Interest Rates Need To Go Up

At this point the government has done all they can to stimulate housing and they have done a good job.  Financial incentives for buyers, encouraging banks and underwater homeowners to do short sales, refinances and principal reductions to prevent some foreclosures.  Great job, gov’t, but we need to take a step back and cut housing from the proverbial teet and focus on other national problems.

Keeping the Fed funds rate low was the first and probably most obvious solution to stimulate housing demand, but we are now at the 4 year anniversary of Lehman Brothers bankruptcy, which prompted the Federal Reserve to lower this rate to the 0% – .25% range on a long term basis.  This is margin that the Fed receives on loans to banks, a margin that does not have to be charged to the consumer, thus the lender can keep the interest rate lower.   To avoid oversimplifying the subject, there are many factors that effect interest rates, another of which is competing bond prices, yields of which have also been very low.   I’ll expand on this subject another time.

It is clear in Playa Vista and in most of Los Angeles that it is a seller’s market.  The lack of inventory, bidding wars, and increasing prices make this undebatable.  At the same time, it is still an extremely favorable time to buy (if you can find something) because of low rates and still much lower prices than a few years ago.  There is so much pent-up demand from the last few years that even if interest rates were at 4.5-5%, I do not think there would be a significant difference in prices of homes being sold today.  Even if 1 out of 3 buyers dropped out of the market, a similar number of properties would be sold, there would just be fewer bidding wars.  Additionally, it is important to manage expectations about what is a “normal” interest rate and people who may have started looking at houses this year may think that getting a 30 year fixed at 4% is high!

I think inflation in the coming years and our raging national debt are both larger concerns at this point than potentially thwarting a housing recovery by hinting at raising rates.  Housing is safe to not be nursed back to health anymore and rates creeping upwards is part of the cycle.  As long as lending practices stay reasonably strict, or just reasonable, there will not be another artificial run-up in prices causing a bubble and then a burst.