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Patrick readers, what steps should Americans take as interest rates rise?
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2014 Jan 30, 6:28am 19,434 views 41 comments
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If interest rates were to rise, this is fantastic for homeowners and real estate investors, who locked in 30-year fixed at historical low interest rates.
I'm not so convinced. When those people try to sell their houses, they will find a softer market. You can't fully assume that pricing is completely independent of interest rates. Most organic home owners (as opposed to investors spending other people's money) are dependent on mortgages, and the monthly payment matters. It's easy to note that 4% of 800,000 is the same as 8% of 400,000.
$400K at 8% = $2935 monthly with $31,879 interest paid in the first year
$800K at 4% = $3819 monthly with $31,744 interest paid in the first year
Note that an equivalent monthly of $400K at 8% with a 4% interest rate gives you a mortgage of $614782.
Now, I'm not saying that if interest rates suddenly shoot up to 8% that a formerly $615K house at 4% will instantly only be worth $400K, but it is guaranteed that higher interest rates will put pressure on prices because it is so monthly payment sensitive. Housing markets are fairly illiquid, so this happens somewhat gradually.
I would rather pay $400K at 8% than $615K at 4% because at 8%, there's a good chance that one day I will be able to refinance to lower my payment, and it will be much easier for me to make extra payments to pay down principal quickly vs. $615K. At 4%, it's unlikely I'll be able to refi too much in the future, and I'll be pretty much stuck with that payment forever, and I have a much higher principal to pay down.
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What steps as active and informed citizens should we take to resolve the issues stated in this article? Also, what would you do if you were in charge?
http://www.ispyetf.com/view_article.php?slug=Fed_Needs_Help_of_its_Worst_Enemy_to_Unload_QE_Ass&ID=348
What makes Treasuries attractive? High yields, which ironically is exactly what the Fed is trying to avoid. High yields are bad for stocks and bad for the economy, but may be the Fed’s only hope to eventually unload assets.
There’s another caveat. High yields translate into lower prices. As yields rise, the Fed’s Treasury holdings – and Treasury ETFs like the iShares 7-10 Year Treasury ETF (NYSEArca: IEF) – will shrink.
Are there other alternatives? How about doing nothing and let the free market do its thing. Perhaps that's what Bernanke and his inkjets should have done all along.
There is another problem largely unrelated to QE and the Federal Reserve. It's ownership of U.S. assets (not just Treasuries).
We know that the Federal Reserve owns much of the Treasury float, but more and more U.S. assets are falling into the hands of foreigners. More and more U.S. citizens have to 'pay rent' to overseas landlords.
Here's a detailed look at this economically dangerous development:
Read more at http://www.ispyetf.com/view_article.php?slug=Fed_Needs_Help_of_its_Worst_Enemy_to_Unload_QE_Ass&ID=348#bJFG1i8wIF1Sb0l1.99
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