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Economic Trends · Apr 16th, 2024
What this video’s about:
In a recent discussion, Erik Clapsaddle, CFA, Senior Fixed Income Portfolio Manager, and Paul Gifford, CFA, Chief Investment Officer of 1st Source Bank Wealth Advisory Services, delved into the intricacies of today’s housing market, contextualizing it within historical interest rates. The housing market, a cornerstone of the US economy and often the most significant investment for individuals, is experiencing notable shifts, prompting a closer examination.
Over the past couple of years, interest rates have seen rapid increases, marking a departure from the prolonged period of near-zero or negative rates maintained by central banks worldwide for over a decade and a half. This departure from the norm has led to a unique situation in the housing and mortgage markets, prompting reflection on the implications for both buyers and sellers.
Paul Gifford noted that while it may feel different this time, acknowledging the uniqueness of the current circumstances is crucial, given the dangers associated with the phrase “it’s different this time.” The prolonged period of low-interest rates has shaped buyer expectations, with today’s homebuyers facing not only higher housing prices but also increased financing costs.
Examining mortgage rates over the last 25 years, it becomes evident that the recent rates, hovering around 7%, may seem normal in historical context but appear elevated compared to the lows experienced in the past few years. This shift has significant implications, particularly for existing homeowners looking to sell and upgrade, as they confront the reality of higher interest rates on their next mortgage.
A notable statistic highlighted by Gifford is that 87% of homeowners with a mortgage currently enjoy rates below 5%, with a majority benefitting from rates of 3% or lower. This historically low-rate environment has led to hesitancy among sellers, reluctant to part ways with their current mortgages and face the prospect of higher rates on their next home purchase.
The implications of these dynamics extend to housing sales, as illustrated by a graphical representation spanning the last 25 years. The period of 2022 and early 2023 witnessed a decline in home sales, attributed to the shock of higher interest rates as the Federal Reserve aimed to curb inflation. However, recent trends indicate a resurgence in home sales, buoyed by a robust economy, strong labor market growth, positive wage trends, and healthy consumer balance sheets.
Recognizing the significance of the housing market in shaping individuals’ net worth, Clapsaddle and Gifford emphasize the importance of staying informed and navigating these shifts effectively. The Market Share, a platform offering insights and expert analysis, serves as a valuable resource for individuals seeking to understand and navigate the ever-changing financial landscape.
In conclusion, the discussion sheds light on the nuances of the current housing market environment, underlining the impact of historical interest rate shifts on both buyers and sellers. By staying informed and leveraging expert insights, individuals can better position themselves to navigate these challenges and capitalize on opportunities in the housing market.
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