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What A 5% Mortgage Rate Means For You The average rate on a 30-year mortgage hit 5% on Tuesday for the first time since 2011. There’s a lot of hype around this headline, so let’s consider what it actually means for your money. Because, hysteria and scary predictions aside, the hard numbers, as they relate to your situation matter most. If you take out a 30-year mortgage for $600,000 at 4.0%, you’ll have a monthly payment of $2,864. Hike the interest rate to 5% and you’re looking at $3,221 a month, a $357 increase. If you have been impacted by inflation, this $357 difference is nothing to sneeze at. Even one of those sneezes you force quit so people don’t freak out that you have COVID. According to a CNBC/Acorns poll conducted just last month, 15% of consumers have put off buying a home thanks to inflation. However, if you’ve simply been sitting on the sidelines waiting for an entry, all you might need is just a little patience.
Using 2011 as a guide, the 30-year hit 5% in February of that year. By the end of 2011, rates plummeted to then record lows of under 4%. If history repeats itself, refinancing activity will pick up and housing prices should cool. We’re already seeing some signs. Just in this morning, weekly mortgage applications decreased 6.3% from last week. This follows 6.8% and 8.1% declines, respectively, for the two weeks prior. This data, coupled with fewer home tours and online home searches, prompted Redfin researchers to signal that, while the market’s still hot, housing might be setting up for a cooldown. The writing might be the wall. |
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Is Everything About To Crash? |
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It’s so scary out there right now that San Francisco Fed President Mary Daly felt the need to calm people’s nerves on Tuesday. Here’s what she said, via CNBC: I understand that inflation is as harmful as not having a job. Maybe slightly extreme. But whatever. From inflation to you name it, it feels like everything related to your money is about to implode. Like A Looming Recession? German economic research group Sentix predicts a recession will start in Europe and quickly spread worldwide, including in the U.S. Sentix says its economic index of conditions across Europe hit a low not seen since December 2011. They categorize the situation as even worse if you isolate Germany. And the U.S. isn’t far behind.
Source: Sentix Sentix isn’t the only one predicting or increasing their odds of a recession. Economists across the world, including in America, continue to add to the chorus. On Tuesday, Deutsche Bank predicted 2024 will kick off with a “mild recession” for the U.S. amid 5%-plus unemployment. From inflation to the potential for a recession, the news sounds all bad. This is when we like to settle in, ignore the Elon Musk news of the day, digest some data, and strategize the best way forward based on our unique personal financial circumstances and appetites for risk. Stock Market Returns Before, During, After A Recession Using data from recessions between 1869 and 2018, Russell Investments found that, on average, the stock market declines 0.9% in the six months ahead of a recession. However, there’s a wide range in these data, from negative 18.7% prior to the March 2011 downturn and a 22.5% increase before The Great Depression. At the moment, the S&P 500 index is up roughly 3.8% over the last six months, but down about 5.6% year-to-date. (More writing on the wall?) During the average recession (about 1.5 years long), the market dropped by 2.9% annually. Looking a year out post-recession, the market delivers an average return of 23.5%. Taking the nearly three-year time period before, during, and after a recession together, the market goes up, on average, 7.1% annualized. Time The Market Or Stick To Buy-And-Hold Here’s the real interesting part. Source: Russell Investments In the 14 recessions surveyed, totaling 21.6 years, where the stock market produced negative returns, you would have generated an average gain of 9.0% if you simply held during the turbulence. The Bottom Line: There’s no one-size-fits-all strategy for investors. However, you can have the best of both worlds. Chances are you will not be 100% accurate if you attempt to time the market. However, if you’re a good market timer (or just a solid, not to mention good-looking, stock picker), you could do better than buy-and-hold. So why not consider both? The mainstream and financial media like to make these things either/or propositions. Time the market OR buy and hold. But, just as one size doesn’t fit all, neither does one strategy and one strategy only work at the individual level. Do as you do elsewhere with your money. You take risks with some of it and keep other pots of cash relatively safe. You can do likewise as an investor. Either way, it helps to have a clear head amid the hysteria and doomsday predictions as well as historical data to help you decide how deep in each direction you’ll go. |
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