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Monday, August 27, 2012

USA Real Estate: Short and Long Term Interest Rates Are Prime

The bad news: housing and unemployment are going to place plenty of drag on the US economy for many months to come. The good news: The Federal Reserve (The Fed) has lowered short-term interest rates to record lows to encouraging borrowing and spending. Since the 2008 financial crisis, many American consumers have come to understand that excessive borrowing can easily lead to dangerous debt bubbles. But rock-bottom interest rates also mean that paying down existing debt is as easy as it’s going to be (at 3.25%, the current United States Prime Rate is as low as it can possibly go.) Bottom line: in this exceptionally favorable interest-rate environment, consumers should prioritize paying down debt, from credit cards and student loans to mortgages car loans.

Most credit cards in the US market have a variable rate that’s indexed to the US Prime Rate. The Federal Reserve has virtual control over Prime via the fed fund target rate. The formula is very simple: US Prime Rate = (fed funds target rate + 3).

Conventional, conforming 30-year fixed-rate mortgages (FRM) tend to track very closely with the yield associated with the 10-year US government treasury note.

Seattle's Commercial Real Estate
Seattle's Commercial Real Estate (Photo credit: Canadian Pacific)
Countless Americans who want to participate in the economy are dealing with a very frustrating paradox: both short- and long-term interest rates are extremely low, yet many are having trouble getting approved for loans. The Federal Reserve has gone to extraordinary lengths to stimulate growth, from lowering interest rates to purchasing Treasury and mortgage securities to acquiring commercial real estate loans. But the Fed hasn’t been able to jump start the economy in any significant way.

“Big, American credit-card banks are doing much better than they were three years ago, but serious debt problems in Europe are still simmering, and could explode at any moment,” Said Steve Brown, Executive Editor at FedPrimeRate.com. “An economic implosion in Europe would almost certainly result in contagion to US banks, and if that were to happen, banks could recoil from lending in a huge way, like they did after the 2008 Lehman Brothers collapse.”

Contributing the nation’s economic woes is the looming 2013 fiscal cliff. Many economists are predicting a return to negative growth if Congress isn’t able to produce an alternative to the substantial spending cuts and tax increases that are set to take place in early 2013.

The Fed has gone to extraordinary measures to get the US economy back to sustainable growth. The Fed even became a holder of commercial real estate during the worst of the financial crisis. But, despite rock bottom interest rates, the American economy continues to languish.

On August 1, 2012, the Fed’s interest-rate setting Federal Open Market Committee (FOMC) once again noted that it expects to keep short-term rates at record-low levels for two more years.

Encouraging businesses and consumers to take on debt and spend is a flawed strategy for jumpstarting any economy. It’s a precarious recipe for creating dangerous debt bubbles down the road, the kind that can easily lead us back to a 2008-style financial crisis. But the Fed can has a limited toolbox to work with.

“The Fed needs to execute another round of quantitative easing after the November elections,” added Brown. “QE3 would help to drive long-term rates even lower than they are now, which would be fantastic for the mortgage market. Home prices are finally starting too move in the right direction, but this fragile recovery could very easily falter at any time. I’d like to see 30-year FRM’s drop below the US Prime Rate, which is very possible.”

Quantitative easing is when a central bank buys Treasury and/or other government securities to stimulate growth and increase the supply of money in an economy. It’s typically used when lowering short-term rates to boost growth is ineffective, a situation that many economists refer to as “pushing on a string.”

Brown recommends that consumers prioritize paying down or paying off the most oppressive forms of debt, like credit cards and payday loans. He also notes that since 1972, the cumulative average rate for a 30-year FRM is 8.74%, while conforming, conventional 30-year FRM’s were at 3.55% in July 2012.

About FedPrimeRate.com

Founded in 2004, the FedPrimeRate.com website offers insightful and exceptionally useful financial tips, tools and information about interest rates, mortgages, credit cards, insurance and more.

Taken from: http://www.livetradingnews.com/usa-real-estate-short-and-long-term-interest-rates-are-prime-83519.htm
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