ATLANTA - We hear daily about new all-time record highs in the stock market. It seems like everyone who wants a job can find one, and the economy seems to be hitting on all eight, and maybe even ten, cylinders.
So all this sounds like good news, right? Well, depending on your point of view, the answer might be a conditional YES.
Here to explain this economic conundrum is real estate expert John Adams.
Question: What's going on with the economy?
Adams: In one word, UNCERTAINTY.
Q: And what does UNCERTAINTY have to do with real estate?
Here’s where we are:
1. When the economy is doing great like it is now. The stock market reflects that economy, so investors take their cash and invest in the stock market, hoping for returns like they have gotten in the past year.
2. As investors move their cash into stocks, there is a shortage of cash invested in bonds. The ten-year bond is most closely tied to home mortgage loan rates. When there is a shortage of funds invested in ten-year bonds, interest rates RISE to make bonds more attractive to those investors. That causes home loan rates to rise in general.
3. However, the one thing that investors hate more than anything else is UNCERTAINTY. And the recent killing of Iranian terror chief Qassim Suleimani has raised questions about what the future may hold, both for the future of the Middle East, and more broadly, how this action may impact other nations, notably Israel, and the United States itself.
4. When investors face uncertainty, they get nervous and engage in what is called a FLIGHT TO SAFETY. Fearing the possibility of a correction in the stock market and hoping the avoid the enhanced possibility of a loss, investors take their money OUT of the stock market, and place it into the BOND MARKET, where the possibility of loss is almost non-existent (at least in government-backed instruments).
5. Since Friday, when the drone strike on Suleimani was made public, a literal flood of dollars has left the stock market and flowed into the bond market. As a direct result of that movement, home mortgage interest rates have dropped by as much as a half percent. Early last week, most 30 year loans hovered around 4.0%, but by Friday afternoon, we saw those same 30 year fixed rate programs at 3.625%, with some even slightly lower.
6. The average rate on the 30-year fixed mortgage is now about 87 basis points lower than it was a year ago, which translates into pretty big savings for homebuyers, especially on the lower end of the market. Home prices have begun to reheat, after cooling for much of 2019.
Q: How long will this interest rate drop last or will it even continue at all?
There is no way of knowing what will happen. Diplomatic instability tends to drag down mortgage rates, but that is a tendency, not a certainty. If the crisis escalates, we might see further drops, but remember that rates are already historically low
Q: So what's the bottom line?
A: The bottom line is this: Mortgage rates have dropped. We can’t know what the future may hold, but if you can find a rate right now that is acceptable to you, my advice is to lock it in as soon as possible.