When deciding whether to buy real estate, lately a prominent chunk of the conversation revolves around interest rates. So, this blog article will take an honest look at the history of interest rates in Arizona, what the future looks like for interest rates, and how large of a role that should play in the decision of whether to buy real estate.

Why Do Interest Rates Fluctuate?

First, let’s address the question: why do interest rates fluctuate? Interest rates are like the pulse of the economy. When the economy is strong, central banks often raise rates to prevent inflation from spiraling out of control. Conversely, when the economy is weak, they lower rates to encourage borrowing and investment, aiming to stimulate growth. It's a balancing act—keeping inflation in check while fostering economic activity. That certainly adds a level of caution when hoping for low interest rates, doesn’t it?

Low interest rates are often symptomatic of a struggling economy. When the economy faces downturns, central banks reduce interest rates to encourage borrowing and spending, hoping to stimulate economic growth. While this can be beneficial in the short term, prolonged low rates might indicate underlying issues such as high unemployment, weak consumer confidence, or stagnant growth. Cheap borrowing costs can also lead to excessive debt and asset bubbles, potentially destabilizing the economy further. Many Americans suffered during the 2008 financial crisis; a time that we should not be eager to return to. It is important to remember this in the conversations of interest rates in 2024 and going forward into 2025: while low interest rates can provide temporary relief, they are often a sign of deeper economic troubles that need addressing.

Interest Rates and Buying a Home

Now, let’s address that question about how much interest rates should play a role in deciding whether to buy real estate. While interest rates often grab headlines and dominate discussions about home buying, they aren't the sole factor to consider. Far from it. When buying a home, interest rates are just one piece of a much larger puzzle. Also when discussing this topic, it is important to consider who is speaking and how much expertise they actually have in the field.

When planning to write this article, we reached out to Dan Graham, the Chairman & CEO of Compass Mortgage for his insights into the topic. He commented, “Clients have an expectation that rates will return to the 3 to 4% range of 2020 and 2021.” Does that ring true in the conversations you have had recently regarding interest rates? But, Dan next offered a reality check that is backed by historic and verifiable facts. He continues, “The lows of mortgage interest rates over the past 50 years were 2020. It is unrealistic to think the lows of the last 50 years will return so quickly.  But if you look at the last 50 years of mortgage rates we are below the average rate.” What does this mean for the real estate consumer? Dan commented, “Now is a good time to buy. In fact, it is below the average rate for the past 50 years.”

A History of Interest Rates

After receiving and reflecting on the comments of our mortgage expert, we made ourselves a little project exploring the history of interest rates in Arizona. Would you like to see what we found? Over the past 40 years, interest rates in Arizona have experienced significant fluctuations, reflecting broader economic trends. Here’s a brief overview:

• 1980s-1990s: High Rates and Gradual Decline
• • • 1980s: Interest rates were quite high, peaking at around 18% in 1981 due to inflation and economic instability.
    • 1990s: Rates began to decline, averaging around 7-8% by the end of the decade.
• 2000s: Stability and Lower Rates
• • • Early 2000s: Rates continued to drop, averaging around 6-7%.
    • 2008 Financial Crisis: Rates fell sharply to around 5% as the Federal Reserve lowered rates to stimulate the economy.
• 2010s: Historic Lows
• • • 2010s: Rates reached historic lows, averaging around 3-4%. The lowest rate recorded was 2.65%.
• 2020s: Rising Rates
• • • 2021-2023: Rates began to rise again, reaching around 7% by late 2023 due to economic recovery and inflation concerns.
    • 2024: Rates have moderated slightly, settling in the low-6% range as the Federal Reserve implemented rate cuts.

Overall, while interest rates have seen dramatic highs and lows, they remain relatively low by historical standards. This trend highlights the importance of considering long-term financial goals and market conditions when making real estate decisions.

If we consider the interest rates of today and compare it with a time of similar interest rates in our history, we will find an interesting comparable that should encourage more than discourage. The 1990s was a decade of remarkable economic growth for the United States, often referred to as the "longest peacetime economic expansion" in the country's history. The decade began with a recession in the early 1990s, but the economy rebounded strongly. Key factors contributing to this growth included technological advancements, particularly in the fields of telecommunications and the internet, which spurred innovation and productivity. The stock market saw significant gains, with the Dow Jones Industrial Average reaching new heights. Additionally, the federal government achieved a budget surplus for the first time in decades, thanks to a combination of economic growth and fiscal policies aimed at reducing the deficit. Unemployment rates fell, and inflation remained low, creating a favorable environment for both businesses and consumers. Overall, the 1990s were a time of economic prosperity and optimism in the United States. So, if the interest rates we see today reflect a stable economy, that is a very positive thing for homebuyers and homeownership.

Mortgage Payments Versus Rent Payments

This leads us to our next question involving interest rates, since interest rates directly effect the mortgage payments of new homeowners. Is it advisable to keep renting while waiting for interest rates to decrease? The answer to that question greatly depends on personal circumstances, but here are things to consider when deciding whether to rent or buy while interest rate watching:

• Equity:
  • Mortgage payments build equity. Part of each mortgage payment goes towards building equity in your home, essentially acting as a long-term investment.
  • Rent payments do not build equity. The money spent on rent is purely an expense with no long-term financial gain. So, while waiting for interest rates to drop, how much money is being spent with no return that could have built equity?
• Payment Stability:
  • Mortgage payments can have stable payments. If you have a fixed-rate mortgage, your principal and interest payments remain constant throughout the loan term. Also, if you run into financial hardships, often times lenders are willing to work with you and setup a temporary plan for payments.
  • Rent payments fluctuate and can increase with each lease renewal, making long-term budgeting challenging. While watching interest rates, are you also watching rental rates? If landlords know that people are hesitant to purchase, they can capitalize on this by increasing rent payments due to supply and demand. Would you rather buy a home on your own terms or do you want to be forced into buying a home because your rent increased higher than the amount of a mortgage payment? Also, if you run into financial hardships, how flexible will your landlord be regarding late or smaller payments?
• Appreciation:
  • Mortgage payments appreciate. What that means is as you pay down your mortgage, your home may appreciate in value, increasing your net worth.
  • Rent payments do not have appreciation: Renters don’t benefit from property appreciation, meaning they miss out on potential increases in net worth.

In a nutshell, mortgage payments contribute to building your financial future, whereas rent payments offer short-term flexibility without the investment benefits. It all comes down to your personal priorities and financial goals. Dan Graham, the Chairman and CEO and Compass Mortgage, offered this advice for those interested in purchasing real estate. He said, “Mortgage rates change every day and throughout the business day. Find a lender that will allow you to lock in your mortgage rate before you find a property to buy. That way you can certainty with what your mortgage payment will be based on when you find your property to buy.”

Balanced Thinking Leads to a Wise Investment

Exercising caution before making big financial decisions is an admirable trait, reflecting prudence and wisdom. In a world driven by instant gratification, taking the time to thoroughly evaluate risks, benefits, and long-term impacts showcases a commendable level of responsibility. Ultimately, patience and careful consideration are the cornerstones of sustainable financial success. But there is balance needed. The temptation to wait for low interest rates before diving into the real estate market is strong. However, here’s why you might not want to hold off on your home-buying dreams:

• Refinancing will still be an option - Should interest rates drop significantly in the future, you have the option to refinance. This can potentially lower your monthly payments or reduce the loan term, making the initial rate less impactful in the grand scheme.

• Market timing is tough - Attempting to time the market perfectly is nearly impossible, even for seasoned investors. Interest rates fluctuate based on a multitude of economic factors that can be unpredictable. Waiting for a dip could mean missing out on the perfect property in the meantime.

• Current rates are favorable - While the low-interest rates of the recent past might have set a high bar, today’s rates are still historically low. Waiting for even lower rates could backfire if they rise instead.

• Real estate is a long-term investment - When purchasing a home, think long-term. Real estate often appreciates over time, providing significant returns even if the initial interest rate isn’t the lowest. Plus, building equity in a home can enhance your financial stability over the years.

• Benefits beyond financial - Owning a home isn’t just about numbers. It’s about security, stability, and the emotional benefits of having a place to call your own. By waiting, you delay these priceless advantages.

• Locking in rates now - Securing a mortgage rate today can protect you from future rate hikes. As economic conditions shift, waiting could result in higher costs, whereas locking in a rate now could save you from unpredictable increases.

• Rising property values - In many areas, property values are on the rise. Delaying your purchase could mean paying a premium later on. Getting in now allows you to benefit from any future appreciation.

In summary, while low interest rates are appealing, they aren’t the sole factor in a wise home-buying decision. Evaluating your financial situation, market conditions, and personal goals can help you make a well-rounded choice. Don’t let the allure of low rates delay your journey to homeownership. The best time to buy might just be right now.

If you have questions about mortgage rates or would like to lock in a rate, you can call Dan Graham with Compass Mortgage at (630) 836-2501. If you are interested in taking the next step to buy a home in the Phoenix/Scottsdale area, call Jeff Barchi at (602) 558-5200. His 25+ years of experience have made him one of the best real estate agents in Arizona and that experience is extremely valuable when negotiating the price of a home and making a wise real estate investment.