The Challenge of Low Interest Rates

Interest rates are extremely low, providing challenges for borrowers and investors alike. For potential buyers there may be the temptation to purchase things using debt, instead of saving money for things that are wanted. Renters of apartments are attracted to buy homes since interest rates are at historical lows in the ball park of 3%. With good credit, 30 year fixed rates can be found at 3.5%, and some lenders are even offering 15 year mortgages at less than 3%.  Some real estate and lending experts believe there will never be a better time to buy a home than now. Of course interest rates could go lower, when they hit 5%, then 4% no one ever thought they would.  When the cost to borrow is so low, it may be a good time to buy a home, however as always one should look at their overall budget, savings and debt load before jumping into home ownership. In addition the housing market has risks too, where I live, even though values have come down, sales prices are leveling out in the more desirable zip codes. The number of houses on the market is almost half what it was a few years ago. Potential buyers are having difficulty finding a large selection of really nice homes, and are being tempted to buy a more expensive home. Buying a more expensive home drives up the costs of financing, real estate taxes, maintenance and utilities, challenging the goal of having total housing costs in the twenty percent to low thirty percent ranges of take-home income.

For investors, low-interest rates of investment grade bond, certificates of deposit, and money market accounts, fail to provide sufficient income to senior citizens relying on investment income to supplement them during retirement. Individual investors are not alone in this struggle, institutional investors, those investing billions of dollars in public and private pension plans (defined benefit not defined contribution like 401ks), backing insurance products, government entitlement programs, and other corporations that base a significant part of their financial stability are feeling pain as well. If low-interest rates continue for the long-term, major unwelcome changes will come such as reduction in benefits or increased costs.

Some economists, financial institutions, politicians, and journalists are asking for higher interest rates. If that happens, the already slow economic recovery would slow or halt all together, as higher rates would stall home and auto sales, and increased costs to food and fuel.