Have you noticed? Interest rates are rising, and there are only signs that they are going to continue going up.
People always ask me, “what does this mean for real estate in general? What does this mean for luxury real estate specifically?”
First, higher interest rates are crushing first-time home buyers. I did some math. Tell me if I got this correct: if you can afford a $1,500.00 monthly payment at a 2.7% interest rate, you can borrow $278,000.00. At 5%, you can borrow $218,000.00. That is a $40,000.00 loss in purchasing power.
It does not seem like that much, but the bottom line is that higher rates are devastating to first-time home buyers.
Luxury buyers, on the other hand, know that if rates go to 5.5% or even 6% or 6.5%, from a historical perspective, that is still pretty low. And inflation is reported to be around 9% per year. We all know that in real life, it is more like 12 or 14%, right? Anyway, the true cost of money is the rate of inflation minus the rate of interest. So, if we have 5.5% mortgage rates and 9% inflation, that means the true cost of your loan is minus 4.5%. You are paying negative 4.5%, and if we have 12% inflation, it is more like 6.5% negative.
High-end luxury buyers understand these things:
- They aren’t constrained by budgetary impacts.
- They understand the impact of inflation on the cost of money.
- They understand that real estate and borrowing to purchase real estate is said to be the greatest inflation play ever.
Inflation favors the debtor. Be sure to coach your luxury buyers on this. It is a great time to buy, and some quick reminders.Inflation favors the debtor. Be sure to coach your luxury buyers on this. It is a great time to buy, and some quick reminders. Click To Tweet
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