2020 is a year many of us will be glad to see move over the horizon. As I write this (12/1/20) there have been 270,000 Covid-19 deaths, 162,913 were confirmed positive today and 13,605,981 Americans have contracted the disease so far. We are in the middle of a presidential transition that at least one person does not believe. At the end of October, 11.1 million people are unemployed, add to that on January 1st unemployment runs out for most and eviction moratoriums are set to expire. Oh, here’s a fun fact you’ll enjoy. New research by the Institute for Policy Studies shows that U.S. billionaires have grown their wealth by a whopping 34% SINCE MARCH. Knowing all of this, how can both the stock market and the real estate market be reaching new highs daily? It flies in the face of logic and reason. The short answer for real estate is low interest rates. As of today, rates stand, on average, 2.5% for a 30-year loan and 2.25% for a 15-year loan. Here is how that impacts prices of homes and explains why the market has been climbing so quickly. Let’s compare 3 interest rates, their impact on payment and how that impacts prices. Hillary and Fran are a married couple with a combined income of $68,000. They are making a down-payment of 5%. For the sake of simplicity, the following payments are based on principal and interest, but affordability includes monthly real estate taxes and homeowner’s insurance. It is a stark reality that low interest rates allow you to buy much more house. There is another factor at play that we hear about but have trouble wrapping our heads around. Supply and Demand. The low rates cause anyone who can afford to buy to start looking, that is the demand. Due Covid-19 and an uncertain economy, owners are staying in their homes longer, that is slowing supply. Compare the following 2 charts from the Minnesota Association of Realtors for YTD through October. These cover the whole state of MN. Supply first. Inventory started dropping in 2015. As you can see for the last 2 years inventory has dropped by 38%. During uncertain times people tend to hold off making any major changes in their lives if they can avoid it. Now for demand. You can see starting in 2015 prices have been rising as rates have fallen steadily. Note that beginning in January 2019 there were 4 months of prices not increasing, rates at that point were nearing 4.5%. Now look at January of 2020, through March no increases, then it’s off to the races as the federal reserve begins cutting rates. Finally let’s look at the real-world impact of supply and demand on prices. Below is a home in the Twin Cities metro area. This home has sold 2 times in the last 4 years; 2015, and 2019. This is an average home in an average location. 3 bedrooms, 2 baths, one fireplace, double garage and a total of 1700 square feet. It is so easy to look backwards to see what has happened as a result of low interest rates and how they impact prices. What is impossible is to look forward and predict where prices will go and if there will be any unintended consequences of the speed of increasing prices. One thing is certain, if you have a mortgage with a rate of 3.5% or higher consider refinancing now.
Now to the stock market, I have no idea why it keeps going up…I suspect magic. I provide these articles in the hope of helping you understand your home better and to do so with a little humor. Most people, including many agents, don’t know this information so please pass this along to your friends, family and neighbors. If they happen to ask who you recommend as a Realtor, don’t feel the need to beg them to call me…give me their name and number and I’ll do that! Please stay well! Sincerely, Steve Freeman Comments are closed.
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