Saturday, March 28, 2020

Interest Rates Have Fallen

The Federal Reserve has been in the news lately as they dropped their interest rate to just above zero. (0.25% more precisely). They tell us they want to avoid a credit crunch. What does this mean for us unwashed masses in flyover country? There could be several different outcomes. It's been said that you could take all the economists in the world and lay them end to end and they still would not reach a conclusion. While it has never been done, it would be an interesting thing to try someday when more than ten of us can get together. In spite of this uncertainty it is worth considering how this rate drop may impact the world of real estate.


Right now, many businesses are experiencing between fewer and no customers. If they are not flush with their own cash, they need working capital to stay afloat. Shortly before writing this, I saw an article that said Cheesecake Factory does not anticipate being able to pay the rent on their facilities. The CEO of Texas Roadhouse said he will forego his salary for this year so the employees can be paid. This guy is showing leadership and appreciation for the people who make his business work. Money is needed to keep business running. The lower interest rate will help ease the pay back burden but the money supply (the amount the Fed creates out of thin air) is what will keep these people in business.
The same is true for some in the real estate business. If there are mortgages to pay, having tenants out of work does not make for a happy landlord... or happy lender. If this thing is over in a few months it may not hurt the rehabbers and builders too much, yet they still have unbudgeted carrying costs. It is not known at this time how the banks will use this availability from the Fed, lending it out will be giving the borrowers a larger nut to crack, and cuts into their profits but they will stay solvent. King Solomon summed it up well in Proverbs 22:7 “The rich rules over the poor, and the borrower is the slave of the lender.” But... it's better than going out of business. Or perhaps, it just delays it.


The thrifty, work hard and save your money types, will continue to take a beating at the hands of the banks offering their sub one percent CDs. Better to buy a Willie Nelson CD at least the online store won't insult your intelligence.

It's not that many people these days can count on interest accumulation to fatten their home buying fund, but this certainly will not make it easier to accumulate substantial down payment money. In a way it is good for new buyers that the FHA will finance them with almost no money down, But it does leave them vulnerable to downturns in the housing prices as we saw when the bubble burst years back.


When it comes to selling houses, if the money supply holds up, it may make it easier. With cheaper money more people can afford the houses on the market. So until they decide the market is expanding too fast and raise the rates it may be a good time to make hay while the sun shines and sell what is ready, IF the chicken littles in the media have not destroyed the confidence of the buying public.


I understand that most investors don't trot on down the the local financial institution to be laughed and misunderstood by some banker with the employee mentality when they want to fund their deals. However, some do and they may benefit from this lower rate IF the bank passes on the reduced interest and does not make them grovel too much. For the others, cheaper money may have an impact on hard money lenders as well... but maybe not as they are paying for availability apart from the banking system. However, if more money is available overall, it may just result in more competition (and higher prices) for deals.
These are a few of the factors we may be facing in the coming days. Others, including wild cards of how long people will be cowering in their homes, and the attempted destruction of public confidence as well as any regulations our helpful betters may see fit to impose can move any of these suppositions in either direction. Experts, or those we look to for answers don't agree so we just need to stay calm and flexible since this will help us respond to many of these situations we can neither predict nor control.
Having said all that, we need to go back to the beginning and look at something that is common knowledge among those who have been following the actions of the central bank (the Fed) for some time. We need to get rid of the idea that the Federal Reserve is a government agency acting altruistically for the benefit of the American people. Despite the name, they are no more a government agency than Federal-Mogul Corporation or Federal Express. They allow the President to appoint the chairman, but it is still an organization assembled by the major banks in the US. The whole sordid tale is told in the classic book The Creature From Jekyll Island. It's a good read that will scare the daylights out of you... even Willie Nelson said so after reading the book. There have been several other books written on the topic, but this one appears to be the definitive work that pulls back the curtain and shows what is really going on.

Right now there are just too many variables to be certain of the future... but as always we just need to be paying attention to everything going on around us and make the best decisions based on the best information we can get. There are no guaranteed of anything, except change.

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