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Don't Be Fooled By Record-Low Mortgage Rates

The US economy has officially entered recession, and the record lows among interest rates are not merely symptomatic of the Federal Reserve’s response to recession, but they have all the while presaged recession in their very inception of their zero interest-rate policy. 

Those record-low mortgage rates will be available to only a select segment of prospective home buyers, who suddenly face tightening lending standards as banks acknowledge the inherent downside risk of collateral, and the elevated risk of default, in shaky job and housing markets. 

While tightening lending standards may lead the eligible few to feel special in qualifying, that feeling, if unaccompanied by a strict financial plan, will predictably fade as soon as they realize what they've become.

The record-low interest rates permeating the market represent the efforts of the Federal Reserve to induce spending to buoy asset prices in order to sustain the illusion of a viable debt-financed economy. 

Meanwhile, rates for refinancing, where available, serve the interests of a narrow segment of existing homeowners, who possess the acumen to properly invest the cash to not only protect against loss, but to preserve their purchasing power. 

Prospective home buyers, on the other hand, risk buying a depreciating asset, in real terms, while ignoring the investment opportunity cost and the risk of sudden job loss which can unexpectedly force an untimely home sale at a probable loss. 

And these risks are currently enormous. 

We must remember that home prices are a function of rents, and at a time when rents are being deferred by government mandate, where they are likely to be forgiven altogether in the same fashion, there is little substance to any rally in the real estate prices they support.

Those seeking liquidity for speculation are well-served to acknowledge the risks, not only of financial loss but of mounting interest obligations exceeding one’s ability to repay. 

Meanwhile, those entertaining the idea of refinancing without an investment plan, or that of purchasing a home, must acknowledge the new relationship between their assets and liabilities.

If refinancing a home and holding cash, one exposes himself to the downside risks of monetary inflation; if purchasing a home, he risks becoming the unenviable bag holder with an undesirable asset depreciating in (real) value. 

Therefore, while low interest rates can occasionally signal a promising buying opportunity, particularly as an early beneficiary, where cheap credit enables buyers to gobble up assets with capital borrowed against future earnings, they have to first ask themselves whether they are concerned primarily with the price of the home or the price of the capital. 

Wherever interest rates have long been suppressed, one will find prices representative of the participation they have artificially induced. 

Thus, where one finds an environment of cheap credit enabling mass participation, he’ll find a price commensurate with the volume of bids facilitated by those terms. 

With a price long reflective of bullish and speculative sentiment, at the behest of induced democratic participation, you’ll find latecomers buying out the untenable positions of speculators and unwitting risk-takers alike. 

They will be seduced by the price of capital after unquestioningly accepting the present and expected future price of the currently-overpriced liability; they are sold the asset, the house and the dream it represents, upon failing to understand the liability, the mortgage that they may be unable to repay or sell.

Ultimately, most people want to spend less for the things they buy, not merely less on the means by which they finance the purchase. 

With interest rates at record-low levels for the past two decades, homeowners and speculators alike have been rewarded with real estate appreciation and the lines of credit thereby made available for further speculation and investment. 

They’ve been spoiled with an ever-increasing pool of bidders who’ve gained entry to a market flush with cash and cheap credit, who’d happily accept the mortgage on their unexamined assumptions that home prices would continue to rise and that there would always be a greater fool willing to buy and assume their liability. 

Unfortunately, once the cost of capital normalizes and sentiment suddenly shifts, there will be no greater fool and no one left to buy the bag. 

The homeowner will be left staring inside, wondering what in the world he had done; he will be left to finally acknowledge that he had been conned. 

With that being said, the announcement of record-low mortgage rates isn’t nearly the cause for celebration that some may believe, unless you’re one of the lucky few to sell to an unlucky buyer who fails to understand why.    


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