Q: I have a personal question. I was wondering if you knew what normally happens to interest rates when the housing market falls.
In other words, let’s say there’s another dip in real estate real estate prices. Would that mean that interest rates will go up? I was just wondering if there was some sort of trend. Would this be the same for a line of credit? I’m assuming it is but just wanted to make sure.
A: I’m not sure that there is an official correlation between home prices and interest rates. But I’ve noticed that interest rates tend to go down during recessionary times as the Federal Reserve lowers its Federal Funds rate in an attempt to stimulate economic growth.
And as the demand for homes lessens and prices for those homes drop, there can be a downward pressure on interest rates.
In this Great Recession, the Federal Funds rate has been near zero for a relatively lengthy period of time. My sense is that interest rates will stay low until the investors of the world are convinced there are better places to put their money than in U.S. government bonds paying close to nothing.
Why invest in a bond that pays close to nothing? Because you’re interested in capital preservation and are worried that there isn’t a safer place.
By the time the housing market recovers, I fully expect mortgage interest rates, as well as interest rates for home equity lines of credit, to lift off of 60-year lows and we will see inflation, to some degree, return in one way or another.
In short, a stronger housing market will often mean higher interest rates. But before we get there, we need job growth to return and the unemployment rate to fall. We also need the housing market to come into balance – that means that the number of homes available for sale either as a result of foreclosure, sellers who are desperate to sell or those who simply want to make a move need to is roughly equal to the number of home buyers looking to purchase a house.