Real Estate Matters

Thanks to the Brexit vote and the uncertainty this caused in the bond market, this week mortgage interest rates fell to nearly the lowest point in history.

According to Freddie Mac’s Primary Mortgage Market Survey, interest rates on 30-year mortgages landed at 3.41 percent, just 10 basis points (1/10 of 1 percent) off the all-time low reached in November 2012.

As you might expect, the number of people who put in applications to refinance their mortgages jumped.

Refinancing your mortgage has a number of shortterm and long-term benefits, particularly if you missed the 2012 super-low interest rate window: You can lower your monthly payments, which will put more after-tax cash into your pocket today, and you can potentially shorten your loan term, which will put a lot more cash in your pocket over the long run.

Lenders are now regularly quoting fixed-rate mortgages with 10-year terms and the low interest rates are eyepopping: 2.8 percent for a 10-year loan. On a $100,000 mortgage at 2.8 percent for 10 years, you’d pay just $14,768 in interest over the entire life of the loan. That’s almost like borrowing money for free.

Not everyone will qualify for these sorts of low interest rates. You need to have excellent credit, and a decent amount of equity in your home (certainly more than 20 percent helps). And because banks continue to ask for nearly every document under the sun, you’ll also need to have the fortitude to comply with seemingly endless requests for paperwork.

Assuming all that, you’ll be sitting pretty with maybe a new loan carrying the lowest interest rate on your block or in your building. And, that’s something to brag about at the water cooler.

It may also help explain a conundrum that real estate industry observers have begun to noodle about: the relative lack of homes for sale.

There’s been a lot of attention focused on why millennials aren’t buying homes at the rate and age of the previous generation. Some of the ideas include the fact that millennials are overwhelmed with student loans; they prefer living close to work; they’d rather be renters than owners to have increased flexibility; with the types of jobs they have (many of them 1099 or minimum wage), they don’t qualify under stringent new banking rules put in place since the great recession; and, they don’t have any savings.

All of this makes sense. But by the same token, there aren’t a lot of homes available for sale in the first-time buyer price range (or even the trade-up range).

But we believe that the super-low mortgage rates that have been floating around since the recession coupled with the destroyed financial lives of millions of baby boomers and Generation Xers has a lot to do with it.

When the Great Recession really set in, millions of financial lives were destroyed. Millions of homes went into foreclosure or were sold via short sale, and billions, if not trillions, of equity was lost. (Home prices have come back, but those homeowners who lost their homes have not enjoyed the price appreciation.)

At the same time, millions of baby boomers and Gen Xers lost billions in their 401(k) accounts when the stock market crashed. Or, they had to cash out their retirement savings in order to stay afloat when they lost their jobs.

If they were able to stay in their homes, and could refinance with some of the lowest mortgage rates in history (the bottom being 2012), they’re now living cheap in their homes. While their home values have by and large recovered, it would likely cost them more to live elsewhere. Why move when you can stay in your home for less?

Those who should be downsizing because they need less space or have retired are not doing so because they can’t afford to retire, and it’s cheaper to stay where they are. And, their millennial children are now back home living with them because they, too, can’t afford to rent or buy their own home.

Could the combination of needing to work and enjoying the savings afforded by a super-low interest rate refinance be the reason homeowners aren’t selling?

Ilyce Glink is the creator of an 18-part webinar and ebook series called “The Intentional Investor: How to be wildly successful in real estate,” as well as the author of many books on real estate. She also offers information on her YouTube channel. (youtube.com/ user/ExpertRealEstateTips).