What’s the Big Deal About a 7.25% Interest Rate?

J. Harmon Home Team

I’ve heard many, many people say something to the effect of “7.25, well when I bought my first house it was 14,15,16,17%. I don’t see what the big deal is.” And they are right, if that was the only factor. 

Historically, 7.25% is not very high. In the most recent 20 years, its actually about average. The problem is that in the last 5 years, it is exceptionally high and the consequence of the historically (and some might say dangerously) low rates was multiple double digit inflation of prices. Couple 2 straight years of 30+% house price growth with a suddenly 3x growth in interest rates, throw in relatively stagnant wages and you have an affordability problem like we haven’t seen in a long time. You also get a situation where someone selling a house they bought 4 years ago, cannot afford to sell. They will get the same house for almost 100% more in price and pay 3x interest. So they sit. And wait. For something. Not sure what to wait for. 

Consider this, in order to “fix” the issue we have to have a couple of the following to happen:

1) Rates drop–rates are high to curb inflation. Only way they drop is for there to be a recession and people to lose jobs, lose wages and ultimately, hurt.

2) Prices drop–again, this means there is pain. Some kind of crash, probably a recession and job loss. 

Do we want these situations to happen? I’m not sure what the right answer is. I mean, we want lower rates but at the cost of a recession? We want prices to be “more reasonable” but what does that mean and do we really want another crash?

Your thoughts?