Monday, April 19, 2010

Rising interest rates; The end of an era.

The New York Times last week predicted "a sustained period of rising interest rates." The projections at issue are for a long period of rising rates, not merely a short term fluctuation:

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.

emphasis added

Everyone who has borrowed money in the past thirty (30) years has done so in the climate of falling rates. No one who is fifty years old or less has personally experienced borrowing in a climate of high rates. Attached is a commercial from January 1983 that might remind us of the way things used to be and are soon becoming again. [The film relates to car loans instead of real estate, but the concept is the same.] The ad assumes that the audience would be excited about car loan rates of 11.9%. In 1983, they were right, and they may be right again soon, even though current car loan rates are less than half that amount for 5 year loans and even less for shorter loans.

[H/T for video conversion]

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