Whither Interest Rates?

There’s sure a lot of stuff being written these days about interest rates, and it certainly is a legitimate hot topic.  The most common view, often espoused by real estate agents and mortgage lenders, is that rates may go up significantly in the second half of the year – so you should buy now.  While I agree, of course, that now is a good time to buy, my opinion is heavily influenced by the continuing stability of prices and the advantage of the tax credits, as well as current low interest rates.

My counter-arguments on the ‘rates will rise’ theory are that:

1. There are a lot of people and companies in this world who make their living selling money, i.e. making loans, and have lots of it.  The world is awash in money, and despite the recent unpleasantness, mortgages are still one of the best places to put it.  Large scale money has to have large-scale outlets, and mortgages are one of the largest.  Just like the rest of us, they can’t cry over spilled milk forever; they have to move on with the world as it is.  I expect that the lenders will soon once again be competing to sell you their money, although not as rashly as they did 3 years ago.

2. The Feds know that the housing market is one of the most critical components of the recovery, and they will not likely be willing to let rates rise enough to damage it.  It seems unlikely that they will allow interest rates to get as high as 6%, and they have plenty of ways to keep it down.  The bond purchase program that the Fed has been running all year is winding down right now, but they can wind it up again if they want to.  ‘Don’t Fight the Fed’ is a Wall Street saying that has a lot of history behind it.

3. Many people think that other sovereign nations will stop buying US government bonds (their competition is a big part of what keeps the price up and the yields/interest rates down).  ’Stop buying’ is a euphemism for ‘not willing to buy at currrent yield rates’, so the expectation is that they will demand much higher yields, or take their money ‘elsewhere’.   The argument is that our economy is so beaten up and our national finances are in such a mess that other countries will want to put their money somewhere else where it is at less risk.  That sounds logical – until you start looking at the alternatives – the ‘elsewhere’.  The issue in this argument is finding a better large-scale safe haven.  The large-scale options are the US dollar, the EU euro, the Japanese yen, and maybe the Chinese yuan.  Our recovery seems to be working, albeit slowly, and the dollar is rising on world markets; the big sovereign buyers seem to like it right now.  The European Union is seen at risk of coming apart over big deficits in Greece and Spain, followed closely by Italy, and therefore the euro is weak.  The Japanese have a far worse deficit problem than we do, and have been mired in a recession for almost 20 years.  And China is considered big, but young and unpredictable.  So right now we may not be viewed as solid as Switzerland used to be, but we are pretty clearly the least worst of the choices, and the dollars from our trade deficits will probably continue to be recycled back to us as bond purchases – and thereby hold the rates down for some time to come.

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