Low Mortgage Rates: Love Them Or Hate Them

According to a leading measure of U.S. residential real estate prices, the S&P CoreLogic Case-Shiller Home Price Index, home prices rose 11.2% year over year in January.  With a limited supply of new homes on the market, increased demand from ultra-low interest rates, and stay-at-home dynamics due to Covid-19, the conditions are perfect for higher home prices.  So, if you are in the market for a new home, what should your mindset be in this environment? Below are some thoughts:

 Low Rates Do Not Guarantee Good Deals

While mortgage rates are at or near, all-time lows this does not mean you should rush out and purchase a home.  Low rates are one of the key drivers of price in the housing market, and while you may be getting a low borrowing rate, you must be mindful of the price and the reality you may be overpaying for your home.  Recommendation:  Research the price history in the area you are interested in and understand its response during periods of increasing interest rates.  This can help you evaluate the risk you are taking by purchasing a home in an extremely low interest rate environment.

Let Non-Financial Priorities Guide Your Decision

Remember the axiom “Price is what you pay, value is what you get.”  Regardless of what you ultimately pay for a home, be sure to spend considerable time evaluating the value add to your life in non-financial terms.  Whether the value-add is a particular school district for your children, proximity to work or family members, etc., understand what you are getting and whether it is worth the price you will pay.  Recommendation:  Make a list of what you value/ prioritize in a home and then grade various home options against those values.

Time Horizon is Key

With any investment, the amount of time you intend to hold it is important.  While I consider a home more of a consumption item than an investment, it helps to view a home purchase through an investment lens to avoid making big mistakes.  For example, if you feel you may be paying more than a home is worth, it may not significantly influence your decision if you intend to own/live in the house for twenty years.  However, if you plan on living in the home for a shorter period (i.e., five years), any significant downside move in the value of the price could cost dearly.

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Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, which specializes in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™.  In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.

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