The Sky is not Falling

The Sky is not Falling

 Grab your favorite adult beverage, get comfortable and kick back.  This may take a while.  It appears that misinformation is being spread far and wide.  There is discussion that rising interest rates will be something akin to the great apocalypse and that the window of real estate recovery will slam shut, never to open again.

Fear not.  I am here to tell you that the sky will not fall, volcanos will not erupt and large winged creatures will not swoop down from the heavens to steal your children.  In fact, a rise in interest rates will be a result of positive economic change, not a reason for economic panic. 

 First, let’s understand the dynamics that keep interest rates low.  Low interest rates are typically associated with a struggling economy.  Low interest rates help to spur investment by keeping the cost of capital low, thereby increasing the opportunity for corporate borrowing and creating an environment for future industrial and economic growth.  This growth, in turn, results in increased hiring, lower unemployment and higher wages.  This is called a blueprint for prosperity. 

 As the economy improves, the demand for investment capital will increase, driving up the cost of borrowing, resulting in higher interest rates.  The key is to strike a balance where interest rates rise at a reasonable rate in response to economic demand.  If they rise too quickly, borrowing and capital investment will slow down and you run the risk of recession.  If they rise too fast, you have the flip side risk of inflation.  I am going to go out on a limb and assume that the governors of the Federal Reserve are smart enough to appropriately manage this process.

 In an improving economic environment, both home prices and interest rates will increase.   However, remember the phrase “A rising tide lifts all boats”.  An improving economy will also result in more jobs and higher wages, increasing your ability to pay more for a home.  Furthermore, if you will be selling a home, you will benefit by selling your home at a higher price as well.  In this environment, an increase in housing values does not mean that a real estate bubble has returned.  It means that economic strength has emerged and should be a reason for rejoicing.  The skies will be sunny, the birds will sing and your 401Ks should be well funded.

 So, next time you hear that interest rate increases will serve as a new death knell for housing, try not to get caught up in the hype.  Remember that housing prices currently remain relatively low.  Both home prices and the cost of borrowing can only go up at this point.  It is a sign of recovery.  Also, if you are buying a home as a long term investment and find that interest rates are rising above 5% or so, take a step back and look at the historic nature of interest rates.  A spike from today’s rates would still result in exceptionally low historic rates. 

It is now time for another adult beverage.  Pour a full glass and raise it in toast to the expectation of an economic recovery.

Until next time…

Keep kicking the dirt!