Why Are Interest Rates So Low and What Does it Mean to Me?

Unasked2 copy Whether you are thinking of buying or already own a home the current historically low interest rates may help you save thousands of dollars.

Rates in the last week have averaged the lowest point since records were first kept over 30 years ago. Refinancing today may help you save hundreds of dollars in monthly interest payments but even more important are the long term savings.

Rates are low right now because the financial crisis in Europe is driving the appetite for U.S. bonds which in turn raises the price and lowers the yield (interest) payment. And since mortgage rates roughly track the 10 Year Treasury Bond you can see where rates are headed and why. Rates are the lowest they’ve been–period.

If you think about the past 30 year trend of interest rates, which have averaged around 9%, it’s easy to guesstimate that the odds are good rates will be higher in the future rather than lower. What does that mean to you? If you are considering a purchase it means that there are two ways to look at it: if you buy a home at today’s rates either your monthly payment will be substantially lower or you can buy a considerably larger home for the same amount of money. In fact a payment on a $1,000,000 home ($800,000 loan) would be around $4,234 per month as opposed to $6,437 at the average historic 9% rate. But that doesn’t even begin to tell the whole story.

Not everyone stays in their home for Fhfb_contract_rate30 years but this offers up a substantial savings in interest payments. Most people aren’t aware of the long term costs of home ownership so you’ll be interested to note that at today’s rate your total interest payments over 30 years would total $725,000 and at the historical 9% rate it would be as high as $1,517,000–over double the interest payment for the same home. What could you do with an extra $793,000?

Perhaps rates will never be as high as they were back in the late 70’s and early 80’s but rates have still averaged 6.7% over the last 15 years during a time of historically low rates.

Case-shiller MSANow combine this with the recent decrease in home values and it’s hard to argue that waiting to buy a home will significantly benefit you.

Median Price Methodology–What’s Your Home Really Worth?

Unasked3 As a frequently unasked question and part of our real estate REVEALED series, we delve into how the median price is determined and reported for your city.

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This graph illustrates the appreciation for homes which sold in the second quarter of 2008 and had previously sold within the last ten years.

Clearly the best way of determining what appreciation is for a particular home is to watch the home trade hands in an arm’s length transaction several times over many years without any major improvements (other than maintenance).

The Case-Shiller Home Price Indices Methodology comes closest to achieving this on a macro level. However there are inherent limitations in the methodology they employ. We’re not here to find fault with their method of data collection and interpretation—clearly it is as good as it gets on a macro-level—but for interpreting micro or niche markets it uses too broad a brush to paint an accurate picture of a particular area’s housing landscape. Here’s why:

·         It lumps many micro and niche markets into one large metropolitan area and cannot effectively differentiate smaller market areas since it relies on huge volumes of data in order to arrive at meaningful results.

·         It uses an algorithm to exclude all old sale pairs to support their assumption that older home sale pairs must have been remodeled. This has the unwanted effect of throwing the baby out with the bathwater, and discards very valuable information on repeat sales pairs which have not been updated over long periods of time.

We have overcome these limitations by being able to use the "sales pair" methodology and exclude homes that have been remodeled based on our personal experience in seeing virtually every home that has sold. In fact some of the home sales used are homes we’ve personally sold in the course of our 17 years in business.

However, due to the relatively small market sample our data will be more vulnerable to isolated sale anomalies but to a certain degree that is mitigated in that 100% of our data is usable—and local.

  • We can also go back to homes that sold recently which have not traded hands in the last 30 years and still included them in our study so long as we can verify they have not been remodeled.
  • We can also distill this information down by neighborhood.

Essentially we have watched the same sales pairs sell and can analyze the empirical and statistical data to offer a sound assessment of a particular areas value trends.

Here are some interesting facts–for 2nd quarter 2008 sales:

·         58 homes sold during this period

·         22 had not sold within past nine years and were excluded

·         11 were remodeled and excluded

·         25 were not remodeled and were used for our study

·         Only homes sold that were purchased after 2005 have sold for less than what they were purchased for.

Of those seven sales after 2005:

                1 was a foreclosure

                1 was a short sale

                1 was an REO (bank owned sale)

                2 non distressed properties showed an average of 11% appreciation

                1 non distressed property lost 15%

                1 non distressed property lost 20%

               

The homes that were selected had sold in prior years and had no extensive remodeling performed. Each sale pair represents the best analysis presently available for tracking the same home exchanging hands over time. Several recent distressed sales have perhaps skewed the numbers in that they were foreclosures selling at what was owed, not what it might have been worth. Nevertheless the data is for the most part reliable and illustrates that only people who overpaid for homes from 2005-2007 may now own a home worth less than what they paid for it as a result of the downturn.

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