For a long time, I was all about adjustable rate mortgages (ARMs). Why pay more for longer than you need to, right? But then, in 2021, the average 30-year fixed mortgage dipped below 3%. Suddenly, I wasn’t so against them anymore. That super low rate must have tempted a lot of folks to buy homes. But then, in 2022, that same 30-year fixed rate mortgage shot up to nearly 6% because of high inflation and a tough Federal Reserve. If you’re thinking about refinancing, you can easily check the latest mortgage rates online. You’ll get real, no-strings-attached quotes from competing lenders in minutes. It’s a weird time in the mortgage market, so take advantage!
In 2021, when the global pandemic was in full swing, I wondered who was buying homes. Let’s look at some profiles of people who were snapping up homes at record low mortgage rates.
First up, we have tech employees. The NASDAQ closed up over 45% in 2020, so a lot of my tech colleagues were looking to buy their first homes or upgrade. I work at Apple, and our stock is up around 28%. So, we’re feeling pretty flush these days. It’s strange.
Next, we have people who are tired of being overly frugal. For over 10 years, I’ve been saving between 20% to 50% of my after-tax income. My income has also gone from $80,000 to $165,000 during this time frame. But I’m still renting a studio apartment from when I was 25 years old. I’m sick and tired of hoarding so much cash. What’s the point if I’m not going to spend it?
Then there are parents planning to work from home permanently. With work from home likely becoming a permanent trend, I think it’s smart to try and buy a home now before open houses go back to the norm. Eventually, the economy will open up and buyers will return in droves.
We also have people who find it cheaper to buy than rent. The media likes to talk about a decline in rent prices without talking about a bigger decline in mortgage prices. Maybe this asymmetric reporting is a way for the media to try and “stick it to landlords” since the media knows that’s what readers like.
Next, we have people buying homes for their children. I have older friends whose adult children decided to break their lease and move back in with them. Frankly, after four months of sheltering-in-place, they are sick of their children!
Then there are those who found their dream home. We live in a neighborhood with incredible ocean views. However, not all homes have ocean views. Only homes on the west side of the block do. If your home is on the east side of the block, you’re usually facing homes on the west side of the block, unless you built an addition.
We also have people planning to propose. I’m 26 years old and plan to propose to my girlfriend later this year. As a result, I am buying a two bedroom, two bathroom condominium for $560,000. The asking price was $580,000.
Finally, we have those who see an investment opportunity. Whenever there is some sort of financial crisis, there is investment opportunity. We are buying single family homes in San Francisco that are 50% higher than the median price point because there is better value. Jumbo loans are harder to get at the moment, so we are taking advantage of less competition.
It’s a strange time to buy real estate. On one hand, there are tens of millions of people unemployed or underemployed. On the other hand, mortgage rates for all durations have hit record lows. Meanwhile, millions of stock investors who held on now have record-high or close to record-high portfolios.
After this recession is over, sadly, the wealth gap will likely widen even further. If you’re out of a job, there’s no way you’re going to buy a house, let alone get preapproved for a mortgage. But if you have a job, you can take advantage of such great discounts. These opportunities are the reasons why we financially prepare for so long.
I’ve been a long-time advocate for getting an adjustable rate mortgage because interest rates have been coming down for over 35 years. With the average duration of homeownership around 8 years, it’s not optimal to pay a higher interest rate with a 30-year fixed or 15-year fixed term.
However, there is a mortgage market anomaly right now. The average 30-year fixed and 15-year fixed rate mortgages are offering better deals than the typical 5/1 ARM.
To pay off your loan quicker and save, consider getting a 15-year fixed mortgage. If you have the cash flow, you’re going to feel great paying off your mortgage quicker. Less interest payments always is nice.
With stock market wealth near all-time, it almost feels like investors are on cheat mode. Add on the fact that millions of people now get to make the same amount of money working from home, the housing market is likely to stay buoyant.
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile.
The combination of higher rents and higher asset values make real estate a tremendous long-term investment. Further, high inflation provides a positive tailwind for real estate.
Take a look at my two favorite real estate crowdfunding platforms that are free to sign up and explore: Fundrise and CrowdStreet.
I’ve personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
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