Are we in a housing bubble, or something else?

Every week we get asked if we’re in another housing bubble. And every week we continue to respond to people with, “no – this is not a housing bubble.”  So, let us tell you what bubble we are in: an interest rate bubble. But before we get into it, we have to mention we aren’t lenders and this is purely for informational purposes.

Interest rates are historically low.

Interest rates are strangely (and in our opinion, artificially) low – though they have gone up slightly this year. When we looked at rates our clients received from our lending partner, Lisa Meyer, we saw there’s been a .5% fluctuation in rates since the beginning of the year. 

Economic stimulus during Covid has caused interest rates to remain low to compel us to buy houses and cars and use our credit cards.  With Covid still being part of our lives, we think low interest rates will hang around for another year. 

But after that, who can say how high they will go?  Back in 2018 our clients were getting loans in the 5% range, whereas now they’re getting them around 3%.

Source: Freddie Mac, 30-Year Fixed-Rate Mortgages Since 1971

Who’s involved in getting a mortgage?

When a person buys a home and takes out a mortgage, there’s an exchange of real dollars.

An investor hires a bank, or a lending broker, to loan money to home buyers who fit specific criteria (credit score, debt-to-income ratios, payment history, etc.). The buyers who fit that criteria receive their loan from the lender, who receives it from the investor, and the money is paid to the seller.

Between the investor and the buyer there is a layer of sales, service, and underwriting professionals that don’t work for free. These pros all get paid from a portion of the total interest rate. These professionals who issue a rate at 3% aren’t actually going to make 3% on the loan. They’ll actually earn less.

Who are the investors behind mortgages?

The truth is, the investor is not a person. This makes sense since we don’t know a single person who would think getting 2-2.5% every year for the next 30 years is a good investment.

The main investor during this most recent run of low interest rates has been Fannie Mae and Freddie Mac. The “F” in Fannie and Freddie stands for the word “Federal.”

These investors are entities of the US federal government whose purpose is to securitize our mortgages. In other words, the investor who is accepting these 2-2.5% returns is the federal government.

So, when the government stops buying our mortgages, where will the money come from for buyers to get mortgages? It will have to come from private money. And private money will expect a higher return on their investment, thus pushing interest rates back up into the 5-6% range.

We’re not in a housing bubble.

So this was a long way to get to this point but, we don’t have a real estate bubble. What we have is an interest rate bubble, and that bubble will eventually burst.

Those who’ve purchased their homes or refinanced during this last year made a great choice to lock in their payments at these historically low interest rates.

It isn’t too late to get a low interest rate.

Getting a mortgage under 6% is beating the historical average – and even more so at 5%, 4%, and 3% (the current average rate). We just can’t say enough how advantageous the rates have been over the last year and are right now.

It’s not too late to get in on low interest rates and secure your lower house payment for a long time.

If you’re thinking of moving, the environment may be competitive for buyers but the interest rates are unbeatable.

Contact us today to start the process of buying your next home!


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