The Federal Reserve, headed by chair Janet Yellen, has been kicking around the idea of increasing interest rates nation wide for some time now. As we all know, our country is still operating in a staggering deficit and the Fed is hoping that an increase in interest rates can help to reduce our national deficit. The hope by the folks over at the Fed is that as we are beginning to see substantial gains in employment rates, that the economy as a whole will see a continued growth in the private sector. To the Fed, if we see a positive upswing in spending soon, that may justify increasing interest rates across the board to increase their revenue. I am all for reducing our nation's debt, but I fear that increasing interest rates will do more harm than good. According to an article by CNN money entitled, "What an interest rate increase means for real people," there are 4 key areas in which these increases will hurt us the most.
- Mortgages will rise... (This is very important to me and my clientele).
If you are interested in purchasing a home any time soon, you should most definitely do it now! 2015 will be the last opportunity to achieve our current mortgage rates before the Fed raises them. It is still unclear exactly what the new mortgage interest rates will be, but they will be more than the national average of 3.8%. I see them rising no more than 1% and probably hovering around the 4.5% mark. This interest hike doesn't just apply to mortgages. It will also affect auto loans (car, boat, RV, etc). A 4.5% interest rate is still not too terribly bad, fortunately. The national average being 3.8% is largely due to the low rates of FHAs, which are provided by Sallie Mae and Freddie Mac. Sallie and Freddie both provide the most mortgages in the country and their purpose is to make home ownership easier and more affordable for us Americans. Most conventional loans (those provided by banks and credit unions have a higher interest rate, but are most appealing for other reasons, including their ease of refinancing).
- Those who save, will succeed... a little.
Due to the mortgage collapse and the succeeding financial crisis, many people did not feel comfortable investing their money. A lot of people lost a lot of money when the banks were in dire straits and needed bailed out. Because of this, many Americans decided not to invest and instead hoarded their money in low-interest savings accounts. A lot of people I know participated in money market accounts, which are just kind of savings/investing hybrid fund with higher returns than savings accounts. This rate hike will at least benefit those who remain less aggressive with their money and keeping their savings accounts full. The current average interest on savings accounts is around .44% and is expected to jump slightly when this increase occurs. However, I highly doubt that these rates will come near the 1% mark, which is still not very enticing. I have never been a big fan of saving the majority of your money. Money is a resource that you have to use in order to create more money. Keeping your funds in a low-interest savings account will not allow that resource to be utilized to it's fullest ability. There are a myriad of ways to invest that are safer than you would expect and they will definitely return more than saving. I offer my lenders 12% interest when they fund the rehabs through my investment company. These loans are 100% real estate backed!
- Job creation.
It sounds weird, but interest rate increases should create more jobs. As all of these financial institutions are able to harbor more money from their lent money, they will in turn have more money to invest into new businesses, mortgages, notes, etc. So, though it may hurt right off the bat, it should create an insurgence in job creation down the road, which will increase wages, productivity and general economic health. At the moment, we have only seen a 2% wage growth since the financial collapse, but this is expected to grow very soon.
- The stock market will become more shaky.
The stock market is already a volatile environment. If you know what you're doing, the stock market can be a fruitful endeavor. If you do not, however, you can find yourself in big trouble. The news of this rate increase cause a frenzy on Wall Street. Mainly because investors want to get in to yield those higher returns that the hike would provide. As great as that sounds, this will actually cause the stock market to become even more volatile as the companies that sold the stock are required to return an even higher return to their investors. This will make revenues fall shorter within those companies and cause uncertainty. Again, there are many other areas to invest your money that are far less volatile, create an even higher return and are just generally less stressful.
As an real estate investor, I obviously prefer investing in real estate. Real estate has created more millionaires than any other vessel in history. Many people are not interested in owning a rental property due to the annoyances of the taxes, tenants and toilets. I do not blame them. Luckily, those who are interested in investing in real estate have many more opportunities to invest than they realize. The main focus of my investment company is to rehab problem properties acquired from distressed sellers and then resell those properties at the market price. For these projects, I provide my lenders with a 12% interest rate on one year loans with a balloon payment when the property sells or the year is up (usually a 6 mo. process). These notes are mortgaged by my private lender and they have full recourse, which protects them far more than any other high-interest loan that I have ever heard of. If you do not have the funds to lend for a full project, you can lend what you've got an assume the second position on the mortgage for the same return! If you or anyone you know has any interest in lending or investing in real estate, feel free to let me know! And of course, if you or anyone you know needs a Realtor, I am more than happy to help.
Troy Franklin Gandee