What Does An Interest Rate Really Cost?

The Weekly Recap

GDP rose 2.9% in Q4 of 2022, NYC saw a 32% increase in signed real estate contracts over the week prior and in a promising sign for NYC renters, 21 % of rental listings cut asking rents in December and 15% are now offering at least one month free. A bunch of banks are looking to launch a digital wallet to compete with the likes of Apple Pay and PayPal. NYC finally has a connection between the LIRR and Grand Central. Investors predict moderating inflation will ecourage the Fed to ease the pace of rate hikes this year. Think inflation here is bad? Inflation in Venezuela SLOWED to 234% last year. Bank of Canada hiked their rates to a 15 year high and announced a pause in future rate hikes.

What Does An Interest Rate Really Cost?

'Rising rates' has been a term that has made people trepidatious about entering the homeownership market but what does that actually cost? Seeing a 3% rate increase to almost 7% can be a challenging notion to wrap your head around. With that insight, lets get some perspective:

• The Average Interest Rate: The average rate for a 30 year mortgage is historically 7.76% according to Freddie Mae. Even today at 6.46%, we are still well below historical averages.

• Interest Rates: Why have we seen such a dramatic increase? Well, in a time long ago, before Covid and increasingly during it, the US Treasury was essentially lending money for free to banks while providing what seemed like unlimited 'stimulus' money to individuals and business to keep spending high while the government told us to never leave our houses. That created an OVERSUPPLY of money which started to fuel, you guess it, inflation. Inflation occurs when there is too much money chasing too few goods. So in order to limit inflation the Federal Reserve began to exercise what is known as QT or Quantitative Tightening. Part of QT is raising interest rates to limit the amount of money individuals had access to, to create an equilibrium between available goods and the amount of money in circulation, hence why we now have rising rates.

• What Do Rising Rates Do: The higher an interest goes, the purchasing price of a consumer goes down.

• What Does the Cost of Interest Mean: Say you're looking to take out a $700,000 home loan and rates are at 6.5%. Your monthly payment will be $4,424. You say, I want to wait until rates are at least 5%. Your monthly payment would be $3,758. Is losing an almost million dollar asset worth a $666 monthly difference? Or a $7,992 a year difference? The answer is no. There is a time value to money, ROI in real estate is determined not by timing the market, but by time spent in the market. It could take over two years for a rate to get near 5% again as even with inflation cooling, the FED is expected to raise rates again. Within those two years you've lost two years worth of price appreciation.

Market Performance

Here are how some other asset classes performed this week as of this mornings opening bell. 

Mortgage Rate Update

Rates continue to trend in the right direction. With the Federal Reserve meeting next week to decide all of our inflationary dreams and nightmares, we may see rates start to move upward again come February.

Real Estate News You Can Use

• GDP Rose 2.9% in Q4, Higher Than Expected Among Recession Fears CNBC

• Some Economists See a 'Rolling Recession' ahead. Here's What That Means CNBC

• NYC Finally Unveils LIRR to Grand Central Connection NY Post

• Nest Seekers Chief Economist Reveals Opportunities in the Real Estate Market Fox Business

• Here's When National Home Price Decreases Might End, According to Goldman Sachs NY Post

• US Reached Its Debt Limit and Treasury Will Exercise 'Extraordinary' measures Reuters

• What JPMorgan and Other Banking Giants Say on a Recession Barrons

• Bank of Canada Hikes Rates, Signals Pause in Rate Hikes Reuters

• GDP Report Shows Economic Growth Cooled Slightly in Fourth Quarter WSJ

• The Common Misconceptions that Can Prevent You from a Perfect Credit Score CNBC

• Big Banks Want Their Lending Credit Back Bloomberg

• Seven Banks Including JPMorgan, BofA and Wells Fargo Plan Digital Wallet WSJ

• US Business See Lower Odds of US Entering a Recession Reuters

The Deep Insight

 Puppy of the Week

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