Blog with MAE Capital

What is Going on With Interest Rates?

February 7th, 2018 4:43 PM by Gregg Mower

2018 started off with relatively low interest rates but in the last few weeks interest rates have been on the rise.  The stock markets have hit record highs and the economy has added over 200,000 new jobs.   Although the Stock has corrected and has become volatile in the last week or so it is still trending over 24,000 points, the highest in it’s history.   So with the strong stock market and new jobs interest rates are rising to slow inflationary pressures, a kind braking system to the economy.  In order to understand this affect to the equity markets (Stock Markets) and why it signals coming inflation, we have to break it down to why it is happening.   As people make more money and buy more things that puts a pressure on the supply of goods and services and when there is a stronger demand for goods and services prices will tend to go up.  As prices go up for goods and services the Federal Reserve will raise interest rates to slow the demand down as the higher prices for credit (higher interest rates) will slow people from purchasing goods and services, in theory.   

The theory of fighting inflation by raising interest rates has been a policy of the Federal Reserve Board since the 1970s.  So, when the interest rate markets see any possibility of inflation they will tend to start the process of raising interest rates in anticipation of the Federal Reserve raising them.  This is what we have been seeing since the first of the year. Several events have happened to signal possible inflation in the future and as they unfold we see the markets adjusting to stay in front of what the Federal Reserve will do with interest rates when they meet at their monthly meetings.  One of the major events that is signaling inflation is the lowering of the corporate tax rate to 20%.  It seems people in the media and some closed-minded folks think that by lowering corporate taxes helps the rich some how when, in fact, it helps the American middle class people far more.  This is simple economics that is not taught in our public schools.  

To fully understand this, you must first look at corporations as tax pass through entities.  When a corporation pays higher taxes they just pass that cost through to the consumer in the form of higher prices for their goods and services.  Higher taxes also mean a big corporation will limit how much money they keep as profit in the U. S. as opposed to taking that profit in a country with lower taxation rates.  The money saved by the lower tax rates will tend to keep the money in the US and will be re invested to hire more American workers and keep dollars in the US.  Thus; more money in our economy for the American people to spend and eventually driving up prices causing inflation and forcing the Federal Reserve to raise interest rates to slow the economy down.  You see, if the economy grows too fast then there will be a higher demand for goods and service than they can be provided and that will cause prices to go up.  The theory has been to raise interest rates so the flow of money slows down with the higher cost of money.  This is a confusing topic for most people that don’t have a degree in economics like your author, but if you understand these basic principles you can not only save yourself money, but you can make money by knowing what is coming.       

So how does this relate to Real Estate you ask?  Knowing the economics behind the economy you can make better decisions as to when to buy home for investment or when to lock in your interest rate on your home or when to refinance and save on your monthly payment.  What this tells me about this year in Real Estate is that it should be a hot year for Real Estate Investment on both the Residential side as well as the commercial side of Real Estate.  A smart investor will note the economy is starting to improve and more people will have more disposable income to invest thus driving up Real Estate prices.  We have seen this happening in the residential sector for a few years now but it did not have to do with a strong economy as so much as the lack of supply of homes.    We have seen builders come back into the markets where they can build, and the supply of homes has increased to offset demand.  In the markets where builders can not build, due to lack of land, we have seen prices increase to astronomical levels.  IN some markets the Government has kicked around rent-control which would limit the amount of rent a landlord could collect in a certain area.  The result of rent control would be more run-down real estate, lack of new investment and corruption.  The Government should let the free markets figure out where rental prices should be as well as values.  As you can tell I am a firm believer in free markets and less government involvement as history has shown that when governments intervene in economics it causes markets to tighten as people and companies have to spend more for compliance of the government regulation that enviably hurts the very consumer they are trying to help.  I know the what the argument is from the other side is but it makes no economic sense as every result of more government is higher prices to people, bar none.  

In conclusion my advice to potential new home buyers is to lock in their interest rate as soon as they can when they are buying a home in this market.  If you have been contemplating refinancing your home my advice would be to do it sooner than later as you will be facing higher interest rates.  If you are looking to invest in Real Estate, again do it sooner than later as you will not only get a lower interest rate today than you will tomorrow, but the prices of the Real Estate Investment will be lower today than tomorrow.  Interest rates will be common place to be in the 5%-6% range for residential homes in the next 30-60 days from February 7, 2018.  For more questions on buying Real Estate or Refinancing or even commercial Real Estate give us a call and we will help you with all your Real Estate investment needs.  Again, MAE Capital Real Estate and Loan 916-672-6130.  

Update to this article 2/22/18- Rates continue to rise due to all the factors listed above and now the Federal Reserve has also said they need to counter inflation by raising rates.  I will  predict that interest rates will be consistently in the 5's by mid summer.  So if you are looking to refinance to take cash out to consolidate bills, pay for college, or home improvement I would suggest that you push up your time frames and get it done now so you can lock in a lower interest rate.  It is simple, call one of our qualified Loan Officers and lock you interest rate in today.  


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