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Will the TDP Hold Interest Rates Down for the Foreseeable Future

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Big move over the past 7 days

Interest rates moved higher last week taking away the gains we have seen over the past seven weeks. The average overnight rate according to figures published by BankRate on a 30 year conforming loan jumped 8 points since last week and sit at 4.39% as of yesterday.

All signs in historical figures would point to higher interest rates ahead which would be a real bummer for the real estate market. There is no doubt that the historically low interest rates we have enjoyed for the last 5 years have been a huge boost to the market recovery we have experienced. And there is no question that the Fed's purchases of various debt instruments are the reason rates have been this low. Those purchases have been in the trillions of dollars and now the Fed is the largest owner of US debt. Many believe that China is our biggest banker but the Fed now holds about a trillion dollars more of our Treasuries than China does.

Now that the Fed is slashing an additional 10 billion dollars of debt purchases each month one would think rates would move higher. After all wasn't it the idea that these purchases are to artificially keep interest rates lower. But since the Fed started slowing their debt purchases interest rates have dropped from 4.56% to 4.39%. Funny math indeed.

So signs point to higher rates and no doubt they will probably move higher from where we stand today. But how high can they go? All one has to understand is that if rates move say 3% into what would be a more reasonable interest rate on a historical basis we cannot pay the interest on our debt. I call this the TDP which is an acronym for trillion dollar problem. You see if rates move just 3% annual interest payments on our 17 trillion dollar debt increase by over 500 billion dollars a year. We can't come close to balancing the budget today let alone handle the burden of an additional sum like that. Not when only half of America pays taxes today.

Where we go from here is anybodies guess but higher interest rates do not seem to be possible without a huge economic explosion. If you need a complimentary consultation for any of your real estate needs throughout Palm Beach or Martin County please give us a ring. As we tell all of our clients you can pay more and receive less but that just would not make any sense. Always interesting, always fun.

Fins up.......

Tom Priester
Principal Broker

Paradise Sharks Real Estate
Direct Line 561 308-0175
tom@tompriester.com

www.paradisesharks.com

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