October 25, 2016
You can’t read or watch the news and not view a story about some type of
addiction in America — whether it is common substances such as caffeine,
legal prescription drugs such as pain killers, or illicit drugs such as
heroin. But today, we ask a question about addictions and our economy. Are
we hooked on low interest rates? Perhaps we are using too strong a word to
describe the situation, but it seems like we have gotten pretty used to
historically low rates during our economy recovery.
Why do we think that we are getting too used to low rates? For one, every
time there is talk of the Federal Reserve Board raising rates from these
ridiculously low levels, the markets react significantly. Keep in mind that
we are talking about raising rates slightly from close to zero. Of course,
most Americans don’t really recognize the Fed’s Federal Funds Rate. But if
you look at something they are familiar with, such as rates on home loans,
we can see the issue more clearly. Rates on home loans averaged over 7.5%
for a generation from 1980 until 2010, a period of 30 years. Now rates have
averaged around 4.0% for the past few years.
What happens if rates move up in the future? Will people stop buying homes?
If someone is paying 4.0% on their home loan, higher rates would make them
more reticent to sell their home in the future unless there is a major life
change such as marriage, relocation or retirement. And certainly, they would
be more reticent to refinance as well. Thus, if rates are going to rise from
these unbelievably low levels, they would have to rise gradually such as not
to have a significant affect upon the economy. The Federal Reserve Board
will have to be very cognizant of these possibilities as they consider their
future moves.
Source: Origination Pro