Why ‘How Are Interest Rates’ is the Wrong Question to be Asking

When someone asks me ‘how are interest rates’ it’s for one of two reasons. Either they have a general curiosity of what direction I think they’re headed or they’re going to take my answer into consideration when deciding whether they should buy a home now or wait. Don’t get me wrong, interest rates are important, but assuming you qualify for a loan, rates should never be the deciding factor of whether you should buy a home or not. Never. Friends, family members, colleagues and the media may say it’s a bad time to buy, but I’d like to show you why waiting can be costly.

Every year we see headlines that look something like this:

Notice the date on this of June 9, 2017, 6 years ago. And let’s say there was a prospective homebuyer thinking about buying a home but because they came across an article like this, they decided to continue to rent and hold off on buying. What would they have missed out on? Well, on average since 1992, home prices have appreciated by 5.4%. Let’s play this out and say the home they were considering was purchased for $500K and then went on the market 6 years later. Using the average appreciation rate of homes, here’s what they would’ve missed out on:
Year 1: Home purchased for $500,000
Year 2 Home Value: $527,000
Year 3 Home Value: $555,458
Year 4 Home Value: $585,452
Year 5 Home Value: $617,066
Year 6 Home Value: $650,387
In 6 years, based on real data, this hypothetical person would’ve missed out on $150,387.

Let’s take this a step further. In this theoretical case study, in year 1, let’s say interest rates were at 7%. Had the person purchased that home and put the standard 20% down, their monthly payment would’ve been $2,661/mo. But they wanted to wait for rates to drop and in year 2, they did, and they fell to 6.5%. Now with a home value of $527K, with rates at 6.5%, the payment would’ve been $2,664/mo. But they weren’t quite ready, and they wanted to wait one more year. And as luck would have it rates fell again, and now they were at 5.875%. And in this 3rd year of looking to buy a home, the value was now $555,458, which brings their monthly payment to $2,629/mo.

As you can see, in year 3, with rates at the lowest point, they timed the market and were able to get the lowest payment. Good for them, right? Obviously, you see what’s happening here and you can see how the decision to wait was costly. Yes, they can save $35/mo. ($2,664 year 2 payment – $2,629 year 3 payment), but it will take them 132 years to make up the $55,458 appreciation gain they missed out on.

There is so much talk about interest rates these days and how “high” they are. I put high in quotes because historically speaking, they’re about average, but yes, they are high compared to where they were over the past couple years. There’s no denying that. The volatility is unique and can certainly be stressful as a prospective homebuyer. But keep this in mind. When rates drop by 1%, that makes 3-5 million people eligible to buy a home. And with more buyers entering the market, that will drive home prices up. It’s basic supply and demand.

I totally understand that rates are important. I do. I stare at them all day long. But focusing exclusively on interest rates is short-term thinking and it’s crucial to work with your real estate broker to see the long-term view. As Warren Buffet says, “A simple rule dictates my buying: Be fearful when others are greedy and be greedy when others are fearful.” Now is not the time to be fearful. Happy hunting.

Scott Nadler
Vice President of Lending
CrossCountry Mortgage, LLC

C: 973.769.8180
scott.nadler@ccm.com

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