Rising Rates -- Good News?

Several articles debating the effect of higher interest rates upon the economy have appeared in major periodicals in the past few weeks. The majority of them come to the conclusion that the recent rise in rates represents good news. Not because the higher rates will help the economy. But because of the fact that rates have risen because the economy is doing better. Or at least the threat of a double dip recession has faded from memory. One must remember that it was the threat of things going sour again which caused rates to dive down into uncharted waters. We accept this conclusion; however from this debate arise two additional questions. First, are Americans better off because rates have risen? Our answer is yes -- with a caveat. Americans who own a home and/or stocks are better off because these assets have gone up in value due to the better economy.

 

For Americans without a home, rising rates might make the recent bargains on real estate a distant memory. Which brings up the second question. Will rates continue to rise? At today's rates, home ownership is still a bargain and stocks are a much better place to invest as compared to yields on interest rate bearing instruments such as bank accounts. If rates continue to rise, this equation could change. We would have to predict the future to answer the question -- and we don't have that power. Friday's employment report showed 175,000 jobs created with a slight increase in the unemployment rate. This gives us not much of a clue as to the direction of rates because the report was "middle of the road." However, we will say that perspectives have changed significantly over the past three years. Three years ago, 175,000 jobs created would have been considered good news.

 

Mike Ervin

Senior Mortgage Banker

NMLS# 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com