“Why in the world would anyone want to buy real estate right now?” –everyone
Here’s a February 1st non-surprise for you: The Fed just raised interest rates another 0.25% on Wednesday. We are now at a fed funds rate range up to 4.75% and if you want to borrow from a bank, add a few points to that. It’s ugly. Money is expensive, and getting more so every few months.
Fed chairman Jerome Powell has said that he anticipates continuing increases as long as inflation is above 2%. It won’t be surprising to pay 6.5% for that new home mortgage and 7% or higher for the commercial mortgage. For every $100,000 borrowed today, you’d need to pay back $7,000 each year, double what it would have been had you had the foresight to purchase last year. For retail buyers (those buying their beautiful dream home), they have to purchase something smaller so they can meet their monthly payments. For investors, they have to pay less as well. For each, that translates into smaller offers and decreased property values – but not right away.
The market is funny, and sellers have this rosy retrospectoscope that tells them that maybe the market is not that bad. They knew they should have sold last year but cling to those prices and are still asking for laughable amounts. People don’t buy, so days on the market increase, and potential buyers are worried about what terrible secret that house might be holding that caused it to stay on the market so long. Finally, sellers are starting to realize that if they really need to sell now, they have to lower their asking price. And that brings us to why you should purchase now.
Here’s the Secret
With a high interest rate, you certainly won’t be able to pay as much for the property because more of your profit will go to debt service. A seller that needs to sell will need to decrease the price to compensate for this. In today’s market, instead of paying that money to the seller, it’s shifted to the bank. You are still paying the money in either market. The secret is that you don’t pay that money to the bank right away – you pay it over many years. Once inflation gets under control, you will happily see interest rates going down. At that point, you can decide to refinance. You’ll still be bringing in all that income, but your debt service will go way down. You get to keep the money. It’s all gravy, and you’ll feel like a genius. Buy now, but as always, buy right.