Interest Rate Dilemma

Discussion in 'Economy' started by ThinkCritically, Apr 6, 2012.

  1. ThinkCritically
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    ThinkCritically Open to opinion

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    What will happen when interest rates increase again? Will this not reduce demand for housing, thus further dropping the price of homes. Also, low interest rates have helped to prop up the market. If interest rates rise then you will see a flood of risk averse investors leave the market to go back to less risky investments.

    Basically the fed can't raise interest rates right now because it would cause a massive downward correction in the market prices of houses and stocks.
     
  2. DSGE
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    Well it depends. If interest rates get raised because that's the appropriate response to market conditions, it's not going to "reduce the demand for housing" or anything because in this case the interest rate is increasing naturally in response to increased demand for, for example, housing. If they raise interest rates for no reason, that is, if they suddenly decide to tighten monetary policy (further), then that'll be bad.
     
  3. American Horse
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    Will an increase reduce demand for housing?
    I don't think so. In the late 70s early 80s we saw 18% interest rates on mortgages, and no diminishment in demand. As a matter of fact increases in interest rates can prompt people to get off the dime and do something. Once rates go up and a trend is indicated, folks don't believe they’ll come back down again soon. The amount paid for interest can be much more than the principle payment when calculated over the amortization of the mortgage. That means they can get a lot less house if they wait. And also higher interest rates go in parallel with inflation so increased housing prices along with secure values seem to be in the cards then.

    With those high interest rates there were a lot of contract sales, side mortgages, even trades. Sellers could earn a higher interest rate than they could get from CDs (at banks) or other investments. Individuals actually got into the home financing business as a lucrative source of income. Back at that time I was a builder/developer and the wife was a real-estate broker/agent
     
    Last edited: Apr 6, 2012
  4. eflatminor
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    eflatminor Classical Liberal

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    And thereby delaying the inevitable downward correction and making it worse. Centrally planned price controls don't work, not for the price of computers, not for the price of money. End the Fed and let markets set interest rates. We would have NEVER seen the bubble and inevitable burst in the housing market if markets had determined the price of money.
     
  5. Widdekind
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    if M V = P Q; and if increased Interest Rates "attract" Money out of the consumer economy (into Savings), i.e. M --> m; then increased Interest Rates would tend to reduce Prices & Quantities, i.e. "Interest Rates tend to be deflationary (in the consumer economy)" ?

    if so, then "banks attracting business" deflates Prices, in the consumer economy; and in the stock-market; and in the housing-market (i.e. competing low-risk 'investments') ?
     
  6. ThinkCritically
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    ThinkCritically Open to opinion

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    Agreed, so we are facing an inevitable deflationary pressure in both the stock market and the housing market as interest rates rise... which means interest rate are going to stay around zero for quite some time to come
     
  7. Widdekind
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    what about Investing, in "artificial (man-made) real-estate", e.g.

    • artificial off-shore islands of beach-front property (cp. Dubai, Tokyo airport)
    • artificial "super-wave" beaches for surfers ($10B annual sales, i.e. "Point Break every day")
     
  8. Intense
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    It would also increase funds for Retired People and those who still put money in Banks, retirement Investments. So the question is who are you going to Screw?
     
  9. Staidhup
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    So, what else is new, the federal reserve continues to play king maker and Russian roulette with the economy to stave off and postpone reality by holding rates down and manipulating the bond market in the hope that some sort of economy will surface to save the day. In fact, look at the delema of sovereign debt exposure in Europe and potential result a major default will have on the US financial community, it will turn your hair white. The magic word is bubble, and eventual devaluation of the currency. The problem remains in that most voters have not the slightest clue as to the future implications such moves have on the market. Yep, Houston we do have a problem, each upward tick in rates results in unprecedented economic turmoil!
     
    Last edited: Apr 7, 2012
  10. Widdekind
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    naively, there exists a "Consumer market" (small short-term p,q, e.g. "cars"); an "Investment market" (big long-term P,Q, e.g. "land"); a "Savings market" (banks):

    M V = pq + PQ + S
    Perhaps most American "Blue-Collar Consumers" are familiar with the first; and unfamiliar with the second ? Cp. perceived antagonism, between "Blue-Collar Consumers" vs. "White-Collar Investors", in another thread, the latter blamed, for "diverting" money, away from the "Consumer market", thereby depressing "Consumer Demand", i.e. prices & quantities (which seems true, in the "short-term"; but, "should" all banks be closed, too, to eliminate Savings ?).
     

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