As a science teacher, my students that love the Solar System often talk about our largest planet Jupiter and the large “red dot” on it’s surface. They are amazed that the “dot” is actually a tornado or storm that has been swirling and spinning on the gaseous surface of Jupiter for at least 300 years.
Enough with the Science now for what that has to do with Real Estate.
Jupiter and its Giant Red Spot (Storm)
The perfect storm that has been brewing since about late 2007 in real estate is as the “bubble” burst …
and house prices began to plummet, (can I use the term plummet?) so did the mortgage rates. For those unaware of what mortgage rates are and how they are “decided”, let me give you the skinny.
Historical Interest Rates for Housing Mortgages
The APR or Annual Percentage Rate vs. Prime Rate
This is a graph of the Federal Prime Rate in US
The Perfect Storm (APR Rates)
The Prime Rate is the rate that the government sets on loaning money to banks. In other words the price of borrowing money from the government. It is currently about 3%.
Now, that is the rate that the government charges financial institutions (banks) to borrow from them. However it does not end there. We then need to borrow from those banks that borrowed from the government (capitalism at work). Of course in order to make money, the bank puts a “price” on their money usually in the form of percentage points.
Federal Prime Rate 3%
Banks Annual Percentage Rate: 4%
APR Rates for various Mortgage Types
Generally as the Prime rate goes down, the APR does too but the are some individual exceptions (but that is for another post).
Now, back to the red spot…. The storm. We already know how houses are more or less on sale (cheapest they have been historically),
but now because the Prime Rate is historically low (to stimulate the general economy), so s the mortgage APR. These graphs are mages will help. Also loom at the video for more info.
There we go.. PERFECT STORM to purchase a home. You pay less for the house in the beginning because it is a rock bottom prices AND you will pay less over tie because APR interest rates have NEVER been lower.
I’m just saying….