The other day I was talking with a friend about the opportunity to buy in today’s local real estate economy. She agreed it seems obvious that when you know you’re going to stay in the area for more than five years, buying now is the answer.
As she continued, it was clear that her children, who were born and raised here, could not see historic low interest rates as an opportunity, just a burden. These children were happy to pay the landlord’s mortgage and didn’t see any benefits for themselves if they had the opportunity to control their costs with a fixed payment each month, live in a home with higher-grade finishes than “rental grade,” and decorating in their own taste without having to ask permission. They didn’t even take into consideration the tax deductions that homeowners gain.
Her children are well-educated and employed with high-paying jobs for our area, yet she didn’t share with them how home ownership has benefited their family over time. The family home actually provided an education for all the children. Perhaps she should discuss homeownership with her children more seriously.
It is difficult to save money these days, and when your home does it for you — over time by building equity — it is much easier to build wealth for yourself and your family. In fact, if you look back over time, the wealthy families during hard times bought commodities such as gold, silver and real estate as inflation fighters for when cycles changed, and every seven to 10 years we have a change. My friend mentioned her children were waiting until they started a family to buy. While they wait, which may be an option, what do you think is likely to happen over time?
Today, our inflation rate is about 4 percent. Isn’t it interesting that our mortgage interest rates are below 5 percent? Since 1965, mortgage interest rates hover at 2.4 percent above the inflation rate. The only times these changed were in 1969, 1973-74, 1978 and today. We have all heard, “history repeats itself.” When that happens, we will see inflation and interest rates rise. Isn’t the real question, how high will they rise?
If we look back at the early 1980s, we see double-digit rates nearing 18 percent. My friend didn’t know that when interest rates rise just 1 percent that the payment increases 20 percent.
She considered the serious effect that would have for her family. I wonder if her children have considered that they may be priced out of the market, and that it could happen overnight. In 1986, I was a lender selling money at 13.99 percent, and people were ecstatic to get it. I saw interest rates change 2 percent over two days, and they didn’t return to that low for years. It was hard to qualify for loans then, just as it is today. Might this scenario happen again?
Over the course of that same 10-year cycle, our home values escalated 300 percent to 400 percent in Santa Barbara. This is not a bad return for an investment you and your family get to use daily. Are you beginning to see how those wealthy families in earlier years became so powerful by investing in real estate?
Another fact that is important to remember is market velocity. We currently have one buyer to five sellers — that is a balanced market. Did you know that during the past 35 years, only 10 of those years have been tipped in the buyers’ favor? Now is one of those years, and it may not last long. Looking back at the past decade, when real estate was the darling investment in the media, who had the advantage? Sellers!
Today’s environment is lining up to be a perfect storm that is passing by quickly. You won’t want to miss it, will you? This reminds me of Warren Buffett’s wise words: “Buy when everyone is selling and sell when everyone is buying.” This is a counter-intuitive move that has made many people rich.
When my friend and I finished our conversation, she was going home to talk with her children again so they had the facts to make a decision to live and work here in our lovely area. She also wanted to make sure she could see her future grandchildren and be part of their lives. This good investment has a bit of side benefit for the whole family — not just the buyer.
Isn’t life in Santa Barbara all about quality of life? I thought you would agree.
— Elaine Abercrombie, a broker with Abercrombie Fine Homes, is president of the Santa Barbara Association of Realtors. She can be contacted at elaine@AFHomes.net.