Interest Rates, Inflation, and the Value of My Home
Posted by William P. McGowan, Ph. D on Dec 19, 2004, 20:54
canyon-news.com
The three most important economic issues facing us over the next two to three years will be the problems (and opportunities) created by rising interest rates, inflation, and the value of homes. As our society increasingly becomes one built on the equity people have in their homes, it is important that we all recognize the risks posed by dramatic changes in any one of these areas.
Interest rates
Most Fed watchers agree that Greenspan & Company are looking to raise interest rates by a ¼ point twice in the next three months; once at the Open Market Committee meeting held in December, and another time after the same meeting in February. This will take the Federal funds rate to a new “high” of 2.5 percent. Considering the average Federal interest rate since 1945 has been in the range of 6 to 7 percent, we still have a considerable way to go before anyone can really begin to whine about how high interest rates.
Most economists agree that the Fed wouldn’t be raising rates unless they were confident the recovery is well along, and the most recent data from the Fed’s “Beige Book” shows that growth has been steady and sustainable for more than nine months everywhere but Cleveland. All of this tells a tale of an economy fully at work.
Inflation
The unfortunate by-product of all this economic activity is, of course, inflation. Ask any contractor or raw materials supplier what prices have been doing for things like concrete (up 60 percent), plywood (up 150 percent) and steel (up 70 percent), and it is easy to see that inflation is already at work in our economy. Increased raw materials costs translate into higher home costs which are driven further higher by low interest rates (see above) and increased economic activity that has more people looking for homes that there are homes to view, much less buy. As these “core” prices rise beyond a sustainable level, they take a larger and larger bite out of economic growth.
Home Values
Rising interest rates and inflation are not a good mix for your home value because the wrong combination of either can puncture the bubble mentality that characterizes our present love affair with real estate. In the short- to medium-term, this means that housing values will moderate in highly desirable markets, stabilize in standard markets and fall in neighborhoods where they should have never gone up in the first place.
Economically, the issue of a “Global housing bubble” has been on the minds of most the world’s reputable economists for about three years. These folks fear that price booms in Australia, Asia, the United States and Europe are creating an economic “bubble” which threatens all economic stability. If the trend ever reversed itself in a dramatic way, then it would be big trouble.
The optimistic lot that they are, most academic economists have latched on to this most dire forecast, creating Great Depression-like unemployment, misery and general destruction. Maybe because I’m Irish and in sales, I don’t see it this way. There will be adjustments to higher interest rates and inflation, to be sure, but nothing as giant or dramatic as a Black Friday. But this also doesn’t mean people won’t get hurt, either. With the nation’s level of homeownership at all time highs, it is very likely that some people will lose their homes to the demon of a variable rate loan, but hey, that’s capitalism!
You can reach William P. McGowan with suggestions or questions at AngryEconomist@sbcglobal.net |
