Interest rates, shminterest rates: Can a rise really trash the market?

         I get a kick out of some real estate experts’ comments when the topic of potential interest rate rises comes up. “That will kill the real estate rally,” they shout. “Cash investors buying up inventory in order to generate rental income will lose interest (no pun intended),” some say. “New home buyers will rent instead,” others add.

         Balderdash. What will kill the real estate rally is a bad economy and a loss of consumer (buyer) confidence in the immediate future. Here’s my case for ignoring a slight uptick in interest rates (by “slight,” say 2 percentage points or less):

  1. Prices in many markets are still not nearly back to 2007 levels. And most of us aren’t planning to move to Miami, Las Vegas, Phoenix or any of the other markets that were ravaged after 2007 and where the experts tend to focus their remarks about “too far and too fast”; needless to say, Las Vegas is not Chapel Hill, NC, or Greenville, SC, or vice versa. And baby boomers looking to get on with their lives are not, generally, the real estate investors or first-time buyers the experts are focused on.
  2. Counter-intuitively, a slight climb in interest rates often results in an increase in home prices as it buttresses the notion of renewed economic growth. And, potential buyers tend to rush into the market before rates rise even higher, pushing up demand (and prices). The naysayers may think we are on the back end of this phenomenon of demand, but it may have some months, or even years to go if rates do not rise too quickly.
  3. Home listing agents are well aware that interest rates may be on the minds of their sellers, and they turn that to an advantage when it comes to pricing a home for quick sale. “You know,” they might tell the seller, “that interest rates are up and that could slow down traffic to your house if we don’t price it right.” In short, buyers may benefit by a lower price on a home they want if interest rates are up (or perceived to be so). And a lower house price can soften the effects of a slightly higher interest rate.
  4. Would a couple really give up their dream of a home for $120 per month? That is the difference in monthly payment of a $200,000 loan over 30 years at a 5% mortgage rate vs a 6% mortgage rate. If rates should rise to 7%, for example, the rise in monthly payment would be $257. (Keep in mind, Uncle Sam basically subsidizes around a third of the increase, depending on the borrower’s tax bracket and how much of the monthly payment is interest rather than principal.) In many households, that extra payment could certainly be a stretch while one or both wage earners wait for a salary increase to cover the differences. But we often look at the percentage increases and think they imply a much higher increase in dollar outlays than the real numbers indicate.
  5. The “experts” ignore one important fact of home ownership vs renting, beside the economic advantages through tax deductions and associated incentives –- a sense of belonging. Owners, unlike renters, feel a vested interest in the health of the community; we may hate paying local taxes, but doing so makes us feel as if we have a voice in town operations. And if we decide to show up at a town council meeting to complain, there is no more-credible introduction than “My name is...and I own a home at…”
  6. Buying a home is good for the ego; it can make you feel like a big-shot employer with a payroll that includes a mortgage loan officer, engineering inspector, lawyers (for the closing), the title insurance actuarial and, of course, the real estate agents working in your behalf and the seller’s. On behalf of a grateful real estate industry, I thank you in advance for the purchase of your dream golf home. If I can help you make your dream, and the dreams of local closing attorneys in the southeastern U.S. come true, please contact me. Or, better yet, fill out our Golf Home Questionnaire, and I will respond to you with suggestions of which golf communities best match your requirements.    

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