Taking a broad view of mortgage interest rates, one could easily argue that compared to interest rates of the past several decades, today’s rates are comparatively low. However, no one has the opportunity to finance a home with comparison rates from yesteryear. The reality is we are at the mercy of the interest rate markets at the time we are looking to finance a property. The leading 30-year, fixed rate mortgage in September ascended to 4.53% from 3.35% last spring.
That small 1.2% change in interest rates may not seem like much on the surface, but as we drill down, it plays a much larger role in easing pace of the U.S. economy. In late October, Bankrate.com reported that households earning the median income in only 8 of 25 major U.S. metropolitan areas could afford the median priced home in the same metro area. That is down from 14 of 25 just a year ago. The increased interest rate changes the principal and interest payment per month on a 30-year fixed mortgage from $750 to $864, which will support the purchase of a $210,000 median-priced home, with a 20% down payment. For buyers who just qualified at $750 per month, their buying power was reduced to $187,500 as a result of the higher rate, to remain at the same principal and interest payment.
All of these numbers seem academic. Item A can lead to item B, which could lead to item C. Wrong! Pending home sales released during October, for the month of September, showed an unexpected 5.6% drop in pending home sales. This was the largest decline since April 2011 and the decline was evident across all regions. Additionally, for those looking to profit in real estate as investment properties, as mortgage rates rise, the present value of future cash flows decrease, therefore creating a lessoning demand for real estate. Lastly, we couple this with the self-inflicted wounds created by our national politics over the past year – fiscal cliff, sequester, and government shutdown – which have all weighed heavily on consumer confidence.
In other industries, we have seen productivity gains emerge from new technologies. New companies have sprung up to become household names that 20 years ago did not exist – Google, Yahoo, Amazon, Facebook, Twitter, and many others. Real estate may soon be nearing the post season words in sports no franchise in sports wants to hear, “win or go home”. Essentially, one more loss and the season is over. Win, and they live to play another day. The real estate market is poised for a leader who will introduce that new technology or product that changes the industry from that of order taker to order maker; one that will allow the industry to be less dependent on outside forces. Where is your Superman? And if can’t find Superman, look for a company with innovative ways that will make it a leader beyond the real estate industry.
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I am the CEO of EquiAlt: real estate based alternative investment firm with activities in equity, debt and private equity. Since 2008, EquiAlt's management has demonstrated a high level of competence in hundreds of distressed asset transactions, recapitalized companies while lending on landmark Las Vegas projects.
We understand that there are several strategies and goals in the area of real estate investing. Based on our experience, we offer education and offerings that are truly investment grade. Available products for investors range from totally passive to the traditional active.
Specialties: Risk management, deal structuring, asset improvement, asset allocation, networking, leadership, portfolio building and management.
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