Home Loan Interest Rates and Related Stuff
Bill Barksdale, Columnist
This is a very complex, volatile topic that even economic experts, which I am not, have written long studies about. My observations do not constitute expert advice and you should not base your financial decisions on what I have to say. If you need financial advice it is essential that you consult a qualified expert. So here I go with my opinions and observations.
As a society we are still riding the wave of the devastating financial economic collapse that began in 2006 as big financial institutions began to play Russian roulette with the economy. It made markets nervous and there’s still some nervousness from that disaster.
In 2007 the huge banking institution Lehman Brothers, had been packaging so called subprime loans, which were home loans made to people who didn’t actually have the income to make the payments. They became known as “liar loans” because unethical lenders encouraged borrowers to lie about their incomes and those incomes were purposefully not verified by the many lenders that made them because those lenders were making huge profits and knew that the Federal Government would pick up the tab i.e. U.S. taxpayers. Well anyway in 2007 Lehman Brothers dumped their toxic loans into the financial markets and in 2008 declared bankruptcy!
By the end of 2007 at the tail end of the George W. Bush administration, the U.S. economy began to be unstable. The Lehman Brothers failure triggered a domino effect and many crooked financial institutions began to fail. President Obama took office as the economy was in free-fall. He must have had nerves of steel!
As a real estate agent I can tell you it was breathtaking to watch the real estate market turn around in weeks as home prices dropped dramatically. The effect began to cause wholesale, widespread foreclosures on home owners whose home values dropped. They found themselves “upside down”, meaning they owed much more than their homes were worth.
At the time, home interest rates for well-qualified best buyers were around 6.25%. Many factors go into what your home purchase interest rate will be. Among them are your credit rating - based on your personal history of how you manage money. Do you pay bills on time? Have you had the same job for at least 2 years? Does your income match what you, and your family if you have one, need to live on? How much have you saved to make a down payment? Lots of stuff. If your rating is low, say below 680, you will pay a higher interest rate for the risk the lender is taking on you. Insurability of the property is a factor. Also, location-location-location. Is the property in a desirable location?
Other factors include: is there enough housing stock to supply demand? Answer - There’s not. Inflation is often caused by corporate behavior. Are corporate profit demands increasing faster than a reasonable rate of return? Look at drug prices, medical care & fuel prices for instance. Social conditions are factors. Look at the instability of the January 6th insurrection and the insecurity caused by the recent Russian war in Ukraine. Things like that make markets & their investors nervous. These things cause economic instability.
In January of 2021 interest rates for best-borrowers dropped to an all-time low of about 2.65%. In 1971 they were about 7.3%. In 1980 they were around 18%. When I began my real estate career people were rushing to refinance at the bargain rate of 9.5%! Today, as I write this, a home loan with 20% down payment - 740 credit score is about 5% + 1% of the loan amount for loan points. Lenders are raising their rates regardless of what the Federal Reserve is doing. Per loan officer, Debbie Mirabelli, the Feds are no longer buying mortgage-back securities, so insurance companies and other investors are now taking that investment risk and they want a higher rate of return. My opinion, it looks pretty certain that rates are quickly headed to around 6%, fairly soon.
Home prices have risen to unsustainable highs in most markets. The demand exceeds supply. That causes inflated prices – INFLATION! As one control on inflation, interest rates rise. As interest rates rise, home prices normally fall because more of the borrower’s dollar goes to paying interest instead of the principle they owe on the loan. Thus, the borrower qualifies for a lower loan amount and home prices fall. People need a place to live so until there’s more housing created, or population falls, prices may remain somewhat inflated. We’ll see how much pain buyers can handle.
Normally reasonable housing expense should be no more than about 40% of your household income. Many buyers spend more than that. Fuel prices and a declining supply of truck drivers are rapidly increasing the cost of goods, including food. The need for renewable, non-fossil fuel energy is rapidly becoming an imperative. Lower heath care expense has to be lowered as it is in every other developed country. Huge disparities in what the super-wealthy & regular people pay in taxes must be corrected. Money for increased housing & living expense needs to come from somewhere. Somethings got to give.
Still with me? Congratulations!
Bill Barksdale was inducted into the 2016 Realtor® Hall of Fame, and served as Chair of the County of Mendocino Assessment Appeals Board settling property tax disputes between the County Assessor & citizens and businesses. Read more of Bill’s columns on his blog at www.bbarksdale.com
