We knew this would happen….right?
We knew it was inevitable, didn’t we?
Last week, mortgage rates rose some eighty basis points. Let’s start with the the woulda-coulda-shoulda and then move on to how this will affect the real estate market going forward…
I hate to say “I told you so.”
Except when I’m right.
Then, it’s awesome!
On March 5th, 2010, I wrote a blog post called “Get A Mortgage Pre Approval.” You can read that post here.
Okay, so I didn’t exactly predict that rates would go up (or that they’d go up this soon), but my point was that rates could go up, and that’s reason enough to get a mortgage pre-approval.
When I meet a new buyer-client, the first thing I ask is “Have you been pre-approved for a mortgage?”
Part of the reason I ask this question is to determine how far along in the process the buyer actually is as well as how committed they are, but it’s also to get that buyer locked in to an interest rate in case rates rise.
Some buyers balk at the idea of the pre-approval because it’s “a lot of work.” That’s a terrible excuse.
Spend two hours, fill out the online application, get your T4’s, NOA’s, and pay stubs together and make it happen.
I feel bad for all the people that didn’t get a pre-approval in January, February, or March who are now kicking themselves.
Last week, mortgage rates went up a whopping eighty basis points.
A typical five-year, fixed-rate morgtage went from 3.69% to 4.49%.
And the most interesting part about the rate hike was that it came with mixed reviews.
Some people are obviously upset with the rate hike, most notably those entering the housing market in the next few months who won’t benefit from all-time-low interest rates.
But others applaud the rate hikes, saying “enough is enough” to ridiculously low rates. Many people think that the rates have allowed buyers to enter the real estate market who have no business buying, and this has helped raise prices of entry-level condominiums downtown.
So what does the future hold?
Call me a salesman for life, but I’m not convinced that this rate hike is going to have a major impact on our real estate market.
All that has happened is that mortgage rates have gone from “ridiculously affordable” to “really affordable.”
Think about it.
We’re coming off some of the lowest interest rates in the history of our country.
The affordability factor is still incredible!
I don’t have an up-to-date graph (since StatsCan charges $3.00 to download a chart and they don’t even let you preview it…), but here is a great graph that shows rates from the 1950’s into this decade:
And we all know what has happened since this chart went out of date – rates went down even further.
When I locked in to a five-year, fixed-rate mortgage for my current residence back June of 2007, I was happy to get a 4.99% rate which at the time was phenomenal.
Rates went up shortly thereafter, and some of my clients received rates approaching 5.99%, but then rates came crashing back down to as low as 3.49% earlier this year.
So who cares if we’re back to 4.49%? Wait, okay, I know a lot of people care…
What I’m saying, is that how much does this really change things for a buyer?
Take the example of a $300,000 condo purchase with a 20% downpayment:
Monthly Mortgage Payment @ 3.69%: $1,014.35
Monthly Mortgage Payment @ 4.49%: $1,128.18
First of all, consider how ridiculously low that monthly payment still is. It’s a far cry from when interest rates were at 22.5% back in the 80’s, because then the monthly payment would be $4,304.97…
But who among us can’t afford another hundred bucks a month?
Note to all potential buyers: if $114 per month is going to make or break your ability to live without selling your body for crack, then maybe you shouldn’t be entering the housing market in the first place.
I know you have to draw a line in the sand somewhere, but I just don’t see a “large” difference between the monthlies for the new/old rates.
Take a look at this graphic below:
This graph is completely up-to-date and shows the five-year fixed mortgage rates during the last decade and the relationship between the variable and fixed rate.
It’s interesting to note that variable rates have hovered above that of fixed at several points during the last decade.
You can’t turn on the TV without seeing an ad for your friendly, neighbourhood bank in which they depict “you” as the complete moron who can’t tell the difference between variable and fixed rates, and thus you enlist the help of the 31-year-old high-school drop-out who works at one level above “teller” at your bank who is going to explain to you when, why, what, where, and how you should evaluate variable versus fixed.
But I digress…
I was a little frustrated last week when some people predicted Armageddon after the mortgage rates increased.
Rates are still incredibly low, and I’m just not convinced that the decrease in affordability is going to shake up our market.
When rates go beyond 6.0%, then I’ll come up for air.
But another glance at the graph shows that 6.0% isn’t that bad…..historically.
Are we going to see rates in double-digits once again?
Probably…..at some point….but when?
Take a look at the first chart again that began in 1951.
People talk about “seven-year real estate cycles” or “twelve-year market cycles,” but if I were an amateur chartist, I would conclude that there is a “sixty-year interest rate cycle” which has a huge peak in the middle! Rates were at about 5% in 1951, went as high as 22.5% in 1984, and then came back down to 5% in the last couple years.
Does this mean that rates will hit 22.5% again in the year 2043?
Who cares. And that comes without a question mark because it’s more of a statement…
All I know is that rates are at 4.49% and that is still incredibly affordable.
What the future holds, I don’t know.
But does anybody?