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[Solid Masonry] Rating The Rates And Other Factors: Did We Stub Our Toe Or Is The Cause Of Our Pain More Threatening?

John Philip Mason is a residential appraiser with 20 years experience and covers the Hudson Valley region of New York. He’s a good friend and a true professional who believes that all appraisers need to have a macro-economic perspective in order to be effective. This week, he foregoes going to podiatry school to examine interest rates on Solid Masonry. …Jonathan Miller

There can be little doubt that mortgage rates rank as one of the greatest influences on the real estate market(s). As such, it seems reasonable we devote much effort in trying to understand where rates are headed and why. Human nature being what it is we tend to focus on and give greatest weight to the most recent history. Case in point, stub your toe and there is little else you can think about for the next few seconds, regardless of how happy, hungry or lost in thought you may have been (which may be why you stubbed your toe in the first place). Yet despite our tendency to insist the pain in our toe is most excruciating, it would do us well to remember we are actually in a “relatively” pain-free period; were we to think back to a time when we might have been exposed to something potentially more threatening.

That being said, the Federal Reserve has served us with 17 consecutive rate increases over the past two years. The result is 30-year mortgages are hovering around 6.74% for fixed rate loans and 5.74% for 1-year ARM, as per Freddie Mac’s Weekly Mortgage Survey [1]. But, the rates are definitely a toe stub and nothing more, no matter how much it hurts. That is, if we look at the big picture. In reviewing historical mortgage rate charts at Mortgage-X.com [2] we find more painful periods starting as recently as 4 years ago when 30-year fixed mortgages were slightly above current rates. Looking further back to the 10 years prior (1992 to 2002) rates wandered up and down from around 6.75% to over 9%. And, if you want to talk of life threatening, remember from that from 1978 to 1992 rates ran from around 9% to over 15% on average with some regions of the country experiencing mortgage rates of over 18%!

So, the issue of the day may not be mortgage rates but other more life threatening matters such as over-supply, too much investor speculation, relaxed lending requirements, and my personal favorite, overly-optimistic expectations for rates of return on real estate investing. Also, as Damon Darlin of the New York Times recently pointed out in his article, Keep Eyes Fixed on Your Variable-Rate Mortgage [3], the increased popularity of adjustable rate mortgages may come back to haunt many as rates continue to rise.

We need to stop blaming the Feds, because so far their actions have caused us little pain, relatively speaking. There is myriad of reasons why the real estate market may need to re-adjust itself to the realities of the rest of the world (i.e. housing affordability in relation to job and income growth, realistic and sustainable rates of return in the context of other investment vehicles, and many more).

The fact of the matter is we’ll have to try and see our way through the pain, look at the big picture and ask ourselves, did we stub our toe or is the cause of our pain more threatening?