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Interest Rates: What’s in Store for 2015?

Interest rates are an indicator of a country’s economic health. And as we head into a new year, financial experts worry that rising rates could stall growth and choke the recovery from the massive housing crash of a few years ago. But is a significant rise in rates likely in 2015? Some surprising factors may play a role in keeping them low.

The state of US interest rates has been the subject of much concern -and speculation – since the housing market crashed in 2008. Driven by reckless lending to unqualified buyers, the housing market nationwide went belly up, with wave upon wave of defaults and foreclosures. Low interest rates were a factor in the crash.

As the economy struggled to recover, the Federal Reserve put a series pf stimulus plans in place in an attempt to boost borrowing and get things back on track. Those plans, collectively called “quantitative easing,” called for the Fed to buy up large amounts of bonds and securities backed by mortgages from banks, which would in turn make loans available at lower rates to encourage borrowing.

At its height, the latest round of the stimulus, termed Quantitative Easing version 3, or QE3 for short, involved buying up around $85 billion in bonds and securities every month. And interest rates did drop, falling in some cases to their lowest levels ever. The housing market began to recover, with more borrowing and home sales, which in turn fueled a bump in employment and other sectors of the economy.

But that too worried market watchers, who feared that once the Fed’s artificial stimulus was withdrawn, rates would rebound at higher levels that would make borrowing tougher for many Americans. As a recent article from Business Insider reports, predictions about rising rates float up every year – but they don’t prove true.

Through much of 2014, the financial world watched the Fed, as it went through a change in leadership and hinted repeatedly that it would begin to draw down the stimulus when employment, housing and other factors were on the upswing. Finally, toward the end of the year, the much celebrated “taper-down” of QE3 began, as the Fed shaved off $10 billion in increments from its monthly bond buyup.

While the withdrawal of the stimulus meant that interest rates would be affected more by market forces than by artificial manipulation, other factors, both domestic and internati0onal, are also likely to contribute to keeping rates comparatively low.

As Business Insider reports, economic crises in other countries may help keep US interest rates low. Russia continues to struggle with the decline of the ruble and the fallout from conflict in Ukraine. Mistrust of the ruble and the overall financial stability of the country has caused Russians to turn to foreign currencies, chief among them the dollar, to safeguard their assets and savings accounts. Similar scenarios are playing out in other parts o f the world, too. Greece continues to struggle with debt, and so does Argentina. As uncertainty persists, so does the demand for US dollars.

Fluctuations in energy prices at hone and abroad can also contribute to the rise and fall of interest rates, and for now those prices are low. Deflation could also lead to lower rates. And to a certain extent, individual financial institutions can set their own rates in response to the needs of their markets.

Lower interest rates generally mean good news for the economy: more buying, more growth. That’s especially true for the housing market, where lower interest rates make home buying more accessible. And that’s also good news for income property investors, who can take advantage of those low rates to start building a portfolio or expand an existing one.

As Jason Hartman says, real estate is the most stable of assets. And while dire predictions continue to roll out about the future of interest rates and the market as a whole, that’s still true – and wise investors will still be able to use those assets to build wealth in 2015 and beyond. (Featured image:Flickr/cooperweb)

Source:

Oyedele, Akin. “5 Reasons Why Interst Rtes Won’t Surge in 2015.” Business Insider. businessinsider.com. 30 Dec 2014

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The Solomon Success Team

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