Could low rates be bad?

Question

How awesome are rates right now?! Right?! I feel like the common theme is “take advantage now.”

My thought though as I was eating a bowl of Captain Crunch this morning was...

If I bought another property today with plans to sell in the future. If rates went up. Would that hurt my house sale value? It seems like if rates were higher when I was trying the sell, the buyer would be having to pay more in interest. With higher interest wouldn’t that mean less money in my pocket for me on the actual sale of my home?

History would probably show my house would still appreciate. But would higher rates when selling cut into that appreciation amount?

No one knows the future. Unfortunate there’s no magic crystal balls. I was hoping to hear if this concept is correct. Or am I missing something and that wouldn’t be a thing?

Ryan Xu · Answer

Macro, intrest rate, and real estate price are reversely related.

Individually, a property's price sorely depends on the demand and inventory amount.

In other words, a local project or population trend may affect a house's price more than interest rate change.

That's why we always say "location, location, location!"

Nicholas Anderson · Answer

Low interest rates are great!  I just refi'd, they were going to give me 2.375%!  I had them hike the rate a half point so I could get some credits and not have a bunch more money tacked onto my loan.  So, 2.875% with a 10 month breakeven.  You can't beat that with a stick.  I've got a new rental property for life once I move out.

But, to the question, could low rates be bad?  The answer is an absolute, resounding yes. Low interest rates over such a long period like we have had are bad.  Now, this is going way beyond just real estate investing into Macroeconomics but eventually, yes, the combination of these low interest rates, perpetual QE, and correspondingly low T-Bill & bond rates along with a staggering budget deficit are going to cause us problems.  The situation we're in right now is unprecedented but economic models don't have anything good to say about it.

Manny Cirino · Answer

Lower interest rates feel like a trap if you ask me. Many buyers can suddenly can purchase more expenses homes because payments are lower, it is going to bring in an influx of buyers that will contunue to eat up inventory & inflate prices and huge number of people currently tripping over each other to refinance is crazy.

Mean while unemployment continues to grow, Nothing is open at 100% capacity and many tenants are not paying rent. I see many people starting to avoid multifamily, multifamily is begging to slowly stacking up because buyer can't currently claim the full 75% of rental income as earned income on FHA loans.

And you have articles like the one that recently came out talking about how United Wholesale Mortgage is offering 2.5% interest but charged extremely high fees.

Someone is going to be left holding that bag and it will be too late before you notice what happened.

Juan Pardo · Answer

There is an inverse correlation between real estate prices and interest rates. Usually when interest rates go up prices go down.

Taylor L. · Answer

Sure, rates do impact individuals' buying power, so all else being equal a change in rates would impact prices buyers could pay.

However- The Federal Reserve will not be raising rates for years. Easy money is the way of the world now. They are targeting a higher level of inflation, so falling housing prices are exactly the opposite of what they're working to produce. Also, we saw what happens to the broader financial system when housing prices drop. The whole thing falls apart. I'm not saying housing prices can't fall - they sure can. But when it happens, it's a big problem. A lot of powerful financial institutions are working to prevent that.

Russell Brazil · Answer

Rates dont drive housing prices......housing prices drive rates.

If rates are higher in the future, it is because inflation is higher.  If inflation is higher, that means housing prices are higher.

The relation between rates and prices is often misunderstood.

Brian G. · Answer

@Colton Clark Yes, it’s true that interest rates affect what a buyer can afford to pay and many factors affect RE prices.

Mike Dymski · Answer

It's complicated...interest rates, inventory, labor/materials costs, general economic conditions...they all drive housing prices.  Without a doubt though, loose monetary policies have fueled higher asset prices across the board for decades.  That's why Captain Crunch has such a large smile on his face.  We a debt-fueled economy (business and personal).

Steve Morris · Answer

"If I bought another property today with plans to sell in the future. If rates went up. Would that hurt my house sale value? "

Sure, if nothing changes besides interest rates going up, fewer buyers would qualify at lesser amounts which would put down pressure on housing prices.

You may want to check if your loan is assumable which would help some.  But usually after a few years and some price inflation, your LTV would get a lot less.

Taylor L. · Answer

That would be deflation, which is the main thing the Federal Reserve has committed their considerable resources to preventing. If we see large scale drops in housing prices (like the Great Recession) we can expect major monetary intervention to prop those prices up. To echo what others have said, rates are just one component. Housing prices depend much more on supply & demand anyway.

Could low rates be bad?

Most Popular Reply