From Pensacola to Florida, From Florida to the World
We are all linked. When it comes to property it might be tempting to think of the Pensacola micro-market as completely independent. However, while “location, location, location” is still a good maxim for any property buyer, seller or investor to consider, it doesn’t take much thought to see how Pensacola property is linked to the wider prospects of Escambia County, from there to the state of Florida, thence to the national economy and even to the world economy. Capital is now supremely mobile and world economic systems now live up to the archetype of chaos, the butterfly effect – though now the flapping insect could be a fall in Chinese demand for coal and the resultant storm a crashing domestic economy and house price deflation in Pensacola.
Property and the Crash
The property market is important to the wider economy. How important became apparent in 2009 when a crash in the sub-prime mortgage market led to the world’s biggest economic crash since the depression of the 1930s. In the preceding years more lenders were willing to grant mortgages to lower income families on variable interest rates. When property prices fell in late 2006 borrowers hit found it harder to refinance their mortgages and their repayments rose causing a peak in mortgage defaults. At that point the story leaves the property market and becomes incredibly complex. It’s simplest to say that the debt had been sold on around the financial system and large amounts of it became suddenly worthless. It was a fall in house prices from an unsustainable high that was the first domino to fall in the onset of world economic chaos and the loss of 9 million US jobs.
Property and the Recovery
House prices remain incredibly important and are now being seen as a driver of economic growth again. After the financial crash house prices in the US fell around 30%. That loss of value contributed to appalling statistics as well as causing real human tragedy very visibly around the nation. In the last year or so that drop off has started to reverse, nationally and locally. In November 2013, while the US economy was still struggling and growing slowly American house prices were reported to have risen 3.6% in a year. In the first nine months of 2012 prices rose 7%. In Florida, according to Zillow, the online real estate database, home values have gone up 15% in just a year and Zillow predicts a 6.6% rise in the coming year. Rising house prices are good for those who build and sell homes but the effects go further than that. Selling a home means making it spick and span, buying one means another raft of new domestic purchases. Banks prosper and home owners feel flush and are more likely to spend on consumer goods, boosting demand across the economy.
Mortgage Rates and the Wider Economy
If a housing price rise is good news for the economy, it can become a problem too. This means that governments are keen to keep an eye on house prices. It’s tempting to think that a government has a lot of economic power, but in reality their actions are fairly limited. Chief among the economic levers the government can pull is the central bank interest rate. In the US and the UK this rate has been at an historic low since the crash, allowing banks to get their hands on money cheaply and lend at correspondingly low mortgage rates.
Local, National and International
National and local factors are an important factor in housing demand, but also in interest rates for mortgages (the interest rate is effectively the price of the loan). Currently the UK and US governments are holding interest rates at low levels – 0.5% in the UK, where the Bank of England sets rates and around 0.25% in the US – in order to help their economies to get back on their feet. However, they are not going to stay this way forever. A house price bubble is one fear, but so is rising inflation. Low interest rates encourage new house buyers but also business investment. The situations in the two countries are slightly different. Here long-term fixed interest rates are much more common than they are in the UK. That means that a rise in interest rates could affect millions of mortgage holders in the UK with higher monthly loan repayments. It makes the decision to raise interest rates there a hot political potato. That’s why the Bank of England was given independent control of interest rates. George Osborne, the British Chancellor of the Exchequer, has recently said (through an aide) that he sees rising interest rates as an indicator that the economy is finally on the mend. “If interest rates need to rise that would be sign of success. We want the economy to grow and we want wages to grow,” the treasury official told the Financial Times. That’s in contrast to Osborne’s earlier admission that a rise in rates could be a disaster for millions of families. With home lending further distanced from the Federal Reserve’s interest rates by the popularity of 30 or even 50 year fixes in the US, the decision will be more predicated on the state of the economy at large. However, it could be a key indicator if you are considering going to invest in property or buy a home in the near future.
Where Next for US Interest Rates
The governor of the Bank of England defined very specific economic indicators that would trigger a rise in interest rates (unemployment falling below 7%), but has recently said that these are just the start of a process. The Fed is also thinking about a rise “relatively soon” according to minutes of their meeting at the end of January 2013. They too have placed a hostage to fortune in a definite economic indicator – a fall in the unemployment rate to below 6.5%. The current US unemployment rate is 6.6%. It is likely that a rise will come, but not necessarily inevitable. The sort of economic shock the world economy suffered after the sub-prime crisis was unprecedented, no-one knows how the economy will recover.
Japan went into recession in the 1990s and its central bank followed the script and cut interest rates. They have stayed at around zero ever since as the economy has never really recovered enough to justify putting them back up again.
What does this all mean for Pensacola house buyers? As ever, it means that looking at the economic signals is vital as you consider the mortgage rate for the biggest financial decision of your life.
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