In what seemed like an eternity of interest rates going up every week, the interest rates may finally be starting to cool down. How far will interests fall? Will they continue to fall, or will they climb back up and remain above 7.0% for the long term?
Nobody has all of the answers. If they did, everyone would jump into the market simultaneously. However, if that happened, rates would skyrocket at the exact moment. In other words, it’s a delicate balance that can be difficult to predict and understand.
This article will explore some recent trends and suggest when it’s best to jump back into the market. While the current fixed interest rate environment appears to be stabilizing, it’s crucial to monitor changes closely. Borrowing money with a favorable annual percentage rate can significantly impact your long-term financial health, especially when dealing with a loan’s interest rate and the effects of compound interest.
Historically, since 1981 (when rates were above 18 percent), rates have typically declined every few years, followed by a year or so of correction and higher rates.
That was until 2020, when rates hit an all-time low of 2.65%. This drop was a reaction to Covid lockdowns and the general chaos of the economy. Before Covid, rates fluctuated between 3.5% and 4.8% for about seven years.
The Covid drop, however, caused a massive surge in homebuying and re-financing that caused the sudden market price increase we are now seeing. If Covid had never happened, rates would have likely remained in the 3.4 to 4.5% range.
Variable interest rates on savings accounts and money market accounts also dropped significantly during this period. As interest rates rise again, accrued interest on loans will increase, demonstrating how profoundly interest rates affect both borrowing and saving.
2023 was undoubtedly a crazy year, with interest rates gradually rising throughout the year before finally starting to come back down towards the end.
According to Freddie Mac, the average rates per month were as follows:
Whether rates will continue to rise or will level back out is anyone’s guess. As of January 15th, rates were at 7.06%, still higher than this point last year, but certainly a sharp decline from the 7.79% max we saw in late October.
So why won’t rates drop to where they were before? There are two primary reasons pre-Covid levels aren’t quick to return. The first is we want to avoid the situation that happened during COVID-19, which can be compared to a popular game show…
If you’ve ever watched a gameshow like Deal or No Deal, you understand the idea of jumping at a deal, even if it isn’t as good as it once was. In the case of the show Deal or no Deal, contestants will often turn down a potential deal like $200,000 because they feel their luck will continue.
After a few bad cases, the offer may drop down to $85,000. Suddenly, $120,000 sounds pretty nice, and if offered that amount later in the game, contestants often accept the offer, despite being significantly lower than the $200,000 they denied earlier.
The same goes for interest rates.
Some potential buyers realize that the COVID rates will likely come back, and after seeing rates in the high 7%s, a rate in the 5.0% or 6.0% range sounds nice. If the rates dropped too quickly to, say, 5.5%, the number of people jumping into the market would once again overwhelm the entire system, and there could be another housing crisis.
The second reason rates may not return to pre-Covid levels is that rates probably should have never been that low in the first place. From 2013 to 2019, interest rates hit 3.5% three times; each time they did, there was a quick spike up to around 4.35%. In a perfect market, rates should never spike more than. 25% during any given week or month, yet it happened multiple times when hitting the 3.5% level.
This suggests that the market was not ready for 3.5% rates and that the standard rate should bottom out around 4.0% with fluctuations between 4.0% and 4.5%. The issue is that future rates will struggle to dip below 4.0% because of fear of what happened last time, as well as the Deal or No Deal concept explained before.
Could rates eventually get back down? Sure, but if you want to enter the market, don’t expect drastic changes like 4% soon.
Based on recent trends, interest rates will likely continue to drop, but there will also be some peaks that will cause panic. It isn’t wild to think that rates will go below 6.00% at some point this year, but anything below that may be a stretch, barring some major , unexpected economic event.
If you are looking at getting into the property management industry, it may be a great time to do so. People are likely waiting to buy, meaning they are looking to rent for the short term.
Even if you don’t have experience being a landlord or the time to handle all the responsibilities that come with it, options are still available. Companies like Green Residential, an Austin-based property management service, can handle all the ins and outs of being a landlord.
This way, you can enjoy the financial benefits of being a landlord without the headache of learning what may be required to do it yourself. If you are new to the industry, check them out and see what they have to offer!
It’s impossible to give a conclusive answer to what you should do if you want to buy, sell, or rent out a home. However, by understanding the recent trends and history of interest rates, you can be more confident with whatever direction you decide to take.
Don’t be afraid to talk to a bank, do additional research, or talk to real estate agents about what they are seeing before making a decision.
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