There has been a lot of talk lately on rising interest rates. Only a month ago you could lock in a rate on a 30 year fixed mortgage for about 4.1% with top credit, and now only weeks later rates have averaged out to be about 4.8%. This is a pretty big move in only a month, especially after watching rates fall and fall.
These rising rates are obviously bad for upcoming buyers, however this rise might be a good sign for the economy. Many potential home buyers and investors have been sitting on the sidelines for the last 1.5-2 years watching the rates and home prices drop and hoping they can hold out for the “bottom”. With interest rates starting to rebound, the real estate market could be signaling a turn for the better. If the market starts to turn there will be a chain reaction of positive things to come.
Households in the US usually borrow (mortgages, credit cards, etc) a little over $1 trillion per year, however in 2009 there was a -$300 billion dollar “negative borrowing” amount which was created from loans, credit cards and other debts being paid off and or wiped away by foreclosures and or bankruptcies. Along with this massive swing in borrowing, consumers have started saving 5 times more money than they did five years ago. Household and business borrowing numbers have shown major growth in the last year and are at about 200 billion (500 billion dollar swing from the prior year). This number shows that both consumers and businesses are feeling more comfortable with the market.
According to the Federal Reserve, non-financial businesses are sitting on 1.4 trillion dollars in liquid assets in which they could start using right away if they start to see a positive market shift. These assets could create many new jobs and lift the economy as investments start flowing.
Currently banks are fearful of giving out equity loans because there is a large risk of putting more homeowners “underwater”, like so many homeowners are today. If the market turns and inflationary expectations rise this will help financial institutions return somewhat to a “normal” routine. Things will never be like they were prior to the top of the market, and at the top, which is a good thing because financial institutions were handing out mortgages left and right, ignoring many qualifications and relaxing lending guidelines. If the market really does start to rise, at least we have all learned what can and will happen if lending is not more closely monitored. Our recovery will be a slow process but we should have a strong foundation of qualified homeowners after the current owners have weathered a nasty storm and future buyers will be property screened.
I like real estate because of the constantly changing market and the uncertainty. The only thing that we do know is that there are a lot of people with a lot of money waiting for a market rebound… I will be looking forward to following what is to come! Are we at the bottom? Are we far from it? Are we starting to rebound already? Is the secret big bad “shadow inventory” lurking around the corner? What do you think?