They Go Down Forever!

Rates appear to be going down forever. There is no end to how low they can go, is there? Of course there is. And I find consumers have gotten used to not only low rates, but the fact that they will keep dropping. So they procrastinate and put off refinancing because rates will be lower tomorrow. But they may not. Rates can only go so low. We are at the lowest point for rates in our country. But the weak economy not only produces low rates, it produces doubt and fear.

What can push rates up?

There will also be a point where debt issuers will wonder if they’ll be repaid. And they will slow down on debt issuance, which will push rates up. Consumers act as if there is an endless stream of people and institutions who will lend them money, there is not. And there is also the fact that rates are near zero effectively, when you inflation adjust them. When there is not much return to a debt issuer in issuing debt, rates cannot go lower. We are at that point, or very near it.

A refinance discussion

Below is an email I sent a client who has a 6% rate currently. But he wants to wait to refinance because he is sure rates are going lower. Why he wants to be a market timer when he has a 6% rate I have no idea.

Here is my reply:

“OK, let me know what you decide. I personally think rates are going to pop up this year or next. I know a lot of people in the news and media think rates will stay down a long time. But that is an incredibly foolish assumption. I am not saying there is not a shot at lower rates, anything can happen. But that works two ways, both up and down. No one can obviously guarantee rates will stay where they are or go lower. So why gamble, is my opinion. We just set new historical records, and rates have never been lower….ever. How people think they’ll go lower, or stay flat, I have no idea. What exactly do the pundits base that on? People want a new world record, right after we just set one? Rates are incredibly dynamic. With all that is going on in the world, there is plenty to push them up.

Remember that when rates pop up, they move fast.

There is no reaction time. A lot of people say, “If I see them moving up I’ll react”. But that never happens. Let’s say rates go from 3.50% to 3.75%, for example. People will speculate, “It’s just a blip and they’ll come back down, so I’ll wait”. Then they’ll hit 4% and people will say, “Well I can’t refi now. I want the bottom of the market at 3.50%, we were there just a few weeks ago. It will come back. I will wait.” Then they’ll keep climbing and it will be over. So in my opinion, gambling for a few more fractions when we could lose the whole thing is never a good plan.

Linear thinking

Human beings are incredibly linear thinkers and we never change. When the DOW Jones hit 14,000, we saw books titled “Dow, 30,000 by 2008: Why It’s Different This Time.” Sure it is. And when the DOW was tanking and was headed towards 6,000; everyone thought the world was coming to an end. It was not. It is the same thing with interest rates. We have seen rates come down for years. And we just set the record for the lowest rates….ever. But people expect more. The hubris of humanity is stunning. When you adjust for inflation rates are almost free as it is.

But we’ll wait and see. Just be mentally prepared for all outcomes.

When you are at 6% and can save an enormous amount of money by refinancing, you do it. You do not wait, time the market, or think about it. Just do it. And remember, there are two parties to all financial transactions. There are not only debt borrowers, there are debt issuers. Someone has to issue the stuff in order for someone to borrow it. Watch debt issuers closely, they are going to start to get nervous.