Jamie Woodwell, who heads MBA’s commercial real estate research, said the uptick in commercial mortgage debt outstanding seen in the fourth quarter and throughout 2023 was “among the slowest paces since the mid-2010s.” “Every major capital source increased its mortgage holdings during the year,” he added. “Mortgage originations were down by roughly 50% in 2023 … [Read more…]
In the ever-evolving landscape of real estate, each generation brings its own set of preferences and priorities to the table. As millennials gradually step aside, Gen Z is stepping up, reshaping the way we think about homeownership and the places we call home. Born between the mid-1990s and early 2010s, Gen Z is a generation marked by digital fluency, environmental consciousness, and a penchant for experiences over possessions. So, what does this mean for the real estate market?
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Embracing Urbanity with a Twist
Unlike their predecessors who favoured suburban sprawls, Gen Z is showing a distinct preference for urban living – but with a twist. They seek vibrant, walkable neighbourhoods that offer a plethora of amenities within arm’s reach. Think mixed-use developments where residential spaces seamlessly blend with retail, dining, and entertainment options. For Gen Z, the ideal neighbourhood isn’t just a place to live; it’s a hub of activity and connection.
Flexibility Reigns Supreme
In a world characterized by rapid change and uncertainty, flexibility is paramount. Gen Z values the freedom to adapt and evolve, and this extends to their housing preferences. The traditional model of homeownership may not hold the same allure for Gen Z as it did for previous generations. Instead, many are opting for rental properties or co-living arrangements that offer flexibility without the long-term commitment.
Sustainability as a Non-Negotiable
Environmental consciousness is ingrained in the DNA of Gen Z. They’re acutely aware of the impact of climate change and are committed to making eco-friendly choices – including when it comes to housing. From energy-efficient appliances to Leadership in Energy and Environmental Design (LEED) or Energy Star certified buildings, sustainability is a non-negotiable for many Gen Z homebuyers. They’re drawn to eco-conscious developments that prioritize green spaces, renewable energy, and sustainable building practices.
Tech-Savvy Living
Having grown up in the digital age, Gen Z has an insatiable appetite for technology. Smart homes equipped with cutting-edge automation features are not just a luxury – they’re a necessity. Gen Z homebuyers expect seamless technology integration into every aspect of their living space, from smart thermostats and lighting systems to voice-controlled assistants and security cameras. For Gen Z, a home isn’t truly modern unless it’s smart.
Community and Connection
Despite their digital prowess, Gen Z craves authentic human connection. They value community and seek out spaces that foster social interaction and collaboration. Co-living spaces, communal amenities, and shared workspaces are all appealing to Gen Z homebuyers who prioritize relationships and networking. They’re drawn to neighbourhoods that feel like tight-knit communities, where neighbours are friends and every interaction is an opportunity to connect.
Are you ready to own your first property? Give us a call today! Our experienced real estate agents are more than happy to guide you through this exciting process!
If you see a mandala, you’ve entered the barracks of a millennial. To understand this trend, you have to remember that being a “hipster” was the standard for millennials when we were teenagers or super young adults in the 2010s. If you wanted to be cool, you had to decorate your room or apartment like you played mandolin in a folk band. I also blame Tumblr for this aesthetic. The tapestry, hanging bulb lights, and strung-up Polaroids just meant you had a loooong night of reblogging ahead of you. If you know, you know…and you deserve some kind of emotional compensation for that.
This week, Mortgage Cadence announced that it had appointed longtime reverse mortgage industry professional George Morales to serve on its sales team. The company is aiming to bring more reverse mortgage technology solutions to potential partners already in the industry and those that have yet to enter it.
To understand the dynamics of his new role, RMD sat down with Morales to learn more about his individual and company goals, including the potential for a large national bank to become involved in the reverse mortgage business for the first time since the early 2010s.
Editor’s note: This Q&A has been edited and condensed for clarity.
Chris Clow/RMD: Tell me about the new role and what you’re going to be doing at Mortgage Cadence from now on.
George Morales: My new role is really designed to bring reverse mortgage insights and perspectives to the company. They already have some pretty key people here already who’ve been in reverse for a while, but they needed to broaden and expand that. So, the new role is going from the product management side to the sales side of the business. It’s an interesting role, because I feel like the opportunity for me is to be a “door-opener,” if you will.
I’m standing in a place where I’ve got all this reverse experience, but I’ve also got a lot of forward experience, [having] been in the mortgage industry since 1999. The reverse experience is particularly interesting right now, because we’re seeing traditional forward mortgage companies really starting to come around on the reverse product a little more than we’ve seen in a while. And so for me, I feel like it’s an opportunity to kind of open the door via technology, to how and what is happening in the reverse space.
Clow: What kinds of companies have you, or will you in the future, be talking about reverse operations with?
Morales: We’re in some talks with reverse-only companies that are out there, who are starting to look into expanding into the forward world. That one’s a little more unusual, since we’re normally used to having people “kick the tires” of the reverse business. The whole idea is to just broaden distribution.
I’m part of the Mortgage Bankers Association (MBA) MISMO work group for reverse, where we’re working on creating some MISMO standards that will apply to reverse. Again, the same goal is to broaden distribution of the reverse mortgage products to anybody who wants it out there. That means that data can be exchanged within technology that’s usable in both forward and reverse. That would be pretty cool to be able to see that data transmitted.
Mortgage Cadence is a great spot for me because it provides that platform where you can do forward and reverse on the exact same tech stack. You don’t really need a forward LOS and then a separate reverse LOS to do both; you can do it all in one space.
There’s a reason that we haven’t gone past that 2% penetration rate in the reverse mortgage industry, and part of that is because we tend to huddle in [with ourselves]. And all these endeavors that I get to be a part of are a lot about cracking that open, inviting the forward lender community into the space, while at the same time providing the reverse folks another outlet into the forward space.
Clow: Does tech provide more of an ability to do that?
Morales: Technology has been a cool way to have those discussions. I can’t say whom yet, but we’re in very, very early stages [of discussion] with a large U.S. national bank, a large bank [that is considering entering] reverse. We’re very early on, but the key for them is to be able to originate [the mortgages] that they do already, and then add reverse without having to make reverse a separate business, per se.
They were looking at making reverse a product that they want to integrate, and how do you do that? You’ve got to have the right technology partner, which I think is why our discussions have gotten off the ground. That would be a big benefit for the reverse industry to have a national banking brand’s marketing, advertising and reach. Talk about broader distribution —that’s going to really help, and hopefully that could invite other big banks and IMBs to get back into reverse as well.
My role as a salesperson is interesting. Sales is an interesting word because my goal at the company is obviously to get some new deals — that’s the bottom line. But in doing that, it’s a lot about having the reverse side and the forward side, liaising between the two in that conversation, and getting us to finally broaden that reach that we haven’t been able to in reverse for a while.
Clow: Getting a big bank involved again would certainly be a seismic development in the reverse mortgage business. Was this entity previously active in the business before?
Morales: No. It would be brand-new blood and brand-new investment. The macroeconomic situation is starting to shift slowly, so that’s signaling to some folks [that they may want to consider] reinvestment. Technology is one spot, but [they may want to] reinvest in different products (e.g., reverse) as well.
Currently, we’re the LOS system of record for Finance of America Reverse (FAR)/American Advisors Group (AAG), the largest reverse lender in the U.S. A large percentage of all reverse mortgages are currently on our platform, so that helps the new players to understand that if they’re going to enter into a new market, this being reverse, and especially a big bank that may have a lot of concerns about information security, they want to make sure that we already know what we’re doing in both forward and reverse.
As a former sorority girl who went to college in the South during the 2010s, I’m no stranger to bows. We wore them loud and proud in our hair and on our clothing and slapped them on all sorts of DIY projects. That may have been 10 years ago, but as they say, all trends come back around eventually. Fast forward to last year when designers Sandy Liang and Simone Rocha debuted their fall 2023 collections at New York Fashion Week with one theme in common: bows. Soon afterward, TikTok became full of videos tagged with #coquetteaesthetic, AKA a romantic, feminine style à la Bridgerton. Think baby doll dresses, pastel colors, lots of lace, and delicate bows tied in your hair.
It’s not just fashion included in this trend, though. Bow home decor is having its moment, too. During the holiday season, it was hard not to scroll through social media and see images of bows tied around Christmas trees, candlesticks, ornaments, artwork, and more. But even though the holidays have passed, the coquette aesthetic is still going strong. If you’re interested in trying out the trend for yourself, keep scrolling for suggestions on how to incorporate bow home decor into your space. No trip to the ribbon aisle of the craft store required.
In this article
Decor & Accessories
Some may argue that a bow is an accessory itself, but this trend takes it a step further. In keeping with the delicate, feminine vibes of the coquette aesthetic, add small touches throughout your home with these bow-adorned decor pieces.
Linens & Pillows
Embrace your feminine energy and create the bedroom of your dreams with blankets, pillows, and curtains all adorned with bow accents.
Rugs
Whether it’s a plush bath mat or a large area rug, a patterned rug adds not only visual interest to a space but it also cozies up otherwise cold, bare floors.
Wallpaper & Artwork
If you’re looking to really lean into the coquette trend, consider using wallpaper or wall art to make a bold statement with bows. The best part is peel-and-stick wallpaper or art prints are easy to change out when trends shift.
In recent years, the real estate landscape has undergone a profound transformation, marked by the popularity of build-to-rent homes. This innovative housing model, conceived for rental purposes, has emerged as a trend that not only caught the eye of industry stakeholders but has also redefined the expectations of both landlords and tenants.
In this deep dive, we will unravel the foundation of build-to-rent homes, comb through its growth path from its inception, evaluate its current status and think about the potentially far-reaching impact it may exert on the rental market.
Understanding build-to-rent homes
Build-to-rent homes represent a departure from conventional real estate development, as they are residential properties designed and constructed with the sole purpose of being rented out rather than sold. These purpose-built developments often manifest as part of larger rental communities, strategically incorporating an array of amenities and services to elevate the overall living experience for tenants.
What characterizes build-to-rent homes?
The terms “build to rent,” “built to rent,” “BFR” and “B2R” are interchangeable, all denoting properties constructed explicitly for long-term rentals. Rather than being purchased from other owners, these homes are constructed by owners with the specific intent of catering to tenants.
These properties can be owned by individuals or managed by companies, particularly within build-to-rent communities. The variety of build-to-rent homes includes single-family dwellings on standard-sized lots, small lot homes with closer proximity, duplexes featuring two attached units, triplexes with three attached units and row homes and a series of side-by-side houses sharing a common wall.
The origins of the trend
The roots of the build-to-rent trend delve into the need to adapt to the changing dynamics of the housing market. Factors such as urbanization, a shifting preference for flexibility among millennials and young professionals and a heightened desire for a convenient and hassle-free lifestyle contributed to the initial emergence of this trend. Its early development stages can be traced back to the early 2010s, witnessing a significant surge in build-to-rent developments that were crafted in response to the needs of the housing market.
The evolution of build-to-rent
The evolution of build-to-rent homes is intertwined with the broader socioeconomic shifts shaping our cities and communities. As urbanization accelerated, there was a demand for housing solutions that catered to the dynamic lifestyles of individuals seeking convenience, flexibility and a sense of community. The traditional model of homeownership faced challenges in meeting these evolving needs, paving the way for the rise of build-to-rent homes.
These purpose-built developments were conceived as more than just housing units; they aimed to create entire communities tailored to the modern renter’s lifestyle. Developers, typically a property management company, envisioned amenities like those of apartment buildings like fitness centers, swimming pools, communal spaces, co-working areas and on-site services to foster a sense of belonging and convenience within these rental communities. The objective was not merely to provide shelter but to curate an enhanced living experience that rivaled traditional single-family rentals.
Current status and popularity
As we cross the threshold from 2023 into 2024, the build-to-rent trend continues to gain momentum, asserting itself as a prominent player in the real estate domain. Investors and developers, discerning the potential for stable returns in the rental sector, have propelled a surge in construction projects exclusively dedicated to build-to-rent properties. The demand for such homes spans a diverse demographic spectrum, encompassing young professionals, families and retirees, all of whom are drawn to the benefits that build-to-rent communities offer.
The surge in popularity is not only a result of demographic shifts but also indicative of changing attitudes towards homeownership. The younger generations, in particular, are increasingly valuing flexibility and experience over the long-term commitment of owning a home. The advantages of build-to-rent properties, such as communal living, shared amenities and hassle-free maintenance, align seamlessly with these changing preferences.
Impact on landlords
Build-to-rent homes have ushered a shift for landlords, presenting a host of advantages that extend beyond the traditional rental model. One of the most significant benefits is the higher renewal rate. Tenants, appreciating the convenience and plethora of amenities provided in these purpose-built communities, are more inclined to renew their leases. This not only ensures a stable income stream for landlords but also fosters a sense of community and stability within these rental developments.
The streamlined management of build-to-rent properties is another boon for landlords. Centralized management, often facilitated by professional property management companies, allows for more efficient operations. From maintenance and security to community events and amenities, the integrated approach reduces the burden on individual landlords, contributing to a smoother and more sustainable rental model.
Furthermore, the scalability of build-to-rent developments provides investors with the opportunity to diversify their portfolios. The ability to own and manage multiple units within a single community or across various locations enhances the potential for economies of scale and mitigates risks associated with individual property management.
Impact on tenants
Tenants, the primary beneficiaries of the build-to-rent paradigm, stand to gain numerous advantages from choosing these purpose-built homes. These properties are meticulously designed with tenant needs in mind, offering an array of amenities such as fitness centers, communal space and on-site maintenance services. The emphasis on privacy is a notable characteristic, often achieved through detached or well-insulated units, setting build-to-rent homes apart from traditional rental options and providing tenants with a more comfortable and private living experience.
The communal aspect of build-to-rent living is a significant draw for tenants: This living experience aligns with the social preferences of modern renters, particularly the younger demographic, who prioritize connections and experiences over isolated living. The flexible lease terms offered by build-to-rent developments also cater to the transient nature of contemporary lifestyles. With the option for shorter leases and the absence of the burdensome responsibilities associated with homeownership, tenants can embrace a lifestyle characterized by mobility and adaptability.
Looking ahead at the future of single-family homes
As we cast our gaze into the future, the build-to-rent trend is poised to continue shaping the housing landscape in profound ways. The flexibility, convenience and community-oriented features of these developments are likely to attract an even broader spectrum of renters.
Moreover, advancements in sustainable and smart building technologies hold the promise of further enhancing the appeal of build-to-rent homes, making them a sustainable and forward-thinking choice for both landlords and tenants.
The integration of green building practices, energy-efficient technologies, and smart home solutions align with the growing emphasis on sustainability in the real estate sector. These innovations not only contribute to environmental conservation but also offer cost-saving benefits for both landlords and tenants. As society becomes more conscious of its ecological footprint, the incorporation of sustainable practices in build-to-rent developments positions it as a responsible and future-ready housing solution.
The confluence of these trends is not merely a fad; rather, it signifies a redefinition of how we conceptualize and experience rental housing. The integration of these elements is set to leave an major mark on the housing market, influencing its trajectory for years to come.
Looking for a place to rent, whether build-to-rent or something different. Check out our available apartments and houses for rent here.
The residential mortgage as we know it today is less than a century old. In fact, until the Federal Housing Administration (FHA) was founded in 1934, only one in 10 Americans even owned a home: It was a luxury available only for cash or with a very short-term loan. That all changed with the development of the 30-year fixed-rate mortgage during the Great Depression, and the perfection of it after World War II. Essentially a way to buy a house on the installment plan, it made homeownership possible for millions, and solidified homeownership as a key part of the American Dream.
With the development of the 30-year mortgage came another great American pastime: the watching of mortgage interest rates. When shopping for a home loan, it can be helpful to understand the history of mortgage rate trends in America. Here we’ll break down the past 50-plus years of mortgage trends.
Current and historical mortgage rates
1970s mortgage rate trends
The 30-year fixed-rate mortgage — now the most popular type of home loan — started off the decade at about 7.3 percent in 1971, according to Freddie Mac’s survey. By the end of 1979, the 30-year rate was at 12.9 percent. During this decade, the Federal Reserve’s expansionary policy and other factors helped drive inflation and borrowing costs way up.
1980s mortgage rate trends
At the beginning of 1980, homes in the U.S. cost a median $63,700, according to the Department of Housing and Urban Development (HUD). By 1990, that median had risen to $123,900. Spurred by the Great Inflation, the 30-year fixed mortgage rate reached a pinnacle of 18.4 percent in October 1981, according to Freddie Mac. Once the Fed reined in inflation, the 30-year rate seesawed down to the 9 percent range, closing the decade at 9.78 percent.
1990s mortgage rate trends
The 1990s saw a dramatic shift in the 30-year rate, which plunged to an average of 6.91 percent in 1998, according to Bankrate data. This drop was brought on by the dot-com bubble, an era when investors rushed to buy stocks from technology companies that were overvalued. When these stocks plummeted, investors turned their focus to fixed-income investments, such as bonds. As bond prices rose and yields fell, mortgage rates, which follow the 10-year Treasury’s yield, also declined.
2000s mortgage rate trends
The 30-year rate took another tumble in the latter half of the 2000s when the housing market crashed due to the prevalence of subprime loans. The average 30-year fixed mortgage rate dropped from about 8 percent at the start of the decade down to 5.4 percent by 2009, according to Bankrate data. At this time, the Federal Reserve implemented quantitative easing measures, buying mortgage bonds in bulk to drive down interest rates and usher in an economic recovery.
2010s mortgage rate trends
In the 2010s, the 30-year mortgage rate continued to trend downward, beginning in the 4 percent range, dipping under the 4 percent mark and then ending the decade back in that range, according to Bankrate data. These rates were brought on in part by the Federal Reserve’s pull-back on bond-buying.
2020s mortgage rate trends
2020 saw new lows for mortgage rates, with the 30-year fixed rate diving to just under 3 percent, according to Bankrate data, and averaging 3.38 percent for the year. Amid the pandemic, fearful investors were attracted to safer products such as Treasury and mortgage bonds, pushing yields — and rates — lower.
Rates began to creep back up in 2021, but the ongoing pandemic ultimately tempered their rise.
Then came 2022 and 2023. Determined to curb rampant inflation, the Federal Reserve began raising its benchmark interest rate, and mortgage rates followed suit. In October 2022, the 30-year rate breached 7 percent, but settled back into the 6 percent range for the first half of 2023. In July 2023, rates reversed course. The 30-year peaked above 8 percent on October 25, before drifting back down to 7.21 percent on December 13.
Will mortgage rates continue dropping?
While we can try to guess based on historical data, no one knows for certain what will happen to mortgage rates — whether they’ll change at all, or when. The economy and housing market are cyclical, experiencing ups and downs, at times unpredictably.
That said, we regularly ask economists and other experts to weigh in. For week-to-week predictions, check out our mortgage rate poll. For a monthly look-ahead, read our latest mortgage rate forecast.
Summary: Historical mortgage rates over time
Over the last 50 years, mortgage rates have reached both peaks and valleys, from the high of 18 percent in the 1980s to today’s relatively moderate, but somewhat volatile figures. You can view and follow current 30-year mortgage rates on Bankrate.
Below is a summary of the average 30-year fixed mortgage rate by year. From the mid-1980s on, the numbers reflect Bankrate’s calculation of the effective mortgage rate, which takes into account the average number of points borrowers pay. The data from the 1970s to the early 1980s is based on Freddie Mac’s reporting.
Year
30-year fixed-rate average
Sources: Bankrate, Freddie Mac
2023
7.00%
2022
5.53%
2021
3.15%
2020
3.38%
2019
4.13%
2018
4.70%
2017
4.14%
2016
3.79%
2015
3.99%
2014
4.31%
2013
4.16%
2012
3.88%
2011
4.65%
2010
4.86%
2009
5.38%
2008
6.23%
2007
6.40%
2006
6.47%
2005
5.93%
2004
5.88%
2003
5.89%
2002
6.57%
2001
7.01%
2000
8.08%
1999
7.46%
1998
6.91%
1997
7.57%
1996
7.76%
1995
7.86%
1994
8.28%
1993
7.17%
1992
8.27%
1991
9.09%
1990
9.97%
1989
10.25%
1988
10.38%
1987
10.40%
1986
10.39%
1985
12.43%
1984
13.88%
1983
13.24%
1982
16.04%
1981
16.64%
1980
13.74%
1979
11.20%
1978
9.64%
1977
8.85%
1976
8.87%
1975
9.05%
1974
9.19%
1973
8.04%
1972
7.38%
How historical mortgage rates affect buying a home
Broadly speaking, lower mortgage rates fuel demand among homebuyers and can increase an individual’s buying power. A higher rate, on the other hand, means higher monthly mortgage payments, which can be a barrier for a buyer if the cost becomes unaffordable. In general, a borrower with a higher credit score, stable income and a sizable down payment qualifies for the lowest rates.
While you should keep an eye on mortgage rates, don’t try to time the market or predict what’ll happen. While a home is an investment, it’s also where you live. In general, it’s best to get a mortgage when the time is right for you.
How historical mortgage rates affect refinancing
When mortgage rates are on the upswing, it might make less financial sense to try to refinance. Generally, it’s best to refinance if you can shave off one-half to three-quarters of a percentage point from your current interest rate, and if you plan to stay in your home for a longer period of time. If you plan to sell your home soon, the cost to refinance might not be worth it.
Many homeowners, however, are sitting on higher levels of equity, so consider exploring a cash-out refinance. Shop around to find the lowest possible rate and fees based on your credit and finances, and be sure to lock your rate.
Market trends in the past decade The white paper presented the differences between 2013 and 2023. Mortgage rates were just 3.98% back in 2013 and are sitting at 7.21% year to date. The number of new single-family homes completed in 2013 was 569,000 compared to more than one million in 2023 YTD. The average price … [Read more…]
In a world full of mass-produced goods and cookie-cutter designs, DIY (Do-It-Yourself) shines differently. It’s a creative craft that lets you make stuff on your own. Home is everyone’s safe place, and having things you’ve made there adds something extra special. But sometimes, people’s ideas can get so wild that their creations become a bit silly. Particularly during 2010, there was a phase when anything created through DIY was thought to be cool and aesthetic.
For example, a candlestick made out of tuna cans is bound to raise some eyebrows. Just imagine, it’s a rainy day, the tea lights are flickering, and the smell of gently warmed tuna lingers around you… it’s enough to make any guest want to leave early!
We’ve curated a collection of these laughter-inducing DIY creations that people have come up with. Join us as we take a look inside and cringe. Upvote the pics that you couldn’t believe are true.
Whoa, have you seen what just happened to interest rates!?
Suddenly, after at least fourteen years of our financial world being mostly the same, somebody flipped over the table and now things are quite different.
Interest rates, which have been gliding along at close to zero since before the Dawn of Mustachianism in 2011, have suddenly shot back up to 20-year highs.
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Which brings up a few questions about whether we need to worry, or do anything about this new development.
Is the stock market (index funds, of course) still the right place for my money?
What if I want to buy a house?
What about my current house – should I hang onto it forever because of the solid-gold 3% mortgage I have locked in for the next 30 years?
Will interest rates keep going up?
And will they ever go back down?
These questions are on everybody’s mind these days, and I’ve been ruminating on them myself. But while I’ve seen a lot of play-by-play stories about each little interest rate increase in the financial newspapers, none of them seem to get into the important part, which is,
“Yeah, interest rates are way up, butwhat should I do about it?”
So let’s talk about strategy.
Why Is This Happening, and What Got Us Here?
Interest rates are like a giant gas pedal that revs the engine of our economy, with the polished black dress shoe of Federal Reserve Chairman Jerome Powell pressed upon it.
For most of the past two decades, Jerome’s team and their predecessors have kept the pedal to the metal, firing a highly combustible stream of easy money into the system in the form of near-zero rates. This made mortgages more affordable, so everyone stretched to buy houses, which drove demand for new construction.
It also had a similar effect on business investment: borrowed money and venture capital was cheap, so lots of entrepreneurs borrowed lots of money and started new companies. These companies then rented offices and built factories and hired employees – who circled back to buy more houses, cars, fridges, iPhones, and all the other luxurious amenities of modern life.
This was a great party and it led to lots of good things, because we had two decades of prosperity, growth, raising our children, inventing new things and all the other good things that happen in a successful rich country economy.
Until it went too far and we ended up with too much money chasing too few goods – especially houses. That led to a trend of unacceptably fast Inflation, which we already covered in a recent article.
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So eventually, Jay-P noticed this and eased his foot back off of the Easy Money Gas Pedal. And of course when interest rates get jacked up, almost everything else in the economy slows down.
And that’s what is happening right now: mortgages are suddenly way more expensive, so people are putting off their plans to buy houses. Companies find that borrowing money is costly, so they are scaling back their plans to build new factories, and cutting back on their hiring. Facebook laid off 10,000 people and Amazon shed 27,000.
We even had a miniature banking crisis where some significant mid-sized banks folded and gave the financial world fears that a much bigger set of dominoes would fall.
All of these things sound kinda bad, and if you make the mistake of checking the news, you’ll see there is a big dumb battle raging as usual on every media outlet. Leftists, Right-wingers, and anarchists all have a different take on it:
It’s the President’s fault for printing all that money and running up the debt! We should have Fiscal Discipline!
No, it’s the opposite! The Fed is ruining the economy with all these rate rises, we need to drop them back down because our poor middle class is suffering!
What are you two sheeple talking about? The whole system is a bunch of corrupt cronies and we shouldn’t even have a central bank. All hail the true world currency of Bitcoin!!!
The one thing all sides seem to agree on is that we are “experiencing hard economic times” and that “the country is headed in the wrong way”.
Which, ironically, is completely wrong as well – our unemployment rate has dropped to 50-year lows and the economy is at the absolute best it has ever been, a surprise to even the most grounded economists.
The reality? We’re just putting the lid back onto the ice cream carton until the economy can digest all the sugar it just wolfed down. This is normal, it happens every decade or two and it’s no big deal.
Okay, but should I take my money out of the stock market because it’s going to crash?
This answer never changes, so you’ll see it every time we talk about stock investing: Holy Shit NO!!!
The stock market always goes up in the long run, although with plenty of unpredictable bumps along the way. Since you can’t predict those bumps until after they happen, there is no point in trying to dance in and out of it.
But since we do have the benefit of hindsight, there are a few things that have changed slightly: From its peak at the beginning of 2022 until right now (August 2023 as I write this), the overall US market is down about 10%. Or to view it another way, it is roughly flat since June 2021, so we’ve seen two years with no gains aside from total dividends of about 3%.
Since the future is always the same, unknowable thing, this means I am about 10% more excited about buying my monthly slice of index funds today than it was at the peak.
Should I start putting money into savings accounts instead because they are paying 4.5%?
This is a slightly trickier question, because in theory we should invest in a logical, unbiased way into the thing with the highest expected return over time.
When interest rates were under 1%, this was an easy decision: stocks will always return far more than 1% over time – consider the fact that the annual dividend payments alone are 1.5%!
But there has to be some interest rate at which you’d be willing to stop buying stocks and prefer to just stash it into the stable, rewarding environment of a money market fund or long-term bonds or something else similar. Right now, if a reputable bank offered me, say, 12% I would probably just start loading up.
But remember that the stock market is also currently running a 10% off sale. When the market eventually reawakens and starts setting new highs (which it will someday), any shares I buy right now will be worth 10% more. And then will continue going up from there. Which quickly becomes an even bigger number than 12%.
In other words, the cheaper the stocks get, the more excited we should be about buying them rather than chasing high interest rates.
As you can see, there is no easy answer here, but I have taken a middle ground:
I’m holding onto all the stocks I already own, of course
BUT since I currently have an outstanding margin loan balance for a house I helped to buy with several friends (yes this is #3 in the last few years!), I am paying over 6% on that balance. So I am directing all new income towards paying down that balance for now, just for peace of mind and because 6% is a reasonable guaranteed return.
Technically, I know I would probably make a bit more if I let the balance just stay outstanding, kept putting more money into index funds, and paid the interest forever, but this feels like a nice compromise to me
What if I want to Buy a House?
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For most of us, the biggest thing that interest rates affect is our decisions around buying and selling houses. Financing a home with a mortgage is suddenly way more expensive, any potential rental house investments are suddenly far less profitable, and keeping our old house with a locked-in 3% mortgage is suddenly far more tempting.
Consider these shocking changes just over the past two years as typical rates have gone from about 3% to 7.5%.
Assuming a buyer comes up with the average 10% down payment:
The monthly mortgage payment on a $400k house has gone from about $1500 at the beginning of 2022 last year to roughly $2500 today. Even scarier, the interest portion of that monthly bill has more than doubled, from $900 to $2250!
For a home buyer with a monthly mortgage budget of $2000, their old maximum house price was about $500,000. With today’s interest rates however, that figure has dropped to about $325,000
Similarly, as a landlord in 2022 you might have been willing to pay $500k for a duplex which brought in $4000 per month of gross rent. Today, you’d need to get that same property for $325,000 to have a similar net cash flow (or try to rent each unit for a $500 more per month) because the interest cost is so much higher.
And finally, if you’re already living in a $400k house with a 3% mortgage locked in, you are effectively being subsidized to the tune of $1000 per month by that good fortune. In other words, you now have a $12,000 per year disincentive to ever sell that house if you’ll need to borrow money to buy a new one. And you have a potential goldmine rental property, because your carrying costs remain low while rents keep going up.
This all sounds kind of bleak, but unfortunately it’s the way things are supposed to work – the tough medicine of higher interest rates is supposed to make the following things happen:
House buyers will end up placing lower bids which fit within their budgets.
Landlords will have to be more discerning about which properties to buy up as rentals, lowering their own bids as well.
Meanwhile, the current still-sky-high prices of housing should continue to entice more builders to create new homes and redevelop and upgrade old buildings and underused land, because high prices mean good profits. Then they’ll have to compete for a thinner supply of home buyers.
The net effect of all this is that prices should stop going up, and ideally fall back down in many areas.
When Will House Prices Go Back Down?
This is a tricky one because the real “value” of a house depends entirely on supply and demand. The right price is whatever you can sell it for. However, there are a few fundamentals which influence this price over the long run because they determine the supply of housing.
The actual cost of building a house (materials plus labor), which tends to just stay pretty flat – it might not even keep up with inflation.
The value of the underlying land, which should also follow inflation on average, although with hot and cold spots depending on which cities are popular at the time.
The amount of bullshit which residents and their city councils impose upon house builders, preventing them from producing the new housing that people want to buy.
The first item (construction cost) is pretty interesting because it is subject to the magic of technological progress. Just as TVs and computers get cheaper over time, house components get cheaper too as things like computerized manufacturing and global trade make us more efficient. I remember paying $600 for a fancy-at-the-time undermount sink and $400 for a faucet for my first kitchen remodel in the year 2001. Today, you can get a nicer sink on Amazon for about $250 and the faucet is a flat hundred. Similarly, nailguns and cordless tools and easy-to-install PEX plumbing make the process of building faster and easier than ever.
On the other hand, the last item (bullshit restrictions) has been very inflationary in recent times. I’ve noticed that every year another layer of red tape and complicated codes and onerous zoning and approval processes gets layered into the local book of rules, and as a result I just gave up on building new houses because it wasn’t worth the hassle. Other builders with more patience will continue to plow through the murk, but they will have less competition, fewer permits will be granted, and thus the shortage of housing will continue to grow, which raises prices on average.
Thankfully, every city is different and some have chosen to make it easier to build new houses rather than more difficult. Even better, places like Tempe Arizona are allowing good housing to be built around people rather than cars, which is even more affordable to construct.
But overall, since overall US house prices adjusted for inflation are just about at an all-time high, I think there’s a chance that they might ease back down another 25% (to 2020 levels). But who knows: my guess could prove totally wrong, or the “fall” could just come in the form of flat prices for a decade that don’t keep up with inflation, meaning that they just feel 25% cheaper relative to our higher future salaries.
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When Will Interest Rates Go Back Down?
The funny part about our current “high” interest rates is that they are not actually high at all. They’re right around average.So they might not go down at all for a long time.
Remember that graph at the beginning of this article? I deliberately cropped it to show only the years since 2009 – the long recent period of low interest rates. But if you zoom out to cover the last seventy years instead, you can see that we’re still in a very normal range.
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But a better answer is this one: Interest rates will go down whenever Jerome Powell or one of his successors determines that our economy is slowing down too much and needs another hit from the gas pedal. In other words, whenever we start to slip into a genuine recession.
In order to do that however, we need to see low inflation, growing unemployment, and other signs of an economy that’s not too hot. And right now, those things keep not showing up in the weekly economic data.
You can get one reasonable prediction of the future of interest rates by looking at something called the US Treasury Yield Curve. It typically looks like this:
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What the graph is telling you is that as a lender you get a bigger reward in exchange for locking up your money for a longer time period. And way back in 2018, the people who make these loans expected that interest rates would average about 3.0 percent over the next 30 years.
Today, we have a very strange opposite yield curve:
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If you want to lend money for a year or less, you’ll be rewarded with a juicy 5.4 percent interest rate. But for two years, the rate drops to 4.92%. And then ten-year bond pays only 4.05 percent.
This situation is weird, and it’s called an inverted yield curve. And what it means is that the buyers of bonds currently believe that interest rates will almost certainly drop in the future – starting a little over a year from now.
And if you recall our earlier discussion about why interest rates drop, this means that investors are forecasting an economic slowdown in the fairly near future. And their intuition in this department has been pretty good: an inverted yield curve like this has only happened 11 times in the past 75 years, and in ten of those cases it accurately predicted a recession.
So the short answer is: nobody really knows, but we’ll probably see interest rates start to drop within 18-24 months, and the event may be accompanied by some sort of recession as well.
The Ultimate Interest Rate Strategy Hack
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I like to read and write about all this stuff because I’m still a finance nerd at heart. But when it comes down to it, interest rates don’t really affect long-retired people like many of us MMM readers, because we are mostly done with borrowing. I like the simplicity of owning just one house and one car, mortgage-free.
With the current overheated housing market here in Colorado, I’m not tempted to even look at other properties, but someday that may change. And the great thing about having actual savings rather than just a high income that lets you qualify for a loan, is that you can be ready to pounce on a good deal on short notice.
Maybe the entire housing market will go on sale as we saw in the early 2010s, or perhaps just one perfect property in the mountains will come up at the right time. The point is that when you have enough cash to buy the thing you want, the interest rates that other people are charging don’t matter. It’s a nice position of strength instead of stress. And you can still decide to take out a mortgage if you do find the rates are worthwhile for your own goals.
So to tie a bow on this whole lesson: keep your lifestyle lean and happy and don’t lose too much sweat over today’s interest rates or house prices. They will probably both come down over time, but those things aren’t in your control. Much more important are your own choices about earning, saving, healthy living and where you choose to live.
With these big sails of your life properly in place and pulling you ahead, the smaller issues of interest rates and whatever else they write about in the financial news will gradually shrink down to become just ripples on the surface of the lake.
In the comments:what have you been thinking about interest rates recently? Have they changed your decisions, increased, or perhaps even decreased your stress levels around money and housing?
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* Photo credit: Mr. Money Mustache, and Rustoleum Ultra Cover semi gloss black spraypaint. I originally polled some local friends to see if anyone owned dress shoes and a suit so I could get this picture, with no luck. So I painted up my old semi-dressy shoes and found some clean-ish black socks and pants and vacuumed out my car a bit before taking this picture. I’m kinda proud of the results and it saved me from hiring Jerome Powell himself for the shoot.