Interest Rates

[Tim Phun]

Just wanted to see how fellow BPers feel about future interest rates? As all investments are linked to rates, I feel that rates in the future matters a great deal.

If an investment property is purchased today and the intention is to sell it 5-10-15 years from now, doesn't the future rate matter? I often ask this question and get a response of why does it matter if my cashflow pays for PITI. In response, I would say that if rates were at say 6-8 percent, the principal value of the house would decrease significantly. Its a similar scenario of saying that HP stock is yielding X% so who cares until of course HP goes from 50 to 13.

Is my logic flawed? Thanks in advance.

[Kathy Batesel]

I'm probably not educated enough to give a great answer, but I do have some thoughts on the matter.

I think history is the best teacher for some things. The economy is one of those things because of its somewhat cyclical nature. My answer is based on my exposure to real estate stats and limited education on economics.

I think future interest rates are going to increase in the coming 3-4 years, although I cannot predict how much. I also think housing prices, which have stabilized a bit, are going to slowly increase. I'm aware that from the time the National Association of Realtors first started tracking sales price increases/losses on a national basis, there had never been a loss until the housing bubble burst around 2007-2008.

I have gone back to try to find the information because I can't remember exactly when they started tracking, and I did not see any updates including the price drops we've seen, but was unable to find the information I wanted. I believe the tracking started in the mid 1930s. I remember that 1/2% was the smallest growth increment, with another year at 1%, but that 2-3% annual growth was a steady, reliable norm for all the years till 2004. Another consideration is how the market behaved when interest rates were in the double digits during the 1980s.

When I look at these factors together, my personal conclusion is that we could see interest rates creep back toward 8% pretty easily as our market stabilizes and growth continues. If today's buyer found loans at say 4%, that can be a great tactic for commanding a higher price if he can let someone assume the loan (refer to the terms of the note to make sure it's assumable!)

In sum, I guess what I'm getting at is that if you factor correctly, you can make money either way.