Amid historically low rates, is real estate a good investment?
January 29, 2015
Mortgage rates kicked off 2015 by declining for three consecutive weeks, with 30-year rates reaching 3.66 percent by January 15. That is the lowest mortgage rate in over a year and a half, and among the lowest in history.
This reduces the cost of housing for new buyers and homeowners who refinance, but are those low mortgage rates enough to make housing attractive purely on an investment basis? When it comes to buying and selling properties for a profit, there are some reasons to look beyond today's mortgage rates.
Why rates aren't as attractive as they seem
Buying real estate might seem like one of the few ways investors can turn the low-interest-rate environment to their advantage. However, low mortgage rates alone might not be enough to make buying properties a winning investment strategy. Here are three reasons why:
1. Adjusted for inflation, current mortgage rates may be higher than they seem. The Consumer Price Index declined over the latter half of 2014, meaning that the economy has been experiencing some deflation. If inflation has turned negative, when adjusted for prices, 3.66 percent mortgage rates are higher than they appear.
2. Mortgage rates have not fallen as much as some bank rates. At 3.66 percent, 30-year mortgage rates are now 4.80 percent below their historical average. That sounds pretty good, except when you consider that short-term deposit rates are currently 5.53 percent below their long-term average. In other words, banks have dropped the rates they pay consumers for deposits more than they have dropped the rates they charge for borrowing.
3. Real estate prices may be vulnerable if mortgage rates rise. The trade-off of buying when rates are low is that if rates rise, it could adversely affect real estate prices. This would not affect your cost of living in the home, but it could affect your return if you plan to sell.
Making mortgage rates work for you
The fact remains that current mortgage rates are very low on an absolute basis. That means that today's mortgage rates help make housing more affordable, and thinking about them that way is the key to making them work for you financially.
If you want to think about real estate strictly from a flip-this-house mentality designed to make a near-term gain, current mortgage rates are not such a great deal. This is where rates being high relative to inflation along with the vulnerability of prices to rising rates work against you.
In truth though, for most people, buying individual properties is not an ideal investment approach under any circumstances. Properties are relatively illiquid, and too costly to lend themselves to broad diversification when bought individually (as opposed to through some form of real estate fund).
On the other hand, if you think of mortgage rates in terms of their impact on your living expenses, today's rates do look attractive. Whether through rent or buying a house in the future, you are going to have to pay something for shelter, and having mortgage rates low on an absolute basis helps reduce your monthly mortgage payments.
In short, current mortgage rates are a better deal if you are buying for your own residence and for the long-term than as a means of buying properties with the hope of reselling them at a profit.
More from MoneyRates.com