Interest rates are at historic lows but cyclical trends suggest
they will soon rise. Home buyers may never see such a chance again,
writes Marc Roth
Well, you may not be stupid or broke. Maybe you already have a
house and you don't want to move. Or maybe you're a Trappist monk and
have forsworn all earthly possessions. Or whatever. But if you want to
buy a house, now is the time, and if you don't act soon, you will
regret it. Here's why: historically low interest rates.
As of
today, the average 30-year fixed-rate loan with no points or fees is
around 5%. That, as the graph above—which you can find on
Mortgage-X.com—shows, is the lowest the rate has been in nearly 40 years.
In
fact, rates are so well below historic averages that it should make all
current and prospective homeowners take notice of this
once-in-a-lifetime opportunity.
And it is exactly that, based on what the graph shows us. Let's look at the point on the far left.
In
1970 the rate was approximately 7.25%. After hovering there for a
couple of years, it began a trend upward, landing near 10% in late
1973. It settled at 8.5% to 9% from 1974 to the end of 1976. After the
rise to 10%, that probably seemed O.K. to most home buyers.
But
they weren't happy soon thereafter. From 1977 to 1981, a period of only
60 months, the 30-year fixed rate climbed to 18%. As I mentioned in one
of my
previous articles, my dad was one of those unluckily stuck needing a loan at that time.
Interest Rate Lessons
And
when rates started to decline after that, they took a long time to
recede to previous levels. They hit 9% for a brief time in 1986 and
bounced around 10% to 11% until 1990. For the next 11 years through
2001, the rates slowly ebbed and flowed downward, ranging from 7% to
9%. We've since spent the last nine years, until very recently, at 6%
to 7%. So you can see why 5% is so remarkable.
So, what can we learn from the historical trends and numbers?
First,
rates have far further to move upward than downward; for more than 30
years, 7% was the low and 18% the high. The norm was 9% in the 1970s,
10% in the mid-1980s through the early 1990s, 7% to 8% for much of the
1990s, and 6% only over the last handful of years.
Second, the
last time the long-term trends reversed from low to high, it took more
than 20 years (1970 to 1992) for the rate to get back to where it was,
and 30 years to actually start trending below the 1970 low.
Finally,
the most important lesson is to understand the actual financial impact
the rate has on the cost of purchasing and paying off a home.
Every
quarter-point change in interest rates is equivalent to approximately
$6,000 for every $100,000 borrowed over the course of a 30-year fixed.
While different in each region, for the sake of simplicity, let's
assume that the average person is putting $40,000 down and borrowing
$200,000 to pay the price of a typical home nationwide. Thus, over the
course of the life of the loan, each quarter-point move up in interest
rates will cost that buyer $12,000.
Loan Costs
Stay with
me now. We are at 5%. As you can see by the graph above, as the economy
stabilizes, it is reasonable for us to see 30-year fixed rates climb to
6% within the foreseeable future and probably to a range of 7% to 8%
when the economy is humming again. If every quarter of a point is worth
$12,000 per $200,000 borrowed, then each point is worth almost $50,000.
Let's
put that into perspective. You have a good stable job (yes,
unemployment is at 10%, but another way of looking at that figure is
that most of us have good stable jobs). You would like to own a
$240,000 home. However, even though home prices have steadied, you may
be thinking you can get another $5,000 or $10,000 discount if you wait
(never mind the $8,500 or $6,500 tax credit due to run out next
spring). Or you may be waiting for the news to tell you the economy is
"more stable" and it's safe to get back in the pool. In exchange for
what you may think is prudence, you will risk paying $50,000 more per
point in interest rate changes between now and the time you decide you
are ready to buy. And you are ignoring the fact that according to the
Case-Shiller index, home prices in most regions have been trending back
up for the last several months.
If you are someone who is
looking to buy or upgrade in the $350,000-to-$800,000 home price range,
and many people out there are, then you're borrowing $300,000 to
$600,000. At 7%, the $300,000 loan will cost just under $150,000 more
over the lifetime, and the $600,000 loan an additional $300,000, if
rates move up just 2% before you pull the trigger.
What I'm
trying to impress upon everyone is that if you are planning on being a
homeowner now and/or in the foreseeable future, or if you are looking
to move your family into a bigger home, then pay more attention to the
interest rates than the price of the home. If you have a steady job,
good credit, and the down payment, then you really are being offered
the gift of a lifetime.
