Interest Rates: The Last Days of the Lows

You have heard the advertisements for the last several years: "Refinance NOW while rates are at historic lows!". Surely, being buffeted with these ads for several years has made us quite comfortable with how low rates are. In fact, I used to ask myself, how can they go any higher? Times are so good, I can't foresee any reason interest rates would increase.

Well, I am a little wiser than I was then. All markets ebb and flow. If low rates are ebb, we are due for some major flow in interest rates.

Lets see what Mr. Nouriel Roubini has to say about it this week:

Desperate times and desperate economic news require desperate policy actions ... The Treasury will be issuing in the next two years about $2 trillion of additional debt ... These policies – however partially necessary – will eventually leads to much higher real interest rates on the public debt and weaken the US dollar once this tsunami of implicit and explicit public liabilities and monetary debt driven by rising twin fiscal and current account deficits will hit a world where the global supply of savings is shrinking – as most countries moves to fiscal deficits thus reducing global savings – and foreign investors start to ponder the long term sustainability of the US domestic and external liabilities.

Mr. Roubini is a highly competent economist and happened to call the subprime mortgage crisis well before it hit the market. In laymen terms he is saying that interest rates MUST increase due to the fact that no one will want to lend money to the U.S. unless the rate of return becomes attractive enough. All these bailout programs instituted by our government are creating inflation problems for us in the future.If you print money to pay for bills you can't afford otherwise, you create inflation. If you don't stop printing money when you have inflation, you get more inflation...and then hyperinflation. Think Weimar Republic. Think $20 for a gallon of milk. Gasoline at $14 a gallon. That is what inflation gets you. It also makes investments in financial insturments (like mortgage debt) very unattractive unless interest rates and rates of return are keeping up with inflation.

I don't know what degree of inflation is coming. The Federal Reserve has pledged bailout funds in an amount over half of the entire economic output of the U.S last year - $7 TRILLION. That kind of infusion into the money base will affect prices. It has to.

So what does this mean to you and real estate?

First, if you have an ARM or any kind of adjustable rate, and you have the ability to refinance right now, DO IT! Don't wait till next year. Do it this week. Why this week? The Fed just purchased $600 billion in agency (read: Fannie Mea/Freddie Mac) debt which has temporarily pushed the the risk for that debt lower and therefore interest rates on mortgage debt have plummeted in the last few days. Once the market adjusts pricing to compensate for future inflation expectations, these low rates of today will be gone for a generation.

You may be asking yourself "Why refinance my ARM when I want to sell my property in a year or two?". Let me answer this for you. First, you need to plan on the buyer getting an interest rate in the future. If the rate is too high, he can't buy your property. You end up being stuck with the home AND a major payment increase when your ARM resets. It will take a couple years worth of rent increases to catch up to that reset payment in a high interest rate environment. Second, if the rate is too high for potential buyers, you may be forced to use seller financing to sell the property. You can't do that if you have a wild and volatile ARM underlying as the foundation for the transaction. Seller financing works best with fixed interest rate mortgages underlying.

These reasons should be enough. Put your financing foundation on a rock of stability.

If you need a competent mortgage professional. I will gladly refer you to someone I work with.