Enjoy Low Interest Rates While They Last

By Richard Courtney

In what has become expected in this post-Recession boom, home sales continue to set records each month with no end in sight, based on October sales figures from the Greater Nashville Association of Realtors.

There were 3,015 sales in October, up from 2,469 last October, an increase of 22 percent. Year-to-date sales are up 6.8 percent compared
to 2013.

There also are 2,730 pending sales, versus 2,401 pending sales for this time last year, so the November numbers will be up another 18 percent or so as many sales that close never hit the pending status.

Inventory continues to shrink, dropping from 15,957 to 15,051, which will eventually slow sales. The data is slightly flawed since some new construction is never listed as for sale before closing.

For example, the condominiums at 1212 that were set to close this month are not listed as active listings, nor are they pending.

Closing dates for the 90 pending units have been extended to January. So in January, 90 sales will show up for condos that are not for sale.

This also is the norm for many new subdivisions in the area.

It is customary for builders to construct a model home or two and sell homes based on the model, plus upgrades. With the sales in the area afire, construction delays are inevitable and the gestation period for a new home can rival that of humans, reaching nine months on most new single-family housing.

In years past, a nine-month period from contract to closing was equivalent to optioning a stock since interest rates could jump from the once-attractive 8 percent to as high as 9.5 percent.

In this era of continued historically low interest rates, that fear doesn’t exist in the minds of the buyers. When interest rates rise – and they will – the music might stop for new construction.

Based on post-Recession economic trends, interest rates have been stable for years ranging from 3.875 percent to 4.75 percent. One thing – perhaps the only thing – that people on both sides of the aisle seem to agree on is rates will increase.

When this happens, look for things to slow. And that is the reason that it has not happened yet.

Scott Ractliffe, a senior vice president with Pinnacle Financial Partners, says the payment on a $400,000 loan at 4 percent interest is $1,912 for principal and interest. If rates were to hit, heaven forbid, 5.5 percent interest, the payment for the same $400,000 would be $2,273, an additional $4,332 per year.

Additionally, at the 4 percent interest rate, the buyer would be required to have an annual income of $96,000, while the 5.5 percent would require $110,000, Ractliffe says.

And there are two other intangibles in play in this scenario, Ractliffe adds.

The first is that the populous has grown accustomed to these low rates and perceives rates in the 4 percent range or thereabouts to be the norm. When rates rise, there is the tendency by consumers to wait for rates to drop again, causing activity to drop.

He also cites the cycle that ensues, noting that it takes a year of waiting for borrowers to realize the 4 percent mortgage is gone for good. Once that occurs, people get back into the market, but more slowly as there is always the hope that the lower rates will return.

After a few years of rates increasing and property values rising in 3 percent to 5 percent range each year, there will be a reduction in rates in 2021 or so.

Then, with all of the equity built and the ability to buy a new, more-expensive home and have the same monthly payment after investing the equity in the purchase and taking advantage of the new 6 percent low interest rates, down from 7.5 percent, the market goes bonkers again.