Another Bright Spot? Low Rates May Be Here to Stay
by Evan Vanderwey on 29/09/09 at 3:17 pm
In keeping with our previous “cautious optimism” ideal, I’ve been watching for more bright spots in real estate and investing. And here’s another…
One of the financial magazines I read weekly is Business Week. It can be a little bit politically charged, but depending on who’s writing the economics ‘short’, it can be very good.
This week’s is written by Peter Coy. Google his name and you’ll find him to be a bit pessimistic on the economic recovery and not quick to get on band wagons that others are riding. His is a level-headed report of the facts, and he doesn’t generally over play his theories. Just the kind of guy you want to hear good news from.
The article I’m referring to – linked here – will not disappoint you. It explains simply and clearly why Bernanke is so committed to a VERY low rate standard.
His reason in a nutshell: The economy at large has a ton of excess capacity right now, which will take a long time work through. What do we mean by capacity? You see it practically as high unemployment and high inventory of homes on the market. Both examples are resources that are more plentiful, more in “supply” than we need. It will take a lot of economic growth just to work through what is already here and to use up this excess.
Another reason for extra capacity is the recent rise in productivity. The productivity numbers rose again this month, though they were expected to remain flat. So, not only do we have an excess in resources, we;re also getting more efficient at producing them. This will create slow growth in the economy, in Big Ben’s opinion, and support for his theory is growing.
Take five minutes and read the article. You might also consider who you know who might appreciate this information.
Some concluding thoughts:
WHAT IF BERNANKE IS RIGHT?
Then we’ll have slow economic growth and keep interest rates low for some years to come. We can live with this. Let’s be honest – putting our Lansing hat back on – we’ve been living with it for some years already. But here is where we might see light on the horizon – a bright spot. It may just be Mid-Michigan’s turn for moderate jobs growth. If this happens while the rest of the country (world) is lagging, then we could have both rising home values AND low rates. Let’s not be too much the ‘realists’ to think this couldn’t happen.
WHAT IF BERNANKE IS WRONG?
Then the economy at large heats up, rates rise sooner – not a lot, most likely, but sooner. AND our 401k’s rebound again. We can handle this too! Even if he’s wrong, 1982 inflation and rates are not a likely event based on the slow growth expectations. At least not for a while. Most of us who need a fixed rate will get one while they’re low and few will remain by the time anything wild happens.
WHY IS THIS IMPORTANT TO ME?
If you are buying a home or refinancing a mortgage right now, then you should still consider a fixed rate. Mostly because they’re very low right now (see my blog 24/7 for daily averages). If you are currently in an Adjustible Rate Mortgage, you should get some advice as to what to do. Your rate will likely be very low for the next few years. Let’s not allow fear or greed to dictate these decisions. A good level-headed decision based on the facts of your situation and the realities of your goals is what is needed.
LAST THOUGHTS
Let’s also be very honest with ourselves. As “smart” as Mr. Bernanke is, he does not know or hold the future. Only time will tell if his contributions were beneficial. He’s helping us navigate right now, and I am thankful for that, as am I thankful for all like him who are in positions of great weight and difficulty. I would urge us to remember the phrase written ON our money when we think ABOUT our money: “IN GOD WE TRUST”. After all, low rates, housing credits, and three shifts running at General Motors will all pass away in time.
