Rates are Rising ! What ’ s Ahead ?
By Bruce Kellogg
The Reversing Interest Rate Trend
In 1980 , only two years into real estate investing , I purchased two rental houses with 18 % loans from Glendale Federal Savings , which is long gone . So are the two rentals , lost to foreclosure because I could not handle the resulting negative cash flow .
The peak in mortgage rates at the time was 18 %. In the subsequent 42 years , they have drifted down to the recent 3 % range , largely due to fiscal and monetary actions taken by the U . S . government intended to manage the economy .
Now , due to rampant inflation reaching 8.5 % annually , the Federal Reserve Board has begun to raise rates rapidly . They never quantify their intentions , but reputable financial observers are predicting increases over the rest of 2023 .
I believe that the longterm trend in interest rates is reversing now . I think this will change many aspects of the real estate industry in major ways . After 44 years in the business , I feel qualified to express what I envision happening in several areas . I ’ m thinking about what will be happening December 31 , 2023 and beyond . Let ’ s see !
# 1 – Mortgage rates have just reached 6.75 % for conforming 30year fixed rate loans . Adding in the Fed ’ s 1.5 %, we get a conservative 7.25 %. I say “ conservative ” because lenders will add 0.5 % or so to protect themselves in the rising trend .
AdjustableRate Mortgages ( ARMs ) will be cheaper for borrowers , but riskier in a rising rate environment .
# 2 – Car loans are usually close to mortgage loans . Several years ago my son got one below 2 % ( barely ). If these go to 78 %, a lot fewer new cars will be bought . Vehicle , heavy equipment , and some consumerfinanced goods will suffer sales declines . Production cuts and layoffs could result .
# 3 – The Federal Debt portfolio is huge and varied . But new , longterm federal bond issues could reach 55.5 %. Recently in the 2 % range , this will increasingly make it harder for the U . S . to service its debt . Additional borrowing , or tax increases , could be the result . Oh , oh !
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