February 4th, 2013 10:00 AM by Gregg Mower
Are interest rates on the rise? The Federal Reserve said that they would raise interest rates if the unemployment got down to 6.5%. The latest report shows unemployment rising to 7.9% although the markets have discounted this and we have seen the Stock Market (or the equities markets) rise above 14,000 for the first time since 2007. What does this mean for all us who depend on low interest rates to refinance our homes or purchase new homes? It is showing us that over the next few years we will be in an increasing interest rate market. This is the way the government has been playing with interest rates since the Regan years. The idea is that if people are employed at higher rate rates (unemployment is low) that people will have more confidence in spending money. When people spend more money the demand for goods and services increase, thus creating situation where the demand for goods and services exceed the supply or the ability to produce them, in turn prices go up to slow the demand until people stop buying those goods and services. This is called inflation, and traditionally our Federal Reserve has tried to slow the increase of inflation by making the cost of money more, they raise interest rates.
As we recover from the Great recession of the 21st century we start to see the habits of people change. This is a very interesting phenomenon as the last time we have seen a recovery from such an economic down turn was in the late 1940’s after the “Great Depression”. The difference with this recovery is many, but the single biggest reason we recovered from that one was due to World War 2. The war created its own economy as America tooled up to build guns, tanks, airplanes , and weapons of war. The Government turned to private industry to develop and build these tools of war. By doing so it put Americans back to work and gave the public something other than economic woes to look at. The recovery we are going to enter to this time, is very different in that we are winding down a war in the Middle East and our troops are coming home with no job opportunities. It appears this recovery is going to be driven by Real Estate. What we have learned from the past is that as people have gone through great economic loss their spending habits change drastically. After the Great Depression people became very frugal with their money and even though they were making money they tended not to spend it on items that were not considered essential. So those who made good money before this economic recession will probably have learned a valuable lesson about saving and not spend like they did prior to the downturn. This will make this recovery considerably slower.
As new generations enters the work force we will see a different view on spending and savings. This will make for a slow recovery with many dips and surges. With each surge you will see a rise in interest rates as the government will perceive inflation and raise rates to offset any surge in inflation. This will cause more surges and dips in the economy over the next several years. Overall, we have seen the worst of the “Great Recession” of 21st century as people hold on to what they still have, such as their homes, the economy will see a temporary under supply of housing and thus rise in home values. These rising Real Estate values, as well as rising energy costs will be the inflation that the Government will use to raise interest rates over the course of the year.
So the answer to the interest rate question is apparent. Rates will rise, and with the higher interest rates the number of people that will be able to qualify for a home will diminish. This will spur a rush on housing from all sectors from first time buyers to investors to get those homes at the low sale prices of today and low interest rates. Don’t despair I only see rates raising ½% to ¾% over the year. If you have the ability to refinance or purchase a home, now would be a great time to start before you miss the opportunity.