Will Interest Rates Always Be This Low?

Rates on 15 year mortgages are hovering in the 3.65% range, and the rate for a 5/1 ARM is below 3%. We have reached a historic low with mortgage rates. But can they stay this way forever? I’m a boomer approaching my mid 50’s, and I can vividly remember the double digit interest rates that greeted me when I tried to buy my first home in 1984.

Interest rates

Interest rates are at a historic low. Image courtesy of Bitchcakes

If I recall correctly, the rate quoted me at that time was around 12%. As recently as 1996, before computers and fancy online calculators, you had to purchase a book of interest rate charts in order to look up the payment amount. Those books were a reference guide to how much the mortgage principal and interest payment would be, at a given rate. The book began at 9% and went all the way to 18%.

Those who have become adults over the past 10 years probably have little or no recollection of the last time advertised interest rates were above 6%. And today 6% seems like an exorbitant rate. We are still benefiting from the fact that the dollar is the world’s trading currency. If this were to ever change, or a new currency were to be implemented in place of the dollar, today’s incredibly low interest rates would be no more than a distant memory.

That issue aside for a moment, it should be noted that there is no real growth or significant improvement in the housing market. In the past, cutting rates stimulated growth in the housing sector. Not so this time. Housing numbers have not shown any real improvement on a consistent basis, and the majority of major metropolitian areas are still reporting declining home values.

US Dollar

US interest rates are benefiting from the Dollar's strength. Image courtesy of Miran Rijavec

Fundamentals Favor Rising Interest Rates…

At some point, given the present fundamentals in the economy – the U.S. debt situation, the continued borrowing by government at private sector expense, the lack of growth in GDP and the systematic debasing of the U.S. dollar, there is likely to come a time when some currency or blend of currencies will be used as a replacement for the dollar as the worlds reserve.

Or, even if the dollar remains as the world’s reserve currency for the next 20 years, government borrowing at greater and greater levels could still force interest rates up at some point. I think it’s highly likely that something in today’s unstable environment could happen to force interest rates to climb rather quickly.

If a true U.S government default were to actually happen, interest rates could shoot up several points virtually overnight. The August 2nd spectacle was not that moment. But with the seemingly unstoppable growth in government spending, that moment could definitely come at some point.

Expect US interest rates to shoot up again, perhaps sooner than you think. Image courtesy of Bhautikjoshi

Or perhaps American ingenuity will prevail and the U.S. will create new technologies that will trigger new and widespread growth the way the tech boom did in the 1990’s. While computers and the invention of the PC changed the world, they also added millions of new, high paying jobs to the U.S. employment rolls. We could use a similar breakthrough today to increase growth and income. This would mean more tax revenues and produce a much needed revival in the housing market. This would help stabilize the entire economy and remove the pressure to raise taxes and cut benefits.

Common sense and experience tell me that the fundamentals are the best indicator, but for my part, I’m praying that American ingenuity prevails.