Sunday, October 11, 2009

Inflation and Interest rates

I hear a lot of talk (especially from agents) about the interest rates shooting up soon. Personally I think this is just BS. Obviously the agents are trying to sell a house and creating a sense of urgency is a great way to do it by put a little fear into the heads of potential buyers. But is there any chance of the rates rising significantly?

Personally I don't see any chance of rates going up soon. The entire economy is on life support. The government is doing everything it can to prop up prices and keep people from defaulting. They are tying to save as many banks as they can and saving the banks means keeping people paying the mortgage. Raising the rates goes against this strategy. It means less people can afford to buy and more people will default on the mortgages they have. Not to mention the havoc it will cause to the auto industry and credit card default rates.

But there's an even more "fundamental" reason the Fed won't raise the rates. Inflation is at near zero. Sure bread and milk costs more today, but the rate the gov uses is hovering around 1.5%. Another factor is the very high unemployment rate. The Fed usually drops the rate as unemployment rises so that businesses have access to cheap money to expand and hire people. So we have a double whammy to the Fed rate. There's no reason to think they will raise the rates judging by their past behavior. Wew can also take a look at what Japan did in the 90's and early 2000's. They kept rates at near zero for a decade. Why do we think the US will be any different? Our current crash is just as bad as theirs was. Ok, our values haven't plunged 80% ....yet, but our crash and our governments handling of it mirrors Japan's.

Will the rates go down? Probably not much farther than they are now unless the 10 yr treasury rate tanks. Obviously with the Fed rate is at zero, nothing they do can lower the mortgage rates. I think they will fluctuate between 4.5 and 5.5 for the next few years. Until the economy comes off life support we will not see the rates rise significantly. And I don't think that will happen for 2 or 3 years at least.

5 comments:

Unknown said...

Why do you even bother analyzing realtors' statements? How many times do you have to keep debunking their non-sense , similar to "it's a good time to buy?". A couple months ago, I wrote in one of your threads that it is a good time to buy. Today, I think it is no longer a good time to buy. Out there house hunting in your part of the 'hood and there AIN'T NO MO good deals to be had. The bubble is peaking again.

Tyrone said...

Required Viewing:

Santelli On Inflation
.

golfer_X said...

Good deals....nope, aint much these days. Inventory is LOW and inventory that actually has a chance of selling is really low. I hadn't been looking since the spring. I check Redfin by I rarely actually went out. In the last couple of weeks I've been looking again and went out last weekend and this weekend. There's still not much to look at, but there have been a few decent looking homes pop up lately at prices I would consider buying them at. At the low end and even in the middle price range there is jack-squat.

David Rudometkin said...

I feel they could raise rates sooner than we think if the dollar keeps getting pummeled.

golfer_X said...

I don't think so, Here's a quote by James Bullard at the Federal Reserve, (from an article in Bloomberg today).

“It is a little disappointing that private-sector economists are thinking so much about when we are going to move our fed funds rate up,” he said. “We are at zero. We are going to be there a while. The focus should be more on” the Fed’s asset purchase program.