When interest rates go down, real estate values go up even if incomes are flat. This is because buyers look at cost in terms of monthly payments. At the beginning of this year, mortgage interest rates for a 30 year fixed loan were about 3%. Now, they are about 6.5%. Every one percent increase in mortgage rates makes a loan payment about 4% higher. Remember when you got your last loan, you had an option to buy “points” (prepaid interest) to get the loan down? Each point costs 1% of the loan amount and brings down your interest rate by about 0.25%. It takes four points to get a loan rate down by 1%. To get from the present 6.5% down to the earlier 3%, you’d have to pay 14 points, or about 14% of the loan amount.
Even though oil prices are dropping, inflation has not gone down. Instead, it went up. This is what happens when government spends more than it brings in with taxes. The Fed has to engineer some inflation (even if the economy isn’t growing on its own) to erode the government debt so that the debt can be paid back with money that isn’t worth as much. Until inflation gets out of control, then the Fed needs to put the economy into recession before inflation turns into hyperinflation and we end up like Zimbabwe or Venezuela.
The increase in inflation wasn’t very much, but it was a shock considering that experts were expecting inflation to go down. The Nasdaq was down 3.2% on September 13.
What this means is that the Federal Reserve is likely to continue with its interest rate hikes. Experts expect a minimum 75-basis point increase at its scheduled meeting next week. It is even possible that the Fed will announce a full one percent point increase. This means more expensive mortgage rates for all real estate investors. Be glad that you got that 30 year fixed rate instead of an ARM. It will mean continued downward pressure on the real estate market.
I am already seeing many price reductions in the Spokane area. Gone are the bidding wars of spring. It is likely that we have passed the peak and will be heading down in value from here.