Skip to main content

I Don't Care About History (Posted April 18, 2016)

The title of this week’s edition is taken from a line from a song by The Ramones – it’s chosen for the irony, of course, because history is a great predictor of the future, and it can’t be ignored.  So, find your seats and settle down.  Thank you.  Today’s lesson touches on the history of the interest rate here in the United States, and there’ll be a test later.  No cheating off your neighbor. 

•  Early 1950s: interest rates were comfortably under 5%
•  1960s: interest rates were at 6% and starting to climb to 8% by the end of the decade
•  1970 to 1980: interest rates climbed to just over 12%
•  1981: interest rates peaked at just above 18%
•  2002: interest rates had worked their way back to 6%
•  2010: interest rates crept back under 5%

In economic circles (you should attend some of their parties – they’re real ragers), this is an almost picture-perfect demonstration of what they call the “60-year cycle”. With the economy being sluggish for the past five or so years, we’ve sort of bottomed out and held, but things are starting to look up, which means we’re starting a new 60-year cycle. 

With that in mind, let’s look at a quick comparison for a 30-year fixed FHA loan for $200,000 with 3.5% down – monthly payment (PITI):

4% interest rate:   $1,332.24
5% interest rate:  $1,448.90  ($116.66 more than the 4% rate)
6% interest rate:  $1,572.09  ($239.85 more than the 4% rate)

In the face of these numbers and this reality, a very wise man once said, “Buy your dream house now because you may not be able to afford it in ten years.  If you haven’t already run out to have bumper stickers and t-shirts made with this slogan, I’d highly recommend you do so just as soon as you finish reading this newsletter.

It’s not going to happen tomorrow, but we’ll be back up to 5% interest rates sooner than we think.  The difference between a payment at 4% and 5% is significant enough for consideration – you’re looking at a yearly savings of just under $1,400 and an overall savings of almost $42,000 for the 30-year term. 

Using history and the 60-year cycle as our predictors, it is very likely that we’ll be back up to 6% interest rates on 30-year mortgages in just ten years.  That means that if someone were to buy a $200,000 house now, they will be able to afford much more house and keep their payments more reasonable.  Let me explain it another way: in ten years, a $200,000 mortgage, at 6%, is going to cost $5,276.70 more each year, or $158,301 more over the 30-year term of the mortgage.  Also, if home values increase an average of 5% each year, a $200,000 home that someone would be buying today would be worth over $250,000; conversely, what $200,000 will buy in ten years will be a house that’s worth just under $125,000 today.  If you don’t believe me, do the math yourself.  I’ll wait. 


I opened with The Ramones.  I’ll close with the Rolling Stones: “Time is on my side.”  No, it’s not!

Comments

Popular posts from this blog

An Age-Old Concept Reaping Future Rewards

W hy are social media like Facebook and Instagram so darn popular among real estate and mortgage folks?   Hint: the top reason might be an endless supply of memes, cat videos, and the chance to be snarky, but the other reason runs a VERY CLOSE second.   Give up?   Answer:   They’re free – and they really help even the playing field by enabling a one-person shop look and market like an organization who employs an army of wordsmiths and graphic artists. This new century is glorious, right?   With that in mind, let me re-introduce you to a centuries-old concept that is equally glorious – and can help IMPROVE the playing field for you, regardless of the size of your team: karma.   On the subject of “free”, I’m not suggesting that you work for free, but when you freely give of yourself and your knowledge, you’ll see a greater payoff, I promise! Recently, an agent came to us with a question: she has a client who is looking to sell his condo.   It...

KNOWING is Half the . . . Problem

If you’ve learned one thing from reading these columns, it’s this: I don’t read a ton of books by or about the French philosopher Descartes or spend large amounts of money traveling the world to view the Masters’ paintings in far-flung museums – my entertainment and sources of knowledge run to the more . . . mundane, if you will.   Well, I’m not about to disappoint.   In the movie Men in Black , the two main characters J & K (played by Will Smith and Tommy Lee Jones, respectively) have recently met and K is trying to recruit J to join the clandestine government agency that monitors aliens on planet Earth.   Agent K has just shown J a lot of things that are hard to believe/explain and urges J to keep them secret.   At this point, J interrupts him, and this piece of dialogue ensues: J: Why the big secret?   People are smart.   They can handle it.   K: A person is smart.   People are dumb, panicky, dangerous animals, and you...

An Intergalactic Lack of Knowledge

This past week, word had reached my ears that the federal money available for homebuyers in a certain grant program would run out by April 1 st of this year – despite the date, I’m fairly certain it’s not intended as some cosmic April Fool’s Day joke.   At any rate, a real estate agent that I’ve worked with for many years felt it would be a good idea to make a big deal of this and put together some Facebook and Instagram posts letting potential homebuyers know that time is running out.   No argument here.   Anyone who’s sort of been sitting on the fence about buying a home could use a little nudge, and this might be just what they need.   After I had created the posts and put them out there, I started to think about what will happen once this federal grant does run out.   What will potential homebuyers do who need help coming up with a down payment?   And you know what the next thing was that popped into my head when I asked myself that question...