Interest rates are not high

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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

I keep seeing a lot of posts with people noting “interest rates are high”.

Just want to say, no they are not. I don’t need to post the charts here as a simple google search will note this. Last decade interest rates have been super low

If anything is “high” it would be home prices as those in June were all time highs

I would also not plan on rates going back down to 3’s anytime soon (if ever) so investors should be modeling their returns more cautiously and based on what’s in front of them.

Just my vent for the day.

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Scott E.

Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes

I agree Chris that interest rates are not "high" when looking at a historical chart like what @Randall Alan posted.

But interest rates are high right now compared to the price of real estate. The median price for a single family home in the US is around $370k right now. Thats about 3% higher than 1 year ago today.

Rough numbers, rounded for simplicity:

-In Nov 2021 you could buy a house for $360k and get a 30 year fixed loan at 3.25%. This would come with a P&I payment of $1,566.74 per month

-In Nov 2022 you can buy a house for $370k and get a 30 year fixed loan at 6.25%. This would come with a P&I payment of $2,278.15 per month

So yes, rates are not historically high. But payments are. And isn't payment what really matters?

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Randall AlanPro Member
Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
3y

Ok, I’ll add the chart. So historically you are correct… but perceptually they are higher than they have been for two decades.

I agree though… the math will look very different if these (relatively) higher rates persist. Think about how that would impact rental rates if you have to factor in hundreds of extra dollars per month for the higher interest! And how do landlords with new loans compete with ‘existing inventory landlords’ who have much lower expenses? Maybe the old schoolers just profit more if the market is forced upwards? Or, perhaps as the Fed hopes, it brings down the housing prices… lol! But it could be an interesting squeeze between consumers refusing (read: unable) to pay much higher rents, and new landlords unable to acquire properties without charging the higher rents to be able to make a profit?

Supply and demand will likely work on both sides of the coin at the same time - with both rates and home prices easing to allow the mortgage industry to continue to operate.

Randy
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Jon A.
Investor · Brooklyn, NY · Member since 2022 · 158 posts · 118 votes
3y

@Chris Seveney Where do you see rates going on the next 12 months? I ask bc in the next 12 months the Fed will presumably either solve inflation or cause a recession. Either scenario likely leads to lower rates of some sort, though who knows how low.
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Scott E.
Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
3y
I agree Chris that interest rates are not "high" when looking at a historical chart like what @Randall Alan posted.
But interest rates are high right now compared to the price of real estate. The median price for a single family home in the US is around $370k right now. Thats about 3% higher than 1 year ago today.
Rough numbers, rounded for simplicity:
-In Nov 2021 you could buy a house for $360k and get a 30 year fixed loan at 3.25%. This would come with a P&I payment of $1,566.74 per month
-In Nov 2022 you can buy a house for $370k and get a 30 year fixed loan at 6.25%. This would come with a P&I payment of $2,278.15 per month
So yes, rates are not historically high. But payments are. And isn't payment what really matters?
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Desmond Fielding
Financial Advisor · Norfolk · Member since 2019 · 25 posts · 28 votes
3y
Scott, I agree. Regardless of if rates are "high" or homes are "overvalued" they both ultimately lead back to the same point - the cost of owning a home has increased significantly. I think something will have to give eventually whether that's interest rates or home prices. However, I do agree with your point Chris. Time to adjust and learn how to make deals in this current environment. If something pencil's out at 7% then it'll be killing it if you can refinance to 3% down the road. If not, you're still making money at 7% so no harm done.
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Robin SimonBusiness Member
Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
3y
Generally disagree here - yes, they may be "low" or "medium" historically but since many people have 30-year fixed rate mortgages and refinances are easy when rates are low, you really have to look at it more as a comparison vs. what people currently have (90%+ below 5%) versus change over time. In this sense, they are really really high
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Travis TimmonsPro Member
Rental Property Investor · Ellsworth, ME · Member since 2021 · 1k+ posts · 2k+ votes
3y
It was 16 degrees in Houston last night. A neighbor that moved here from Chicago was telling us all how it is not cold. Cool. 16 degrees in Houston is cold. Period.
Interest rates were over 18% before many of us were born. Cool. 7%+ is a high interest rate given recent context.
Just my vent for the day.
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Andrew Garcia
Lender · Charlotte, NC · Member since 2022 · 739 posts · 410 votes
3y
A lot of good points are being made here but I think we are missing the point of @Chris Seveney's post.
Let's stop underwriting deals at a 3% interest rate and spend time ensuring you are in a good financial position to take on the payment. If you are an industry professional, ensure you are advising your clients on how to properly build wealth.
Regardless of whether interest rates are at historic lows or high relative to the last decade, we should be helping clients and investors achieve generational wealth through real estate. Do not advise your clients to take on a payment because "interest rates will go down sometime" so you can get a sale. Likewise, if you are a client, do not use that same logic to buy a deal that you are not prepared to handle the negative cashflow on.
I believe that is all Chris meant in the post, not to have a debate about whether interest rates are high right now or not.
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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
3y
I agree rates were really low for too long. It means most people forgot what 'normal' is. Rates right now about probably where they should be. It will take time for people to adjust to the new reality. Did I benefit from the low rates-as far as buying rentals, for sure.
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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y
@Andrew Garcia
Correct my point is you are going to be waiting a long time if you think rates will go down (home pricing separate issue) and I would not bank on rates dropping significantly to refinance
As part of that I also do want people to wake up and realize the last decade with QE was not normal. I hear people’s points that 85% of loans are lower, but that’s not how economics work. The fed wants to get to 5% and they will and rates are not going back down quickly. Will they have surges sure but an analogy I like to use is a 150lb person gained 150lbs. If they lose 30 of those pounds gain that is awesome but they are still not even close to where they need to be and the first 30 is ALOT harder then the next 30.
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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
3y
Interest rates are higher than cap rates in many places; so, something (price, rate, or both) have to decrease.
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Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
3y
Perspective- Where are you individually on the growth spectrum? First REI purchase or at Asset protection stage buying once in a while?
A. Out in farming country. Farmer owns 1,000 acres at $1,000 per acre average. Land next to them (call it a great deal since you don’t have to move your equipment so far) comes up for sale and they buy it at auction for $15,000 per acre. They will only make $300 profit per acre farming.
They bought the property not for cash flow. They bought it for value add. Leverages both their equipment cost and their time. Plus they will only farm so many more seasons.

B. Switch your model. Start looking for properties for ADUs, can subdivide off lots, make 5 time more offers at your price that hits your targets- LIFE is out there- you will find a seller who wants to sell. We are moving into a buyers market, but that is really on an individual sellers perspective.

C. If you already have debt and own property your making money from inflation. You will pay with cheaper dollars and the value of your house is going up due to construction cost and the fact there is still a housing shortage. So sit still and earn money. Or like the farmer average it out.
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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
3y
Quote from @Chris Seveney:

I keep seeing a lot of posts with people noting “interest rates are high”.
Just want to say, no they are not. I don’t need to post the charts here as a simple google search will note this. Last decade interest rates have been super low
If anything is “high” it would be home prices as those in June were all time highs
I would also not plan on rates going back down to 3’s anytime soon (if ever) so investors should be modeling their returns more cautiously and based on what’s in front of them.
Just my vent for the day.

It is not high unless you see the cap rate in two-dimensional charts :) LOL
1 Reply
V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Quote from @Scott E.:

I agree Chris that interest rates are not "high" when looking at a historical chart like what @Randall Alan posted.
But interest rates are high right now compared to the price of real estate. The median price for a single family home in the US is around $370k right now. Thats about 3% higher than 1 year ago today.
Rough numbers, rounded for simplicity:
-In Nov 2021 you could buy a house for $360k and get a 30 year fixed loan at 3.25%. This would come with a P&I payment of $1,566.74 per month
-In Nov 2022 you can buy a house for $370k and get a 30 year fixed loan at 6.25%. This would come with a P&I payment of $2,278.15 per month
So yes, rates are not historically high. But payments are. And isn't payment what really matters?

That exactly what it comes down to. The average American doesn't go to a lender and say I need a 5% rate or need a $300k loan. They go to the lender saying I can afford a $2,000 monthly payment, then the lender verifies that obviously, but the core of it is the monthly payment.
That's the homebuyer, the investor, and almost anybody that leverages capital to buy real estate.
Interest rates are almost irrelevant, monthly payment is almost entirely relevant. And purchasing price is really the balancing act, and what will prove to be the most important.
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Charles Granja
Rental Property Investor · Kansas City/Chicago · Member since 2021 · 126 posts · 113 votes
3y
Interest rates are incredibly high relative to price. That is why people are complaining. Have you not reviewed the housing affordability index?
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V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Quote from @Charles Granja:

Interest rates are incredibly high relative to price. That is why people are complaining. Have you not reviewed the housing affordability index?

Yeah, it's all relative. These rates are high with all context given. So to say they're not based off an outright chart wouldn't give the full picture.
Something interest to note, my bank is giving out CDs in a 18/24 month term that are paying a LESSER rate than the 6-12 month terms. My other bank is giving higher in the 6-18 month, but lower for 24 months-5 years out. Makes me think they know something we don't, like always.
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Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
3y
My worst financial decision ever was not dropping out of college and investing in an IRA. 20% interest guaranteed program indefinitely with annual $2,000 annual investment. Would have lost my scholarship and taken an extra two years to graduate.
Right now I would love for the fed to go to 18%.
A. Would pay my debt down with cheaper dollars.
B. Our assets would go up in value.
C. Would have no impact on our Self storage business from a cash flow standpoint. Keep raising prices.

D. Refinanced our debt through either SBA 20 year fixed terms or conventional 20 year amort with 7 year balloon. Lost an extra percentage point on average for 3 years, since we refinanced earlier than balloon period. Have great relationship with banker. Moved us to 7 versus 5 year balloon. Not worried about a call or refi in the middle of Fed interest rate decisions. Bought a reduction to our risk factor.
E. Moved out of stock market. Would move liquid assets into 3 to 5 year bonds. Stock market will probably take a 30% run up at the end of 2023, but still won’t be ahead of itself with lost ground. Plus we adjusted to our risk aversion.
So what.
We are here now. Take a look at your positions. Solidify them to meet your risk aversion. Re evaluate your debt and asset positions and adjust as needed. Don’t look at just a deal. Look across your positions.
Make a decision where REI is headed and make your changes. It's your money you will always be right even if you make the wrong decision.
We do Self storage and Subdivisions with lot sales only. If we were in the wealth accumulation stage I would still be pounding away. Have the land purchased and zoned for 4 projects. Just on hold waiting for the tea leaves to move.
9% interest is when I would stop investing in new investments.

8% I would sharpen my pencil and recheck everything.
7% I would compare investment options 1/2/3 against each other. Determine both profitability outlook and Risk analysis.

6% is truly just another day.

Start small and Make Your Big Mistakes Early
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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
3y
Quote from @V.G Jason:

Quote from @Charles Granja:

Interest rates are incredibly high relative to price. That is why people are complaining. Have you not reviewed the housing affordability index?

Yeah, it's all relative. These rates are high with all context given. So to say they're not based off an outright chart wouldn't give the full picture.
Something interest to note, my bank is giving out CDs in a 18/24 month term that are paying a LESSER rate than the 6-12 month terms. My other bank is giving higher in the 6-18 month, but lower for 24 months-5 years out. Makes me think they know something we don't, like always.
Banks often give higher rates for shorter term deposits. My bank has highest rates for 12 month deposits and lowest for 5 year ones.
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V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Quote from @Theresa Harris:

Quote from @V.G Jason:

Quote from @Charles Granja:

Interest rates are incredibly high relative to price. That is why people are complaining. Have you not reviewed the housing affordability index?

Yeah, it's all relative. These rates are high with all context given. So to say they're not based off an outright chart wouldn't give the full picture.
Something interest to note, my bank is giving out CDs in a 18/24 month term that are paying a LESSER rate than the 6-12 month terms. My other bank is giving higher in the 6-18 month, but lower for 24 months-5 years out. Makes me think they know something we don't, like always.
Banks often give higher rates for shorter term deposits. My bank has highest rates for 12 month deposits and lowest for 5 year ones.
My two banks showed higher on the 18 and 24, than the 12 just two weeks ago.
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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
3y
If the rate is highest in ~20 years it is high as that is a long time in finance terms.
Many things from long ago have little impact on today.. The fact that interest rates in the early 1980s was over 18% does not change that today’s interest rates are high.
I can fairly comfortably state no one with property in the US has a significantly higher interest rate on their conventional loan than the current rates. This implies the current rate is highest rate conventional loan which makes it a high rate by definition.

Does this imply that I would expect it to come down to the rates seen in 2021? Not necessarily. Those were incredibly low rates. We may never see such low rates again.

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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
3y
There's this intricate mathematic relationship between interest rate,cap rate and IRR

So during QE era. I found conservative IRR for residential is about 10% IRR. The average Interest rate is 3.5%. Cap rate sloping down from 7% to 5%

Now coming 2022-2032 era
Average interest rate let's say 6.5%. Cap rate is 5%. so IRR is pretty well may be cut by half, let's say 5-6%.

So question to you my friend.
The IRR of putting money to 4% gov. bond is almost similar to real estate appreciation for the next decade if interest rate stays this long. LOL :)

Of course interest rate matter, in fact, that's the only thing that matter.

So what shall I do ?

Deleveraging. Buy cash or use 1:2 leverage ratio with 40 YR IO . Voila . Problem solved. LOL
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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
3y
Quote from @Dan H.:

If the rate is highest in ~20 years it is high as that is a long time in finance terms.
Many things from long ago have little impact on today.. The fact that interest rates in the early 1980s was over 18% does not change that today’s interest rates are high.
I can fairly comfortably state no one with property in the US has a significantly higher interest rate on their conventional loan than the current rates. This implies the current rate is highest rate conventional loan which makes it a high rate by definition.

Does this imply that I would expect it to come down to the rates seen in 2021? Not necessarily. Those were incredibly low rates. We may never see such low rates again.

the interest rate, from my calculation, is a derivative product of M2 growth.
The Fed is just so stupid to print money too much in 2020 by a yearly rate of 40%, average growth is 6-8%.
In 2022 we have the weirdest M2 growth which is negative.

Based on that I think by 2024/2025 we will be back to normal.
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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y
@Dan Heuschele
We are note investors and have over 200 assets in our portfolio and only 7 of them are rates under 7%.
If the mortgage market is 16 trillion and 15% are above 5% there is still 2.4 trillion in real estate above 5%. Remember there are ALOT of people in this country with questionable credit. Not everyone has 800 credit scores.
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Marcus Auerbach
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
3y
Interestingly, the issue going forward will be more with sellers, than buyers. Because they have a 3% rate and now buying a more expensive home with a higher rate is not super appealing!

But we have seen rates come down. A recent survey from Point shows that most buyer's would re-engage at rates in 5% range, some say 4%. But very few would require 3%, which was a historic anomaly anyways

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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
3y
Quote from @Chris Seveney:

@Dan Heuschele
We are note investors and have over 200 assets in our portfolio and only 7 of them are rates under 7%.
If the mortgage market is 16 trillion and 15% are above 5% there is still 2.4 trillion in real estate above 5%. Remember there are ALOT of people in this country with questionable credit. Not everyone has 800 credit scores.

lately, do you see an increase in nonperforming loans???
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Marc Roberson
Real Estate Agent · Wellington, CO · Member since 2017 · 58 posts · 17 votes
3y
Quote from @Charles Granja:

Interest rates are incredibly high relative to price. That is why people are complaining. Have you not reviewed the housing affordability index?

100% This.
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