But I’m also more conservative than most and have watched them increase nearly 50% over the past five years, so I’m slightly concerned about their direction. It may technically be cheaper to buy than rent in LA and home prices may keep climbing higher, but like you said, if you don’t like the house it’s kind of pointless, even if you’re supposedly throwing money away, which is also debatable. It’s a tough call nonetheless and one only you can answer. Of course, owning a home isn’t just about the money. It’s nice to have your own privacy, land, etc. Good luck in your decision.

  8. Michael Merritt October 11, 2016 at 12:28 pm -

    Good read..thank you for sharing..

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