Do All Bubbles Burst?

by Cameron Gunnels

Do All Bubbles Burst?

**Fixed Rate Mortgage over 20 years**

Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE30US, June 12, 2022.

If you look at the 30-year Fixed Rate Mortgage in the United States over the past 20 years the average interest rate is roughly 5.6%. If you zoom out and look at the Fixed Rate Mortgage over the past 50 years the average rate is roughly 10.62%.

What does this information tell us? Well, I hate to break it to you, but 5+ percent interest rates may be the new normal. According to the data, rates are simply returning to historical norms.

If you read my last article you know that as interest rates increase the total cost of owning a home also increases. Especially when home prices are on the incline. So, the next logical question isss …. (drum-roll) ….. that's right you guessed it, "what is happening with home prices?"

Ignoring the effect of Interest Rates the largest determining factor of home value is inventory, the simple economics of supply & demand. I argue that the supply of homes for sale in America will remain below the demand for homes for the foreseeable future. I have two reasons to believe this:

1.In the past 10-years home builders have built less homes than they did in the past 4 ten-year periods. So, during a time of economic surplus, when Americans were making more money than ever, and interest rates were lower than ever. There were literally less homes built than ever before!!!

2. When rates are high, prices are typically low (keyword typically). What motivation does a seller have in a high interest environment? Why would he sell? He/she can pocket more profit he waits and sells in a low interest rate environment b/c a higher sell price will be more affordable to a larger population of buyers. Secondly, If a seller were to sell their home that they bought at a rate of 3.2, what are they going to do now? Go buy a home at a rate of 5.0? Of course not!!

So not only were there not enough homes built, but in this high interest rate environment fewer homeowners will want to sell their home.

It is a valid argument that home appreciation was a result of 2 main contributors low interest rates and a home shortage. With such a steep interest rate increase home prices would typically instantly fall, but in this case, we also must consider the home shortage!! With these points in mind, I am inclined to stick with my conclusion in the previous article. No, home prices will not decline, they will continue to increase but at a much slower rate. And housing will continue to become less affordable, because remember, even if I am wrong and prices were to decrease, as interest rates increase homes still become less affordable.

At the end of the day if you are looking to buy a home the time is now. In the housing market if you play the long game, you never loose. The chart below shows home values over nearly 60 years. It only goes in one direction…

As always, I am available to help in any way I can! Cameron@gunnelsrealty.com

-Cameron Gunnels

Do All Bubbles Burst?

by Cameron Gunnels

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