As real estate professionals, you know interest rates are on the rise. You also know that critics say the housing market will crash, that we will have a repeat of the 2008-2009 financial crisis. I say the critics are wrong. Today’s real estate market is stronger and safer than before. Start with the safeguards themselves, like credit scores.
I used to joke, “If a kindergartener asked for a loan and submitted the application in crayon, a loan officer would show up with a check.” That’s no longer true.
The run-up to the 2008 financial crisis was based on poor lending practices. Loan officers and lenders didn’t care about a person’s credit or ability to repay a loan. A homebuyer could write down how much he made, with no verification of income, and get a loan. Stated income loans were why there were so many subprime mortgages. People with bad credit got easy credit—until they couldn’t.
Because of the Dodd-Frank Act loan officers and lenders are under more scrutiny. As part of good lending practices, they are no longer letting people buy homes without proof of income.
Fewer people with low credit are buying homes today than those in the buildup to the crash. That means more homebuyers are creditworthy, and less likely to default on their loans.
Also, there are currently not enough homes to go around.
Over the last 10 years housing inventory has gone down from almost 1.6 million homes to 350,000. Basic economics tells us that when demand exceeds supply, prices go up or stay high.
Delinquencies, defaults, and foreclosures are other factors to consider.
The good news is that delinquencies are down, which means foreclosures are down.
Right after the financial crash, we kept hearing about foreclosures all over the country. There aren’t as many foreclosures now, which means there are fewer depressed properties for sale.
Now, let’s take another look at the effect of interest rates on the housing market.
No doubt the rise in interest rates will cause prices to drop. But the drop will be mild, a slight cool down rather than a catastrophic descent.
The biggest effect on housing will be refinancing.
During the last few years, the number of refinances were plentiful. People would take money out of their homes to either upgrade their homes, pay off their debts, or get a lower monthly mortgage payment. The amount of economic stimulus from these refinances was close to $400 billion. With interest rates on the rise, there will be a lot less refinancing in the near future.
On a personal note, I bought my first home with a 6.5% interest rate; and that didn’t stop me. A generation before, interest rates were more than twice as high; people were buying homes with interest rates at 15%.
I doubt a slight rise in interest rates will stop most first-time, homebuyers, especially with the current undersupply of available properties.
From this perspective, the housing market looks solid.
Romeo Razi, CPA, is the founder of TaxedRight.com. With degrees in computer science and accounting, he is a former IRS revenue agent. Due to his background in computer science, Romeo is well versed in startups, funding, and the changing landscape of tech. He is also an avid real estate investor.
