Blog with MAE Capital

As this article is being written Congress is still sending our money overseas.  What does this mean for the Real Estate market?  I will break this down in this article to hopefully shed some reality on the situation.  First, we all must remember what drives interest rates today and that is inflation.  The Federal Reserve (the Fed) or our Central Bank has only one way to regulate inflation, and that is through raising and lowering interest that banks borrow from the Fed.  When the Fed raises its overnight interest rates Banks will raise their cost of money to the consumer through interest rates it lends to its customers.  This will lead to higher interest rates for everything Banks lend on including Real Estate Loans.

Real Estate Loans or Mortgage rates directly affect the buying power of consumers when they go to borrow money from their home.  If you are a first-time home buyer, then you know what this does to your power to purchase a home.  With 30-year fixed-rate loans in the 7s now it will take a combined income of over $120,000 a year to qualify for a starter home in California and that home is nothing to write home about.  These homes are in the $500,000 range and depending on where you are in California there may be no homes in that price range and if you find one it might be in a neighborhood where you don’t want to live.  

With housing costs being high due to inflation it is making it really tough for the average American especially in California to buy a home.  With a house in the $500,000 range, you will have had to save up for the down payment minimum of 3% which will be between $15,000-$20,000 and that does not include any closing costs.  In a market like this where the cost of everything is rising daily it makes it difficult for the average family to save for that down payment.  Rents are so high as well and that makes it even harder to save.  It is legal to tap your retirement account to use for your down payment and closing costs, however, this may take everything you have saved.  If you have high-interest-rate credit cards that you are carrying a balance on this may be a further hindrance to saving for the down payment.  

The question I get every day is “When are interest rates going to come down?”.  This question can be answered if you follow the money.  As our government spends more money on foreign aid it is essentially creating a greater money supply.  If our government prints more money the less it will be worth as this is an oversupply of money.  This concept is similar to a store having too many of one item and to sell those items they have to lower the price to sell them.  The same concept holds true for the supply of money, more money in circulation makes it less valuable.  Less valuable money means inflation and inflation means the Fed will raise interest rates.  When the Government spends more money than it takes in through taxation there becomes a deficit or a debt and this is called the National Debt.  Currently, the National Debt is over 34 trillion dollars and we the people hold that debt.  To get this money, the government has to borrow it, and to do so they issue Treasury bonds at higher interest rates.  As the government borrows to spend, it must pay interest on the debt, and as the debt rises the more interest they have to pay.  Currently over 40% of all income taxes brought in, are covering the interest on the debt and that number is rising daily.  This is why I can’t see mortgage rates coming down in the near future.

The next step is that the government will have to raise taxes on its citizens to cover their spending habits and this will further hinder Americans from being able to purchase a home.  My advice to potential home buyers knowing the state of our economy is to buy now if you can.  If you buy a house now and you have to struggle to do so in the beginning, in the long run, your income will go up, and if you have a fixed-rate mortgage that mortgage payment will remain the same over time.  If you buy a house in an inflationary time the value of that house will also increase over time.  This is one way to build personal wealth.  If you wait in the hopes interest rates will come down, you may never be able to afford a home as the cost of living will continue to increase and you will be chasing the housing prices and interest rates.  If you have the means to purchase a home now you should be buying not waiting or if you wait you may miss the opportunity to own a home.   I understand that things are not ideal but if you wait it could become a lot worse.