March News

Are interest rates going to drop further? Will Hawaii see a drop in home values?

Those are the 2 most asked questions I’ve fielded recently, so I thought I would share my insight for this week’s article.

Interest Rates:
There are have been numerous articles published recently that forecast even further drops in mortgage interest rates. No one, including myself, has a crystal ball – so to be fair, it’s all conjecture.

If you’ve read my newsletter for any length of time, you’ll know that there’s multiple components that clash and complement each other in the final determination of what the current mortgage rates are. Those items include current economic health, inflation, investor sentiment, the amount of bonds being offered, lender capacity, lender margins, and some new ones such as servicing portfolio profitability.

As things sit today, no one really has a clue as to just how fast the economies of the world will snap back from our self-inflicted near-fatal approach to COVID. That means forecasting components such as inflation and economic health is anyone’s guess.

Here is what we do know: There’s now pressure building to get the US economy back up and running ASAP. That would be good for economic health but could also spark fears of inflation. With the trillions the US government debt needing to be sold, it will crowd the field for mortgage debt to be purchased by investors too. And with rates still historically low, lender capacity to push through record numbers of transactions will still be taxed. All these factors suggest higher rates not the opposite.

My advice over the years has always worked out and is still valid today. When obtaining a mortgage, seek the lowest rate possible for the least amount of cost. If economic circumstances change, since it didn’t cost you much with this current loan, refinancing again – should rates drop, would not result in you throwing away thousands by paying points now.

Property Values:
Those trying years of 2008-2012 are not that far behind us. Do you remember short-sales and lists of foreclosed properties? What’s facing us now is something completely different. In that crisis many homeowners were in exotic mortgage programs with adjustable rates and large jumps in payments after the initial fixed period. They qualified for those loans not showing any income documents. The collapse happened when too many were unable to keep paying their mortgages after the payments jumped. That led to home values dropping. The problem snowballed when others still making their payments and with good credit realized they now owed more on their home than what it was currently worth. They voluntarily surrendered their homes in droves.

That’s not anything like what we are facing today. Yes, 240,000 Hawaii residents have lost their jobs, but for those with a mortgage, they should have taken advantage of the offer of forbearance. BTW, if you have not, you may only have until the end of May to do so before that offer is cut off.

With the threat of foreclosure eliminated, home prices should not decline for residential properties.

The greatest concern is the vacation-rental condo market.

While these current owners could also opt for forbearance, some will panic and dump their Hawaii real estate investment. We saw this right after 9/11. For the first few months everyone was afraid to fly. Hawaii tourism was decimated. But in short order things changed – and changed in a big way. People need vacations. But in 2002 Americans did not want to leave the security of the United States. Hawaii became a favorite destination offering fun with security.

In a very short amount of time, America’s need to vacation will come roaring back. I believe the same fears that made Hawaii a desirable destination following 9/11 will again usher in a bustling tourism economy. There will be those that panic and will look to dump their properties now. But from what I have seen, real estate prices have not been affected.

Recap:
If your plan is to scoop up a discounted property with cheap money 6 months or a year from now, that plan may not come to fruition. Rates should remain stable with momentary fluctuations. And unless our Hawaii government leaders prohibit tourism to come back quickly, home prices will remain stable as well.

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