Why Interest Rates May Rocket & How You Can Protect Yourself?

Efforts by the Obama administration, and more notably the federal reserve, to revive the economy from this deep and prolonged recession have brought down interest rates on all forms of borrowing to some of the lowest levels seen in more than a half century.

Low interest rates have given a needed shot in the arm to the flailing real estate market and other segments of the economy dependent on borrowing. The advantages of an incentivized business climate was superbly outlined in Jennifer Mackay’s post this morning. Taken primarily through the lens of real estate investments, it’s well worth the read — and then some .

Is there a Such Thing As “Bad Recovery”?

With the economy now appearing to be on the “mend” (maybe a little liberal use of the word), the fed is more than likely to change course and tighten, which means higher rates.

The cost of “Federal Borrowing” — within a very few years the fiscal condition of the federal government threatens to swamp the credit markets with more federal debt, putting indefinite pressure on the economy’s most vital tool for growth… the cost of borrowing money.

The more entities, government and private, wanting to borrow, the greater the supply of debt instruments people and governments of other nations (e.g., China and Japan) will have to absorb. And the end game? >> The incentives to buy those instruments (interest rates) will have to rise enough to entice lenders.

There is also the question of trust — too much debt raises the specter of default. Will those seeking to borrow be able to repay what they owe? In short, the greater the degree of borrowing in the economy, the higher interest rates will have to be.  And this is when “Good” Benefits Today Could Eventually Go “Bad” Tomorrow?…Those higher interest rates

can choke off not only residential home buying but investment by business and industry. In effect, large government budget deficits and the gross debt they generate can stifle the future economy.

The principal culprit is the rising cost? – the federal government’s entitlement programs, health care (medicare and medicaid) and social security being the largest. The government’s efforts of the past year to keep us from falling into a depression—as constructive as they may have been—have created the highest budget deficits in history, reaching $1.4 trillion last year. And they will remain high for a number of years as we ride the recovery.

But the cyclical ups and downs of the economy will shortly be overwhelmed by a wave of aged baby boomers drawing on their government benefits. Many more people on the entitlement rolls means much larger expenditures.  Absent large tax increases — an anathema to most politicians  – those costs will have to be covered by much more government borrowing.

The Good News: There’s Still Plenty of  Opportunity During Today’s Recovery

Like the technology bubble of the late 1990s, and the home price bubble of the past decade, the low interest rates we see today are another artificial bubble. In my humble opinion, the wise investor, home buyer or otherwise, will grab a hold of these low rates, and the longer the term of their indebtedness, the better they are likely to fare over the long run.

Thoughts?

Licensed in Virginia, Maryland, and D.C., Kevin Koitz, with The Koitz Group @ Long and Foster RE specializes in DC real estate and surrounding luxury communities in Montgomery County Maryland & Northern Virginia. Visit his Bethesda Condominiums page to get a flavor for some of finest communities in the DC Metropolitan Area.