Jarvis Grandchildren: ‘Grandpa, please tell us a story about the way real estate used to be!’
Grandpa Jarvis: ‘Let me tell you a story about 3.5% 30 year fixed mortgage rates …’
Jarvis Grandchildren: ‘Ooooooooo, 3.5% 30 year fixed mortgage rates?!?’
Grandpa Jarvis: ‘Yep. 3.5%. Some people even got 2.9%.’
Rates are Headed Up – For Good
As I write this in the spring of 2018, the recent job report states that the economy not only added 200,000 jobs, but wages rose at their fastest rate in 8 years.
And just so you realize:
- Low unemployment tends to lead to wage increases
- Wage increases tend to lead to more disposable income
- More disposable income tends to lead to more money to spend
- More money to spend tends to lead to inflation
- Inflation tends to lead to higher long term mortgage rates
Take a look at the correlation:
As you can see, even as the unemployment rate (the blue line) began to fall in the years following the collapse, wages (red line) didn’t really begin to trend upwards until the latter part of 2015, and even then, only negligibly. The most recent jobs report indicates that wages are starting to rise, a trend that is predicted to continue for some time.
So What Does it Mean for Housing?
Not much … yet. And as a matter of a fact, I am not unhappy to see the rise happening.
Why? Because it means the economy is healthy and people see positive things on the horizon. Trust me, I would rather be in a world with healthy economies and 6 to 7% long term rates than one teetering on the brink of collapse with 3.5% rates.
As we discussed in our 2018 Predictions only a few months back, we predicted a rate rise in 2018 and went into some detail about the implications. Effectively, if we are all making more money, then a slight rise in the cost of borrowing is not something that will cause the market to collapse. And furthermore, as long as credit standards remain reasonable (and consistent) then the risk of a ‘2008, The Sequel’ is quite low.
Home Prices Will Still Rise
Expect housing values to continue to rise, especially urban and affordable, due to a complete, thorough, absolute, and total lack of inventory. As the millennial generation begins to exit their downtown rentals and enter the buying market, affordable urban markets will continue to be starved for inventory.
Expect some of the upper end suburban markets to see slowing price gains due to the fact that homebuilding is finally cranked up again, mitigating some of this inventory shortage.
Think ‘Strategic Finance’
Remember, it is the long term rates that are the ones that have more room to rise. The 3, 5, and 7 year adjustable rate mortgages will still give buyers options a point or two below the long term rates, offsetting any rate increases.
But that said, it is time to get a little more strategic about how you finance your home. Gone are the days of just taking a 30 year mortgage at 3.5% simply because it is a no-brainer to do so. Thinking long and hard about how long you expect to stay in the home will become a key ingredient to making the correct mortgage decision.
But it does feel like we have come to the end of an economic era – the end of the 4% 30 year mortgage. And while I will be a little sad to see it go, it indicates much better times are on the horizon.