There’s an expression in real estate: date the rate, marry the house. Rates fluctuate, but if you love a piece of property and you can afford it, you should buy it because this may be your only chance to do so.
Regardless of interest rates, you should focus what this property will contribute to your happiness. As long as your housing payments, insurance, and other expenses associated with owning this particular home allow you to live the life you want, go for it. Here’s why: If rates come down, you can always refinance to lower your mortgage payments. Also, if rates go down, property values typically go up, so that’s a double benefit. On the other hand, if rates go up it may depress property values, but you will have a mortgage payment that allows you to live comfortably in the house you love.
To be clear, my advice is based on a couple of assumptions. First, I’m recommending a fixed-rate mortgage rather than a variable-rate mortgage. A variable rate changes based on a schedule that is usually tied to market fluctuations, so while you may benefit from a lower rate in the short term, you could end up paying more in the long run. The other assumption is that you plan to live in this house for at least five years.
So often people ask me what I think rates will do. I wish I knew. Right now, I am paying close attention to Federal Reserve Chairman Jerome Powell, who said he expects to lower rates before the end of the year. President Donald Trump has been putting pressure on the Fed to lower rates sooner, criticizing Powell and publicly sharing his opinion that the Federal Reserve discount rate should be 2-3% lower, which could lead to a 2-3% drop in mortgage rates. Will this happen? There’s no telling.
The Fed’s job is to promote maximum employment and keep prices stable, and it uses monetary policy to do so—the discount rate being one of its favorite tools. The discount rate is the interest rate charged to commercial banks on loans they receive from the Fed. Oftentimes, there’s a correlation between the discount rate and mortgage rates, because commercial banks pass on their costs to customers.
However, the marketplace determines mortgage interest rates, not the Fed. The Fed influences the market, of course, but if the Fed makes changes that aren’t aligned with market dynamics, the market will correct. So, ironically, by not changing the rate, Powell may be protecting rates—keeping them in line with financial market trends. To be fair, not all of Powell’s decisions are fiscally responsible. The Fed is currently spending $2.5 billion to remodel its DC offices. That’s just shy of $2000 per square foot(almost as much as our county spent building a new building on Orchard Avenue in Ukiah, but I digress).
To summarize, given all the uncertainty in the market, I recommend buying now and locking in a livable interest rate. If rates go down you can refinance and your property value will likely go up. If rates go up and housing values fall, you’re fine as long as you plan to stay put for a while; plus, you may be able to get your property taxes reassessed and reduced.
If you have questions about property management or real estate, please contact me at [email protected] or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than45 years. The opinions expressed here are his and do not necessarily represent his affiliated organizations.
