We’ve been spoiled rotten, and just like a child who’s been given too much of a good thing, when we have it taken away, we act like whiny brats. After the fed dropped rates in 2020 as a response to the pandemic, we saw the lowest rates in history at 2.68%. Borrowing money had never cost less. Ever. For years, we’ve been beneficiaries of close-to-free money. The dream of homeownership has never been more achievable and as long as you have some savings in the bank for a down payment, a stable job, good credit, and no other debt you could buy a home and start building equity. Millennials and Gen Z aren’t big on staying put and owning a home, (vans and mobile homes don’t count) but those who did buy, will look back at this moment in history and be thankful they took advantage.
To give you an idea of where rates have historically been, here’s a look at the last few decades:
- 70’s – 7.5% range with a high of 11.2% in 1979.
- 80’s – 16.63% in 1981 (the highest in history).
- 90’s – started at 10% but fell to just below 7% by 1998.
- 2000’s – 8% range and ended 2009 at 5%
- 2010’s – 3.5% to 4%
- 2020’s – 2.6% and trending upwards.
For the first time in many years, last week the 30 year mortgage rate floated above 4%. This means that the same monthly payment will buy you less house.
The question I always get asked is how a rise in rates will affect residential real estate value. In this market, buyers want to focus on rates when they’re negotiating to lower the sales price. “Rates are up, so I should be paying less for the same house”. Funny how I am never asked how much the lowering of rates positively impacted how much more they could buy for their money. Perhaps the answer should be “rates are up, so you should buy less house”? Mansions are passé anyway and less is more!
The rule of thumb is that you can afford a house somewhere between 3 and 4 times your annual salary. In other words, if you earn $1M a year, you should be buying a $3.5M home. A majority of New York City inventory is above $3 million and the higher the price, the more often the buyer pays all cash for their property. No mortgage. No concern for mortgage rate fluctuations. No impact to the price. The people who will be affected by higher rates are those people who don’t have millions in discretionary income and liquidity. To these people I say “rates are still historically low. Carpe Diem. Yes, you’ve witnessed the best days in history, but these days are still only slightly less best”.
And stop whining.
SIDEBAR:
We’ve been questioning the future of our cities and civilization over the past few years. It’s hard to predict the future of a city based on its recent history. I just finished reading Annalee Newitz's “Four Lost Cities” and it’s an insightful read about four cities that all have a special history. I highly recommend you read this book – especially as globally, we are in a period of political instability and authoritarian nationalism. History has shown us that this is not something we should take lightly and it will have major impacts on our cities. Newitz says that “we can make predictions about the likelihood that people will abandon a city based on evidence from urban history”.
I agree wholeheartedly with her when she says that politics shouldn’t steer city design – sensible engineering should...but that’s a topic for another Padkos...
Let’s do this.
-Shaun