Yesterday, the rate on the 30-year mortgage dipped below 3% for the first time ever (2.98% to be exact). Rates have been in decline for the better part of, oh… nearly FORTY YEARS! Yes, we’ve seen short periods of rate increases but over the long-term, rates have been sliding since they peaked in the early 1980’s at over 18%! It’s obvious these low rates make it less costly to finance a home purchase, but the impact of lower rates go so much further in the pursuit of wealth creation.
Sometimes, when something becomes “normal,” we tend to lose touch with reality. For instance, ever since the Great Recession (2008/2009), the 30-year mortgage has languished below 5%. People have become accostomed to these low rates not realizing how good they have it. Just stare at the below chart for a minute. Money is so much cheaper today then it was even 10 years ago, let alone 20 years ago! This inexpensive funding makes it sooo much easier for new (and existing) home buyers (owners) to create wealth.
My own experience is a great example. My wife and I purchased our first home in 2000. For Southern California, a modest home costing us $300,000. We financed $285,000 at a mortgage rate of 8.75%! The horror! This left us with a $2,200+ monthly mortgage payment. For comparison sake, to rent a similar size home at that time was probably a slightly lower cost. But, as they teach you in finance 101 (or maybe not), your first big investment should be a home. So, we checked that off the list!
As the years passed, rates kept dropping and we periodically refinanced, all the way to the point where our rate settled in 2012 at… 2.65%! Oh, the excitement! This rate landed us with a monthly payment $1,000 less than our initial monthly payment of $2,200. That is a $12,000 annual savings. This is the opportunity low interest rates created for us.
We sold that house in 2013, but let’s imagine we stayed in that home, sticking with that mortgage and saving $12,000 annually versus our initial payment. Well, investing the $12,000 annually in the stock market, earning an 8% annualized return, this savings would turn into nearly $1,500,000 in three decades. This would have a huge impact on most everyone’s wealth creation plan! And not to mention, we would also own the house… an asset most likely worth a similar amount. Not too shabby.
Every situation is different. Today, you won’t get a 2,300 square foot house for $300,000. Today, that same house is estimated to be worth $800,000. And yes, a portion of home prices do reflect how high or low interest rates are (i.e., affordability). But, the fact that today you can borrow at 3%, versus even 5% a few years back, is a dramatic savings… that can be invested!
There are many ways to look at mortgage rates, but the fact is the less it costs to finance it, 1) The more money you will have to invest and grow elsewhere and 2) The cheaper the overall cost of the house will be. These low rates are indeed historic… an historic opportunity to create wealth.
Note: Nothing contained herein this letter should be considered to be investment advice, research or an invitation to buy or sell any securities.