Low Interest Rates Trump Tax Credit
Dave Stark, President of Stark Company Realtors, posted an insightful blog post at his Starkhomes.com blog, here The point that I find most interesting is that our market experienced a surge in buying when the federal government was offering the $8,000 tax credit. However, now that the tax credit is gone (for all but some military vets), interest rates have dropped so much that there’s a greater benefit in the low interest rates than in the credit (for anyone who holds the property for a minimum of 5 years). Yet, buyers haven’t reacted to the incredible bargain that today’s rates offer.
My take is that the interest rates fluctuate and buyers both can’t count of them staying low nor did they have the benefit of advanced notice, as they had with the tax credit.
Here is Dave Stark’s post:
“Uncertainty” and Housing
We’ve been hearing a great deal about “uncertainty” lately…uncertainty in the economy, uncertainty in the political and regulatory climate. Whatever the source of that uncertainty, it seems to be a palpable force that’s hanging over the economy right now, and from our vantage point, it seems to be affecting housing sales as well. How else to explain the relatively weak response, at least so far, to today’s record low interest rates. When you couple today’s rates (4.375% for 30 years, 3.875% for 15) with the fact that prices are unlikely to go much if any lower, and you have a situation in which the cost of home ownership is undoubtedly as low today as it will ever be going forward. For most buyers, the value of today’s rates over the life of their ownership is likely quite a bit more valuable than the recently expired home buyer tax credit, and yet demand when the credit was available was white hot, while today’s demand remains somewhat subdued.
We’ve heard a few buyers suggest that they think it’s smart to wait because they think prices will go lower yet. To that we would answer, how much lower do you think they will go, and what if interest rates rise over the same period? If rates do rise, and they certainly will eventually (as will prices), do you honestly believe your total cost of ownership will be lower a year from now than it is today? A one percent increase in interest rates will almost perfectly offset a 10% drop in prices. Do you think prices will drop 10%, here in South Central Wisconsin with our low (by national standards) unemployment rate, faster than interest rates will rise by 1%? In the aggregate, prices have not yet fallen 10% from their peak in 2008, through the depth of the recession. Is that what you’re waiting for? If you’re rationally trying to play the odds, this one looks like a no-brainer.
Given the compelling buying opportunity today’s market presents, it seems to us there are only two possible explanations for housing sales not to be going through the roof. The first might be that consumers don’t fully realize yet how low interest rates really are, and what it means for them as homebuyers. The other possibility, however, is simply the uncertain economic picture, which is emotionally freezing people from making a commitment. We know that emotion usually trumps logic, and fear usually trumps desire. The irony of all this is that the primary obstacle to the economic recovery picking up steam is the unwillingness of consumers and businesses to get out there and spend and invest normally again. So fear is creating the conditions that lead to sluggish growth, and more fear. It’s a classic, self-fulfilling prophecy. Here are two concepts that we think are pretty certain. First, everyone needs to live somewhere, so over the long term, housing is a solid investment. Second, the cost of owning a home will never be lower. Given those certainties, should you let uncertainty rule your life?
