With an election year at our doorstep and a looming Double Dip Recession, there may be a lot of forces at work to jump start the slumping economy for political gain. Does this mean another round of Quantitative Easing QE3? In my mind it does. This time they may call it something else but the re-election machine has fired up its engines and printing money is what our President and Fed do best.
What does this mean for interest rates? It’s hard to tell. If it plays out like last year (which it is shaping up to do), we could see record lows for interest rates while the economy is slumping into the summer and fall. But those rates could go up sharply as they had done last year. Another scenario is interest rates go up because of inflation. No matter what happens interest rates are near record lows now and that is one message to convey to customers. So if someone is thinking about buying, now is the time. If anyone is on the fence let them know that a 1% increase in rate will reduce their purchasing power by 10%. That’s a good motivator when someone wants a particular level of home quality.
Loan amount $250,000
Interest Rate 4.5%
Payment $1266/month
If rates go up 1%
Loan Amount 225,000 (10% reduction in Purchasing Power)
Interest Rate 5.5%
Payment $1277/month
In this scenario you can argue that although home prices dropped the buyer still ends up paying more. This is why Cost vs. Price is so important in this market.