There is a lot to love about Millennials. They are great at multitasking, and they’re incredibly tech-savvy. They are extremely well-connected to other people through various forms of social media many Baby Boomers have never even heard of. And, something that benefits Metro members in a big way, Millennials are motivated by helping people. Those are all really good things, but one disadvantage Millennials have is that they’ve grown up in an interest rate environment that may not be representative of what they’re likely to see in the future. I think that’s why I had to talk a 26 year old off a cliff this week about rising mortgage rates.
Upon learning I managed a credit union, the young man asked me what mortgage rates were going to do next year. I thought about telling him the truth; that his guess was as good as mine. But, having two Millennial age children of my own, I kind of enjoyed the thought that one actually thought someone as old as me might know something they didn’t. I told him about an article I read this week that projected 30 year rates could be in the high 4’s in 2017.
I saw a look of disappointment come over his face. He told me his best friend bought a house two months ago and got a rate of 3.5%, and then, he went straight to the edge of that cliff I mentioned. He said, “Just my luck, when I buy a house next year I’ll be getting the worst interest rate in history.”
I started to smile at the over-dramatization, and that’s when it dawned on me that he was serious. In this young man’s entire adult life, mortgage rates have been below 4.5%. He was a sophomore in college the last time rates averaged above that. In fact, the last time mortgage rates were above the 40 year average, the oldest Millennial’s were too young to drive.
They say that in less than ten years, 75% of the work force will be Millennials or younger, and none of them have ever experienced what Gen Xers or Baby Boomers would consider normal interest rates. So, for all them, I will share what I told my new young friend to assure him that, even if mortgage rates go all the way up to 4.875% next year, he would still be buying near the bottom of the interest rate market.
The first thing I told him was that higher long-term rates mean that investors are worried about inflation. So, if inflation does cause rates to go up, there’s a good chance it will cause wages to go up as well, so he’ll probably be making more money to pay for that really high 4.875% interest rate. Then, at the risk of sounding like an old guy who walked three miles up hill to school both ways in the snow, I told him my first mortgage loan was for 8%, and we have an employee who works at Metro who got a rate of 18% for his first home. Interest rates are cyclical; they move up and down over time. And, for the past 15 years, we’ve been in a really low interest rate environment. But, during that time, we’ve also not seen a lot of growth in real wages. Interest rates moving up over time are not necessarily a bad thing, even if you’re at a borrowing age in your life. Chances are, if we have a cycle of higher interest rates for a period of time, it will mean the economy is growing, there are more job opportunities, and people will be making more money.
It will also mean a whole generation of retirees might start earning a little more interest on their savings. And, there will be an increase in demand for homes as a whole generation of young people can finally afford a home of their own.