Do low interest rates really matter ? - Posted by Jeff,Ca

Real Estate Investing
1

Posted by Jim V on July 02, 2002 at 13:33:48:

Long term bonds are currently priced on expectations that the next 10 years will bring an estimated annual change in the CPI of about 2.5%.

For shorter term planning in a specified area, it might be helpful to use area-specific data likely to impact that area. I just personally do not put much value on long term rates as a shorter term indicator. Pay attention to it, yes. Plan around it, no.

Unfortunately, I really do not have any wonderful insights into predicting the trends. :slight_smile:

2

Do low interest rates really matter ? - Posted by Jeff,Ca

Posted by Jeff,Ca on July 01, 2002 at 22:44:35:

Are RE prices rising due to low interest rates? Does it really matter.

Rates are now at a 40-year low.

I?ve been wondering when rates will rise and what the effects they will have for investors buying the old-fashioned way taking out a 30 yr mortgages. Am of the opinion that rising rates will not matter and may bring on a buying opportunity for us. What are your thoughts??

It?s assumed that if rates rise prices will decline.

I regularly track median home prices monthly in the areas where my family has investments. Below are two tables of monthly median home prices in S.F. Bay Area that my family has RE investments in. Note the start of the decline around June 2001. The decline on average was 15%

Newark, CA 94560

Jun-02 $390,000.00
Dec-01 $354,000.00
Nov-01 $365,000.00
Oct-01 $375,000.00
Sep-01 $385,000.00
Aug-01 $385,000.00
Jul-01 $385,000.00
Jun-01 $405,000.00
May-01 $395,000.00
Apr-01 $395,000.00
Mar-01 $385,000.00
Feb-01 $395,000.00
Jan-01 $375,000.00
Dec-00 $385,000.00
Nov-00 $370,000.00
Oct-00 $355,000.00
Sep-00 $355,000.00
Aug-00 $345,000.00
Jul-00 $345,000.00

Decline from Peak 14.41%

Jun-02 $401,500.00
Dec-01 $410,000.00
Nov-01 $410,000.00
Oct-01 $412,000.00
Sep-01 $407,000.00
Aug-01 $400,000.00
Jul-01 $404,000.00
Jun-01 $420,000.00
May-01 $460,000.00
Apr-01 $469,000.00
Mar-01 $465,000.00
Feb-01 $450,000.00
Jan-01 $452,000.00
Dec-00 $440,000.00
Nov-00 $430,000.00
Oct-00 $419,000.00
Sep-00 $425,000.00
Aug-00 $426,000.00
Jul-00 $418,000.00

% Decline from Peak 16.81%

As an example lets use a FMV of 250K today and if rates rise from 6.75% to 9% and the decline is 15% will we better off or worse off? The difference is only $15.69 a month. So why all the hype about low rates.

Purchase Price $250,000.00
Down Payment $20,000.00
Number of Years 30
Interest Rate 6.75%
Principal/Loan Amount $230,000.00
PI Payment $1,491.78
Taxes $260.42
HomeOwners $58.33
PMI $153.33
Total $1,963.86

Purchase Price $212,500.00
Down Payment $20,000.00
Number of Years 30
Interest Rate 9.00%
Principal/Loan Amount $192,500.00
PI Payment $1,548.90
Taxes $221.35
HomeOwners $49.58
PMI $128.33
Total $1,948.17

3

Right again. - Posted by randyOH

Posted by randyOH on July 01, 2002 at 23:49:57:

Jeff,
I also do not think higher interest rates per se are a threat to RE prices. My reasoning is that if rates go up, it will be for a reason and the reason (most likely) will be inflation and inflation is good for RE prices. Of course this only holds for so long. If rates go high enough, at some point they will throw the economy into a recession and that will eventually bring down RE prices. Of course, this is all relative. A mild recession may not affect RE prices, e.g., 2001. However, a severe recession will probably cause RE prices to fall, e.g., early nineties. Agree?
Randy

4

Re: Almost right. - Posted by Jim V

Posted by Jim V on July 02, 2002 at 02:44:29:

The Feds control short term interest rates. Adjustments intended to combat inflation are solely to those rates.

Mortgage interest rates are most closely tied to the 10 year bond rates, the Fed has no control over those rates although they will generally move in sympathy with short-term rates.

I know this doesn’t provide any great insight, but I do think it is an important distinction if you are looking at possible future trends.

5

Agree, but… - Posted by randyOH

Posted by randyOH on July 02, 2002 at 11:42:35:

What you say is true, but what determines long-term rates? Answer: inflation (or if you want to get technical about it, inflation expectations).