When someone asks me if interest rates are going up or down, my typical response is, "it depends." There are many issues which I've learned over my 34 years as a San Antonio real estate agent that are totally unpredictable and often beyond my comprehension. Following is my recollection of just a few incidents of interest rate changes and my opinion of the impact they had on the San Antonio real estate market.
Throughout most of the latter part of the 1970s, interest rates were relatively stable, until 1979 when rates took a giant leap upward to 12%. So confident that this would never happpen, one prominent northside San Antonio builder had guaranteed interest rates of 9.5% to potential homebuyers, and proceeded to begin construction on their homes. Needless to say, he was unable to honor the 9.5% interest rates and lost most of his buyers. It wasn't long before this well-respected builder was out of business.
This was just the beginning of escalating interest rates, which by 1982 had reached as high as 18% on a thirty year mortgage. Consider this: A typical new home in northwest San Antonio in 1982 might sell for $115,000. With an 18% mortgage, the principal and interest rate on a fully guaranteed VA loan would be $1,733.00 per month. Compare this to today's market interest rate which hovers around 5%. The same loan today would have a principal and interest rate of $617.00, a difference of $1,116.00 per month! To be sure, experts saw neither the 18% interest rate, or the current 4.5%-5% interest rates on the horizon. I recall as the interest rates were coming down from 18%, many experts were predicting that we would never see single-digit interest rates again.
Just as quickly as rates went up, they began to come down. By 1983 rates had dropped to 12%. Certain that the 18% rate was an anomaly and in spite of predictions of continued double-digit interest rates, buyers were confident that we would return to the good old days of single-digit rates. But even with this optimism, it was still difficult for most buyers to qualify for a loan at the prevailing rate of 12%. To counter this continued stall in the market, lenders introduced an adjustable rate type mortgage that had a fixed buydown, offering buyers an introductory rate mortgage at 7.5% that would increase 2% per year for the next 3 to 4 years.
Buyers accepted this loan willingly. The thinking at the time was that San Antonio real estate values had almost always increased in value, and confident the interest rates would come down, they anticipated refinancing the prohibitive buy down mortgage long before it reached their peak rate, which I recall reached as high as 14.5%.
Well, the rates did come down to around 10.5% by 1987, but home values had also come down. Many homeowners, who could not afford the prohibitive interest rates, could not re-finance their loans because of unfavorable loan-to-value ratios. Cumulatively, these conditions led to a massive number of foreclosures, with many homes selling for more than 40% less than their original value.
By the early 1990s, the San Antonio real estate market had begun to stabilize. In 1992, interest rates had dropped to 8.5% and homes were selling at fair market value. These conditions prevailed throughout most of the 1990s and through the first half of the current decade. There were some ups-and-downs, but overall, everyone was content with the market conditions until around 2006 when we entered into what might be the greatest well-documented real estate tragedy in our nation's history.
At least in part because of the current uncertain economic conditions, buyers can now purchase a home at a still reasonable price with interest rates of 4.5% to 5.0% on a 30-year mortgage. There is no way of knowing how long real estate interest rates will stay at this rate, or when home values will begin to increase, which is usually the case when interest rates remain low for a sustained period.
Given the history of real estate ups and downs, I'm going to go out on a limb and predict that home values will eventually go up, and interest rates will increase. When will this happen? "it depends."
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