I gave a speech in Houston recently and during an active question-and-answer session this question was posed. How long will interest rates stay low? It’s a great question, especially if you own property with debt.
The easy answer is that short-term interest rates will stay low as long as the Federal Reserve says so. For 90-day Treasury bills and notes up to one year duration, the Fed is the sheriff. What the Feds say is law, and they are determined to keep rates low until unemployment falls substantially (to around 7 percent) and job creation is expanding much faster than it is now. Fed Chairman Ben Bernanke recently notified the public that rates could stay low until the end of 2014. I agree with his assessment.
What about long-term interest rates? Most real estate buyers and investors are focused on the future of the ten-year Treasury bond. The reason for their interest is that many real estate mortgages are priced with a premium above the ten-year rate. Currently the rate is right at 1.5 percent, an unprecedented low. With rates this low, you can buy apartments and put a nice big loan on them and earn a high return on equity.
So the big question is how long will the ten-year treasury stay low? When will the inflation that everyone fears actually kick in and drive interest rates through the roof?
I’ve heard people on TV say that “only fools try to predict interest rates.” So here is my best effort to be foolish.
The ten-year Treasury rate is currently at unheard of low levels for at least three reasons. First, a lot of people feel like the global economy is teetering on another recession, which will be more likely to create deflation rather than inflation.
Second, Bernanke has told the world he will buy a lot of longer-term Treasuries specifically to keep rates low. This magic trick is affectionately known as “Operation Twist.”
Third, everyone knows that many European countries are failing financially and economically and that some countries are going to default on their bonds. So people are selling bonds in these countries and moving their funds to other countries they deem to be safer. Guess who is deemed to be one of the safest? You got it, America.
Every day that you read that another European country or bank needs more bailout funding, more foreign investment funds will pour into America. Since nobody wants to own stocks, it flows into our bonds.
Any day that you read that Congress continues to fail the American people and are unable to create policies to encourage job creation, more investor funds will flow out of stocks and into bonds.
Interest rates on the ten-year Treasury and real estate mortgage rates will continue to decline until Europe creates a new economy and America’s Congress passes legislation that makes business owners want to re-engage and hire people.
Neither of these prospects is likely to happen anytime soon.
Keep up with the latest Texas real estate news. The Center has several RSS feeds designed to help you make better real estate decisions.