The Gift from the Federal Reserve – A Once in a Lifetime Opportunity to Buy a House
It is not often that low mortgage rates coincide with low house prices – the condition that exists today in this country. When mortgage rates are high, they tend to keep house prices from rising because it becomes too financially onerous to finance the house. When interest rates are low, it tends to stimulate demand for houses, pushing up the prices.
But we are in an unusual situation today. The housing bubble which burst in 2008 caused not only a massive oversupply of homes across nearly the entire country, but it also precipitated the worst recession in over fifty years. The Federal Reserve, in response, cut interest rates sharply and despite the fact that the recession has officially been over for two years, it continues to keep rates low. It is trying to allow homeowners to refinance their mortgages at more favorable rates. However, the issue is complicated by the fact that many homeowners now have mortgages that exceed the value of their homes.
The Fed has stated that it will keep rates low for at least another 18 – 24 months, hoping that time as well as a resolution to thorny banking regulation issues will result in existing mortgage owners lowering the carrying costs of their debt.
Regarding the prices for homes, you can see from the chart below (courtesy of JP’s Real Estate Charts) that the price bubble in housing has truly been burst. Both the nominal and the inflation-adjusted house price in the United States has returned to its long term trend line. That is good news over all, but I hasten to point out that the data show an average for the country as whole. There are still significant pockets of oversupply and prices in those areas are likely to remain under pressure for some time. But the shape of the graph is very good news.
All of which gets me to the point of my title. If you are in the market to buy a house, this is as good a time as you may find in the next twenty years to do so. Mortgage rates are lower than they have been in well over fifty years. House prices appear to have ceased falling (for the most part) but have not yet started to regain any significant momentum.
This window of opportunity will not likely be around for more than a year or two. That may seem a long time, but once rates start to creep up again, this golden moment will be gone for years, maybe even decades. And while it may seem counterintuitive, when rates start to rise again in the next two years, so will house prices. The bursting of the housing inflation bubble resulted in damaging deflation, but as the economy rights itself, and employment improves, so too will house prices.
On a thirty year mortgage of $200,000, the difference between an interest rate of 3.5% (what one can get today) and 6.0% (the rate that is more like what it would be without the Fed’s intervention) is a total of $108,364!!! That is more than 50% of the value of the house.
The saying goes, “Don’t look a gift horse in the mouth”. But in this case, I would not only look this gift horse in the eye, I would saddle it up and gallop into the future with the gift of a lifetime. I am particularly thinking of you twenty somethings and thirty somethings who may be thinking that real estate prices still have a long way to fall or that the current mortgage rates might be the new norm. Neither is the case.
January 22, 2012