By Diego Bravo - Realtor® on April 14/2023

People in the United States and other countries, including many of my national and international clients, often ask me this question because they are so confused as to whether they should or not buy real estate in this country. Such confusion is caused by the bombardment of information in the news (tv, newspapers, magazines, radio) and social media with statements such as: “the current mortgage interest rates are too high”, which will lead to “an economic recession coming soon”, and, therefore, “we will see another big crash of the real estate market”.

Of course, each person spreading this information through different channels has a particular intention to do so: Some may be honestly trying to warn the public of what is coming based on their own beliefs/fears. Conversely, the intentions of others may be to benefit/profit from causing confusion, for example, because they…

*   … want to promote and/or sell their products or services that may be an alternative to buying a residential home or investing in real estate.

*   … just want to gain more followers for their social media taking advantage of the confusion to the public they are contributing to create.

*   … want to discredit the government in turn to lead voters against it and, thus, in favor of the political party they prefer or are affiliated with.

In order to respond to the question of the title, I will analyze separately the three statements from the first paragraph above: 

“The current mortgage interest rates are too high”…

To reveal if this is true or not, let’s review the mortgage rate trends within the past five decades since 1974 based on data from the Federal Home Loan Mortgage Corporation (AKA, Freddie Mac). This is a government sponsored entity chartered by the US Congress in 1970, which operates in the secondary mortgage market to support housing affordability and market stability. To make the analysis simple, the following table summarizes all data from the past 49 years:

Table Notes:

-    The second and third columns, respectively, highlight the lowest and highest annual average interest rates for 30-year mortgages within each decade defined in the first column and, in parenthesis, it notes the year in which that annual average rate occurred.

-    The fourth column shows the average interest rate within each decade, although only for nine years from 2014 to 2022.

Now, let’s see current data. According to Freddie Mac, during the first quarter 2023 the fixed interest rate for 30-year mortgages went from 6.09% (on Feb. 2) to 6.73% (on March 9). From these, the average is 6.41%. When comparing this average of 6.41% with the numbers in the table, it proves that saying “The current mortgage interest rates are too high” is not even close to be true: For example, 6.73%, the highest (not the average) interest rate within those three months, is about two and a half times lower than 16.64% from 1981, the highest annual average interest rate within the past 49 years. Likewise, 6.73% is one and a quarter time higher than 2.96% from 2021, the lowest annual average interest rate within the same 49 years. Moreover, 6.41%, the average interest rate from the first quarter 2023, is below the average interest rate from each of the three decades between 1974 and 2003 (11.64%, 10.24%, and 7.29%), slightly above the average rate from 2004 to 2013 (5.23%), and still not far above the average rate from 2014 to 2022 (3.95%), a decade in our analysis that will end on December 31/2023.

What has caused this? To make a more objective and comprehensive analysis, let’s check some history facts in the United States from the past 49 years. The United States…

*    … has had nine presidents from which five have represented the Republican party and four the Democratic party, including the current president, Joseph R. Biden.

*    … has officially participated actively in over 20 wars in different areas of the world, from which the most notorious have been the “Gulf War” held in Iraq, Kuwait, Saudi Arabia, and Israel (1990–1991), and the “Iraq War” (2003–2011), the most aggressive part of the “War on terror” held in various countries of the Middle East after the synchronized terrorist attacks to different parts of the United States on September 11/2001 attributed to militants of the Islamist extremist network al-Qaeda.

*    … and the rest of the world are experiencing an increase of inflation caused by the current war in Ukraine started on Feb. 24, 2022 with Russia’s invasion. Although the United States has not officially participated with soldiers in this war, over $30 billion worth of gear have been sent to Ukraine to date to support their government in defending from the Russian army.

*    … has had a constant increase of its Gross Domestic Product (GDP), year after year, from 1974 (GDP = $1,545,200M) to 2022 (GDP = $25,462,700M), maintaining this nation as the world's leading economy based on this important economic index.

These facts allow us to verify that variations in mortgage interest rates in the United States through the last 49 years are not directly correlated to any specific political party in power, the fluctuations in global inflation, any war in which the US has participated directly or indirectly, or the constantly increasing Gross Domestic Product (GDP).

“An economic recession is coming soon”…

First, let’s clarify the meaning of “economic recession” in the United States. As a rule of thumb, it is defined as a prolonged downturn in most economic activities throughout the country that leads to a negative Gross Domestic Product (GDP) for at least two consecutive quarters. Nevertheless, other economic indicators such as wholesale-retail sales, consumer spending, nonfarm payrolls, and industrial production are also analyzed by the National Bureau of Economic Research’s Business Cycle Dating Committee conformed by eight research economists, who as an entity have the authority to officially declare a recession.

How many recessions have the United States overcome since 1974?

1.       The first two quarters of 1980 (lasted 6 months).

2.       From July 1981 to November 1982 (lasted 16 months).

3.       From July 1990 to March 1991 (lasted 9 months).

4.       From March to November 2001 (lasted 8 months).

5.       The “Great Recession” from December 2007 to June 2009 (lasted 19 months).

6.       The “Covid-19 Recession” that, according to the National Bureau of Economic Research only lasted from February to April 2020 caused by a fast and deep contraction of the economy.  This period included the mandatory lockdown in most states and the prohibition of travelers to enter the United States.

Because the “Covid-19 Recession” has been the most recent and, at the same time, the culprit of a possible economic recession to come according to most forecasters (professional or not), it deserves a deeper analysis. Covid-19 officially hit the United States in January 2020, which caused great economic and public health uncertainty for the rest of the year, but also led to new ways to work remotely and to develop new habits in nutrition, hygiene, socialization, exercising, etc. The massive vaccination to most US population occurred within 2021 as well as a great migration throughout the country, especially because many people were moving to states with warmer climate and lower cost of living.

To face the “Covid-19 Recession”, several government strategies were implemented to reactivate the economy, which seem to have been very effective. Two important strategies are explained below:

1.  Three rounds of stimulus (free) checks were sent to millions of households (or deposited in their bank accounts on file) within 2020 and 2021 based on their annual income previously reported, the status to file taxes, and the number of children to support. The purpose was to alleviate financially those families more highly impacted by the pandemic. The result was an increase in consumer spending.

2.  The Federal Open Market Committee (FOMC) lowered the “federal funds rate” to 0% on March 15, 2020, and allowed the banks to lend 100% of their clients’ deposits without requiring the financial institutions to maintain the typical regulatory reserves. These two measures made money more available in the market for borrowers at lower short-term interest rates, which helped stimulate economic activity through greater consumer spending.

Therefore, the banks were able to offer mortgage interest rates as low as 2.65% in January 2021 (the lowest in US history) being 2.96% the annual average. This explains the historical low mortgage interest rates in 2021. However, those rates were very low not because they should be so low in normal conditions, but because of the special measures the government used to recover the economy after the pandemic. This supports my previous statement that saying “The current mortgage interest rates are too high” is not even close to be true; and those who continue to repeat this either have personal intentions to profit from spreading that information or are not well educated respect to this topic. Moreover, because those historically low interest rates were caused intentionally by specific conditions, it makes us think that those low rates will most likely never come back ever again. At this point, if the reader is planning to buy a property with financing and is waiting until the interest rates go back to those low ones seen in 2021, I think they will continue to wait for a long time, maybe forever.

On the other hand, the “upcoming recession” that has been forecasted since 2021 by many who base their predictions on analyzing various economic charts from the past and comparing them with current ones and/or questioning the strategies used by the government to overcome the big hit to the economy during the pandemic does not end to arrive, yet. Interestingly, to defend their failed theories, the forecasters continue to postpone the month or quarter when the recession will start. In my opinion, those predictions are like saying that the Earth will soon have some drastic changes that may cause humanity to become extinct from the planet; and supporting this statement with different theories such as global warming, a fungi pandemic, a global nuclear war, the impact of a big asteroid, the explosion of the sun, etc. Although no one knows what could cause this, there will most likely be a time when the Earth will be uninhabitable by humans due to natural or human causes, maybe in a few years, centuries, or millenniums, who knows…

Now, why the supposed recession has not been declared? Because various economic parameters and indexes do not fit a recession. For example, in January 2023, the unemployment rate reached the lowest level since 1969 at 3.4%. And if you see in your area (at least this happens in Florida), there are many job offerings although employers must pay higher wages whether state laws apply or not. Likewise, during the same month, the sales at retail stores and restaurants increased 3%, even after the Holliday season when consumers usually spend more and later reduce spending at the beginning of the new year.

As a personal comment, I do not understand what is the reality that negative forecasters of the economy are seeing to predict a recession; at least in Florida, what we see is the parking lots of big stores and malls almost full of cars, where sometimes one must “hunt” for a parking spot by following the pedestrians leaving the buildings and carrying bags; people having to wait at the restaurants for a few minutes to be seated due to the many clients inside; hotels with high occupation rates; highways full of cars with travelers, especially during a holiday weekend and the recent spring break.

“We will see another big crash of the real estate market”…

To begin with, I suggest you read my article from March 22, 2022, "Many Foreclosures coming up soon: Myth or Fact", where I contradicted this same information that many authors had been spreading since early 2020. 

Two main factors triggered the extremely fast real estate market from 2021 and the first three quarters of 2022. First, the low mortgage interest rate being offered by the banks. This encouraged some to buy their first home and others to upgrade their home by selling the old one and purchasing a newer, bigger, and/or better located property, sometimes in another state. Many investors also took advantage of such low interest rates to buy as many properties as they could afford before the interest rates went up again, as it was logically expected.

The second factor is the still big lack of homes in the United States that few people know and, thus, not many talk about. As I said in another article from March 8, 2022, “according to various reports, in 2021 there was a lack of 3.9 million houses in the country. The same reports mentioned that all the real estate developers and builders together nationwide would be able to build a maximum of 1.1 million houses per year granted that no shortages in construction supplies occurred. Based on these numbers, if we divide 3.9 million houses needed into a maximum of 1.1 million houses that could be built per year, the result is 3.54. A raw interpretation of this suggests that the real estate market should continue its uptrend for the next three and half years, just because of supply and demand laws. That is why the biggest developers and builders in the country have their yearly plans already in place until 2025 (included), with a specific number of houses to be built per year in each area.”

This housing deficit, however, is ignored by most economists because, in general, they make up their opinions from analyzing economic charts and/or indexes but have no actual knowledge about the real estate market. In addition to this, they should learn about other factors that affect the demand for houses, such as migration patterns within the nation, a population increase, continuous immigration to the country, etc.

That is why home builders in the United States, the largest, medium size, and smaller ones, continue to build houses at full steam and to sell them, despite: a) the mortgage interest rates are higher due to government adjustments intended to reduce inflation; and b) most news and media have been forecasting for quite a while an upcoming recession and another crash of the real estate market. This makes me think that builders really know the real estate business and, thus, continue to build houses to fulfill this need to many buyers and a growing population.

The good news is that, because of a greater supply of newly built and still-in-construction homes, we are currently in a more balanced housing market, without the ridiculous high speed and price abuse from most sellers and some listing agents from a year ago. Nonetheless, strangely, some real estate agents/brokers continue to list homes for unreal high prices to gain the listings, which later must be reduced because the properties don’t sell. Unfortunately, those entailed price reductions make many potential home buyers, uneducated viewers of the real estate market, and some economy forecasters think inaccurately that property prices are going down and soon there will be a lot of bargains to buy as the market crashes as it happened in 2008…  

Finally, have you noticed the increased cost of renting a house in your area, although there may be more properties for rent than a year ago? This rise in rental prices is also caused by inflation. However, when inflation finally cedes in future months, rental prices will most likely not go down substantially because rental contracts are often made for one or two years. That is why if you are still paying rent and your lease contract will end soon, consider buying a home, instead (watch video here).

Disclaimer: This article is solely intended for informational purposes and in no way constitutes legal or financial advice. Each person should analyze their particular situation to determine if the information presented here can be applied. Looking for financial advice is recommended before making decisions!