Record Low Interest Rates Not Necessarily Good
“As seen in the Real Estate Reality Column in the San Leandro Times & Castro Valley Forum, written by Carl Medford”
Listening to a buyer recently, I heard them complaining about interest rates. “We can’t get a 2.5% rate,” they were stating. “We think rates should be lower.” I happened to be chewing at the time and almost choked.
I have been around long enough to have witnessed rates over 18%. To put that into perspective, a buyer currently looking to buy a $600,000.00 home with 20% down and an interest rate of 3.25% would have a monthly payment of $2,088.00 and need to be earning $82,331.00 a year to qualify. That same buyer looking to buy an identically priced home in 1981 would be looking at interest rates of 18.25%. Their monthly payment would be $7,332.00 and they would need to be earning $235,000.00 a year to qualify.
For those of us who actually had mortgages back in the day, we are grateful beyond belief for today’s unprecedented low rates. I was also building homes in the early 1980’s and the only construction loans available had rates of 24.5%.
So record low rates are a good thing, right? In some ways, yes. They allow buyers with lower incomes to get into properties they would otherwise never be able to purchase. Consequently, today’s record low rates are propelling a mass of homebuyer wannabes into the market to try to grab their slice of the American homeownership pie.
All of which brings up a significant problem: there are not enough homes available for them to buy.
In a classic supply and demand scenario, as hordes of buyers have descended on the limited numbers of available listings, multiple offers have ensued pushing prices higher. Consequently, home prices in Alameda County have jumped 22% since 01/2020. While good for sellers, it is bad news for buyers. A home that would have cost a buyer $600,000.00 at the beginning of the year is now priced at $730,435.00 and instead of requiring an income of $82,331.00 to qualify, buyers now need to earn $102,229 to buy the same house.
Bottom line, lower rates are affecting housing affordability.
The short-term solution would be to build more homes. Unfortunately, increased building regulations and escalating costs have slowed new home starts to a crawl.
Further complicating things, lower rates have flooded lenders with purchase and refinancing applications, effectively clogging the pipeline and slowing transactions. While a blessing in many ways, lower interest rates have a dark side as well.
Carl Medford is a licensed Realtor with Keller Williams Realty and a licensed general contractor. This article is sponsored by the Central County Marketing Association.