S&D II:          Interest Rates

Perhaps the most significant contributing factor to the demand side has been the ability of consumers to obtain financing necessary to fund new home purchases.  This is a result of 2 factors, record low interest rates and the evolution of home financing standards (discussed in next Blog Series posting).  The interest rate environment turned friendly upon the substantial decline of the stock market in the year 2000. 

As mom and pop investors got stuck holding the bag of over-hyped technology stocks, the markets tanked and the economy weakened, forcing the Bond Market(of which mortgage interest rates are tied) to rally substantially during the traditional “flight to safety” in which investors decide its smarter to buy Bonds with a low but guaranteed return versus buying stocks that had no such guarantee.  

Next, September 11^th occurred and that caused a new flight to safety in which the Bond Market rallied further, dropping interest rates and mortgage rates to new low levels.  Today, the economy has still yet to make a full recovery and long-term interest rates remain at a historically low level, despite the increase in the Fed Funds rate. 

The result is that the mortgage payment on 150k at today’s average 5.75% rate is $875 versus a payment of $1075 at 7.75%.  The lowering of rates has made Housing Payments affordable to many, many people who previously had no choice but to rent. This has created an entire new group of homebuyers to add into the Demand mix as it is now estimated that 7 in 10 adults are now homeowners.  It also has spurred countless transactions for existing homeowners to improve their homes or move up to larger units.