Interest Rates, Property Values, and Lessons From a Market Collapse

 I'm no economist and my calculator only does basic math and some functions that looks like M- and M+ and MRC. Maybe pie, I don't know how to make these buttons do anything. As the joke goes, you can lay all the economists in the world end to end and you wouldn't reach a conclusion, so what difference does it make if I chime in? Probably no difference, but I've got a minute so I'm chiming.

The climate is favorable for selling and buying. Caution should always be at the top of our minds when making decisions regarding use of our money. That has not always been the case for me. In the late '90's I threw caution and wise advice to the wind and invested in tech stocks and I was brilliant. My picks always went up. Picking winners was so easy. I dismissed the "old timers" who said the tech stocks had no fundamental evidence to support their values. Then when my stocks went south, I bought into the idea of buy more at bargain prices. I continued this strategy of throwing good money after bad until all the money was bad. Informed people with wise advisors didn't get killed, or at least survived with minor abrasions. There is something worth considernig in that expensive lesson and I am interested in learning more. What did those who lived to surivive another stock decline do that makes sense to apply to real estate?
It's now the end of July and owners are seeing real buyer traffic at their homes. Offers are being written. I sense a fair percentage of buyers who make offers are doing so with a foot in one door and an eye on another house. As owners we send counter offers at our own risk. A buyer's motivation to pursue first choice or second choice is not always significant. Commitments are weaker than the days of old. That tells me there are new fundamentals to consider when negotiating offer terms. Do not count on getting a response to a counter-offer. Make concessions on items of minor significance.

The number of sales is not enough to ripple the real estate pool. In fact, maybe "settled" is accurate compared to the high sell off of low priced homes in the first quarter of the year. Now I'm hearing the buzz around interest rates. My weak economics background suggests I should just listen to the experts and mind my own business, but I have to ask, "Which experts do I listen to?" The ones who say "Good time to buy. Interest rates are low." Or, do I listen to the one in my conscience saying "Careful here. Something isn't adding up." I think I am going to go with common sense and read behind the lines. Who is saying "Buy" and who is saying "Hold"? Everybody has something to gain or lose by the decisions consumers make. Before applying any one recommendation to my decision, I should know if the advisor and I have a similar stake.

When interest rates are at an all time low, what is the most likely direction for interest rates in the next 12 months? If you said "up"  give yourself a PI R Squared. When interest rates go up, what happens to house prices? Well, without any help from Uncle Sam the price of housing goes down in an escalating interest rate climate. If my home value delcines 2% per year as interest rates go up 1% per year for three years will I be in a negative position if I have to sell in 3 years? Maybe. Maybe not. Am I buying for shelter and a lifestyle, or for an investment. If my investment eggs are in my home I have no investment. The money in the home is not able to be moved to safe havens and it's definitely not diversified. A fundamental of investing is diversification. Some money must be liquid for ease of movement in and out of danger.

Should I buy real estate? Maybe the question is "Why do I want to own real estate?", and probably "How long will I keep this piece of real estate?"  Owning a home is a good idea when we own for the fundamentally right reasons. If we own a home and think of it as an investment which will return a healthy next egg, we may be setting ourselves up for dissapointment...again.

Interest rates are one part of the equation.Repair costs, home prices, location, and personal plans are all factors to consider before buying or selling. The allure of  interest rates may not be moving the needle on the real estate activity index. Do interest rates move people to buy in times when people don't want to buy or sell? Maybe.



Think before you leap; still waters run deep.