How Might Lower Interest Rates Next Month Affect You?
The Feds say it’s possible they will lower interest rates in July, causing many to speculate what that might mean for the real estate sector. Will it be a large decrease or a small one? Will it invigorate the real estate economy or are we moving towards a recession? As the uncertainty of local and world events continue, no one knows exactly what will happen.
Some people thought we would be in a recession by now, others thought the supposed bubble would burst and home prices would fall dramatically. Still, others warn that if mortgage interest rates fall home prices will increase and we could be back where we were in 2020 where buyers outpace sellers and those with less money will be left without a new home.
What Should Home Buyers Do Right Now?
The old saying goes, “buy low, sell high,” and currently home prices are lower than they’ve been in four years. While others wait to see what might happen, savvy investors spend the money to buy stocks, bonds, and real estate before prices go up. The rest of us wonder afterward why we didn’t buy when prices were lower. Almost everyone I talk to wishes they had bought land or a home five, 10 and even 20 years ago. The same will probably be said 10 years from now.
As a mortgage lender friend told me, if the Federal Fund rate decreases it may not affect the real estate economy for weeks or months (as it is affected indirectly through its impact on longer-term interest rates such as the 10 year Treasury yield). While the Federal Reserve doesn’t directly control mortgage rates, it can shift the overall cost of borrowing money, affecting mortgage rates. Any rate decrease, however, could quickly spark movement in home buyer activity, causing a rise in home prices.
Historically, when economic environments are uncertain, those who invested their money often see gains in the long run and buying a home can accomplish the same results. Two important questions surround this factor:
1. How long can you keep your new home purchase? Those who see the best gains in equity are the ones who keep their homes five years and longer. It can be difficult to make large monthly payments but it might be more advantageous to put your money into a home you own over putting it in the bank and using it to buy a more expensive home later.
2. Can you sustain mortgage payments until you can refinance your interest rate in six months or when rates decrease enough? While you can refinance your mortgage, you can’t re-negotiate your home price.
Many people believe a major shift, such as an economic recession, will significantly lower home prices and enable them to afford the home they’ve been waiting for but will that actually be the case? What will really happen when interest rates decrease?
First, there will be a boom in buyer activity. Home buyers who have been waiting to purchase will be out in force and there may be lines to see homes for sale, as well as stacks of purchase offers.
- How will your offer compete with the many others?
- Do you have cash to pay for the home and more of it than all other buyers?
- Will you have a home that needs to be sold before you can buy?
- Can you commit a non-refundable earnest money deposit and risk losing it if something goes wrong during the home purchase?
- Can you compete with hedge fund companies that have historically bought hundreds, if not thousands of homes, using cash that outprice regular home buyers?
Second, there will be more homes on the market but they still won’t outpace the number of buyers. Worse, the homes will cost more than they do now, possibly tens of thousands of dollars more. Do you want to pay more for a home than you can now, and can you afford to? The lower interest rate might save you money every month but the higher home price will cost you more money every year.
What Should Home Sellers Do Right Now?
A good sector to follow is commercial home builders. Right now, they are offering large discounts in prices, rebates, and incentives to their home buyers including paying money towards their closing costs or interest rate buy downs. They can afford to do this easier than individual home sellers because they have more homes to sell and can absorb the costs. But home sellers should still think like home builders when selling their homes if they want to sell quickly.
As a home seller and depending on your home’s equity, you can offer some of the same incentives to potential buyers such as offering to pay their closing costs or help buy down their loan rates. In this current market, most home sellers are having to lower their initial asking price because they’re not getting buyers. Why not keep the sale price a little higher and contribute money towards their loan payments? It can be a win-win for you and the buyer which is sorely needed in this current economy. A good home sale realtor will help you promote those incentives to potential buyers to get you better prospects.
Summary:
- Buy low, sell high and take advantage of low markets
- Don’t wait for a recession or bubble burst, take action ahead of economic waves
- You can refinance your mortgage rate, you can’t renegotiate your purchase price
- Buying a home is an investment not just a purchase
- When buying, take advantage of seller incentives. When selling, offer incentives to potential buyers