“The financial crisis that began in 2007 was the most intense period of global financial strains since the Great Depression, and it led to a deep and prolonged global economic downturn. The Federal Reserve took extraordinary actions in response to the financial crisis to help stabilize the U.S. economy and financial system. These actions included reducing the level of short-term interest rates to near zero. In addition, to reduce longer-term interest rates and thus provide further support for the U.S. economy, the Federal Reserve has purchased large quantities of longer-term Treasury securities and longer-term securities issued or guaranteed by government-sponsored agencies such as Fannie Mae or Freddie Mac. Low interest rates help households and businesses finance new spending and help support the prices of many other assets, such as stocks and houses. By law, the Federal Reserve conducts monetary policy to achieve maximum employment, stable prices, and moderate long-term interest rates” (source: federalreserve.gov) Does this all mean as the economy picks up, unemployment decreases, and home sales increase that the days of 3% interest rates are gone and behind us?
| Historical Long Term Interest Rates (30 Year Notes): (source: freddiemac.com) | ||
| December 2012 | 3.35% | |
| December 2002 | 6.05% | |
| December 1992 | 8.21% | |
| December 1982 | 13.62% | |
I shared this chart with you because I think many people have really lost sight of perspective around the cost of borrowing. In November and December of 2012 we were hitting all-time lows in the history of this country when it comes to the cost of borrowing. I have grown increasingly concerned for those clients in their 20’s and 30’s (and some in the early 40’s), who only have one vantage point on what it will cost to borrow money and the total cost of buying a home. When rates inevitably go back up to more normalized rates that we have seen over the past twenty years, the sticker shock faced by new home buyers will be significant when it comes to how much home you can really get with your first purchase. In my opinion, the days of the sub 4% interest rate are quickly fading behind us. You may still be able to spend money on points to decrease your rate and get it under 4%, but within the next couple of years those days will be behind us so it’s a smart money move to take whatever action you can now to lock in a low long term interest rate on your properties. When unemployment dips below 6.5%, job growth is steadily increasing, and our overall inventory on homes have shrunk, these days of unprecedented low long term interest rates will be an asterisk in the mortgage memory book.
| 1981 Mortgage | 2013 Mortgage | |
| Loan Amount: | $300,000 | $300,000 |
| Interest Rate: | 18.45 percent | 3.51 percent |
| Monthly Payment: | $4,631.56 | $1,348.81 |
| Interest Over Life of Loan: | $1,367,362.81 | $185,571.33 |
| (Chart source: yahoo.com) | ||
What will increase in rates mean to you or your family? Just for giggles, let’s analyze the difference between the cost of borrowing money today, opposed to in 1981, shall we? We’ll compare a 30-year, $300,000 fixed-rate mortgage with a 1981 rate of 18.45 percent to one with a February 2013 rate of 3.51.* The figures below aren’t errors or an optical illusion. The interest rate you would have received on a new home purchase in 1981 would have cost you more than $1,181,000 than a loan you took out in February of this year. To boot, the monthly mortgage payment would be four times as much. With those kinds of rates, a yurt seems like a more practical optional than your three story family home.
It’s possible that the Fed could continue to keep interest rates low by expanding its balance sheet from 3 trillion to 30 trillion and continue to print money. What legal or illegal operation have you seen over your lifetime that a long term scenario like that didn’t lead to anything but disaster? The smart money move is to take action now and realize that this interest rate baseball is headed for the bleacher seats. It’s been a towering fly ball lasting in the air for a long time, but the days of 3% interest rays are going, going, and soon to be gone. You should take your at bats now while the getting is good.
Written by:
Ted Jenkin
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