Friday, January 27, 2017

Robust Economic Acceleration Equals Higher Interest Rates

The engine of the American economy is starting to fire on all cylinders. The DJI average busted up over 20k for the first time ever this week and the 'bull' is on the loose. Companies seem to be poised for expansion and hiring; all of this leads to strong economic growth. That is a good thing and will be much needed relief to the anemic post-recession economy.

There is of course a slight downside. Strong bull economies lead almost invariably to higher interest rates. As with everything in capitalistic economies, the market is based largely on supply and demand. As the stock market begins to soak up cash to chase the bull, interest bearing bonds, bank accounts and home loans begin to look less attractive. Rates rise to increase the demand and thus buying a home with borrowed funds becomes more expensive.

Buyers are in a precarious place of having to deal with stingy sellers and the threat of rising rates. Losing a deal by bickering over a few grand with the seller could cost tens of thousands later, in the form of a 1/2 point spike in rates.

I have written many times on this blog that higher interest rates are a much bigger deterrent than price. Any rate under 5% is historically a FANTASTIC rate and any rate under 6% is still historically better than average. But I fear Americans have gotten used to the 3.5%-4.5% mortgages we have had for the last 5-6 years. People under 35 can't remember rates much higher than 5%. The last ten years has been an aberration caused by a sluggish economic growth rate and a huge recession in 2008-2009.

Buyers that lock in a low sub-five rate will be dancing for joy a few years from now when rates are back in the "normal" range of the low 6's.  Back in 2015 I went into extensive detail about rate versus price; check that article out here : "Rate Usually Beats Price" February 9th, 2015.

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