13 ms·

I'm not familiar with a world where interest rates and inflation aren't low. What should I expect?

by matte_black 9y ago

deleted 9y ago
[deleted]
jdblair 9y ago
Loans cost more. The interest rate on my first mortgage (in the 90's) was 7%.
- refurb 9y ago
  Back in the 1970's a 12% interest rate on your mortgage was considered pretty good! It basically reduces buying power for real estate. Using the google mortgage calculator and assuming a $1500 max monthly payment. At a 3.92% (today) rate you can borrow ~$320K At an 8% rate you can borrow ~$200K A 38% decrease in buying power. It's already happening in Canada as the gov't is trying to slow down the real estate market by making buyer qualify at a rate 2% higher than what it is today.
  - smnrchrds 9y ago
    > as the gov't is trying to slow down the real estate market This is not the reason for mortgage stress test, just one of its effects. The main reason for the regulation is to avoid a tsunami of bankruptcies when interest rates eventually increase.
    - encoderer 9y ago
      These are not fixed rate loans?
      - winthrowe 9y ago
        You can't really get a rate fixed over the entire amortization period in Canada, our 'fixed rate' mortgages are a 5 year lockin typically.
      - kylemuir 9y ago
        When those fixed rates end and they have to refix a ton of overleveraged people will force mortgagee sales. In Auckland there's been talk of that for at least 5-6 years. For example, people I personally know only earn $80-90k/yr and yet own a $500k house (absolute entry level livable house in Auckland). They also got in under our old rules which meant they only needed 5% deposit instead of the 20% required now. They're only being propped up by their record low interest rates. If those interest rates went up 2-3% they'd be in serious trouble. EDIT: for more context the average fixed period for any home loan in NZ is roughly 2-3 yrs. The term is a 30 year term typically.
        encoderer 9y ago
        In USA it’s common for loans to be fixed rate for life of loan.
  - Retric 9y ago
    It also made the idea of a starter home more meaningful. Your monthly payments quickly became meaningless especially if you got any kind of a promotion. At 5% inflation if you pay 1000$/month in year 0 it feels like 614$ / month in year 10 and 377$ / month in year 20. At 1-2% inflation the loss of the interest tax deduction over time as you pay more principle and less interest means home lone feels about as expensive in year 0 and year 20.
    - shostack 9y ago
      Right, but isn't the distinction that you are paying principle, which in essence buying equity? It isn't free cash flow, but there's a big difference between putting money towards principle and paying a bank interest.
      - Retric 9y ago
        I am not saying it's reasonable or unreasonable for home interest to be tax free. Just that the difference impacts your disposable income.
  - toasterlovin 9y ago
    > It basically reduces buying power for real estate. But real estate is unlike a lot of other goods in that it's value is significantly driven by what other people are willing to pay, rather than what it intrinsically costs to produce. Thus, as your buying power goes down, so does everybody else's.
trustno1 9y ago
> inflation aren't low Inflation is only low if you trust how the Federal Reserve is calculating it. Personally, I think the weightings they assign to various categories are intentionally incorrect. Anyone who lived through 2008 knows better than to think inflation was sub-2% -- yet many savings accounts have been paying 0.01% interest for over a decade. The fed's monetary policy is taxation without representation.
- dannyw 9y ago
  The Fed doesn’t calculate CPI, but CPI ‘adjustments’ are indeed fundamentally cherry picked to lower the rate. There are a bunch of crazy mechanics like “hedonistic substitution”, min() functions, and adjustments that by definition can only adjust the rate down and not up (eg ‘quality increase’ in basket of goods = adjust CPI down by the ‘quality increase factor’, but quality decrease does not adjust CPI upwards). People use the million prices project to argue CPI is correct, but misses the point that the project uses a regresssion model to automatically multiply their index by an adjustment factor to match CPI - and that adjustment factor has only gotten smaller and smaller (ie their index reports higher inflation growth than CPI) as time went on.
samsonradu 9y ago
Me neither, but I tend to think we'll not find out very soon. The article is heavily biased towards the US economy, meanwhile the EU, Japan still struggle with ~0% yields. Hell, Japan's been doing it since 1992.
adventured 9y ago
It's almost guaranteed we are not leaving a world of low interest rates (vs historical norms of the past 30 or 50 years). Most of the global economy is loaded up on debt: Japan, China, the US, large parts of Europe. These days it's the exception when a country has a modest debt context, whether at the government level, corporate level, or household level. Countries that we normally think of as very well off, such as Denmark, Sweden and the Netherlands are among the most indebted people on earth in terms of household debt to income. They can't afford much higher interest rates at all, it would collapse their housing markets and shatter their household finances. Australia is in the same boat, two years ago nearly 1/2 of all new Australian mortgages were interest only mortgages; over the last 10 years, the average has been about 35% of all new Australian mortgages have been interest only (in a nation where their housing market is 4x the size of the economy; by comparison, the US housing market is 1.5x the size of its economy). As of a year ago, in total around 39% of all outstanding Australian residential loan balances were interest only. [1] For those that recall the US real-estate bubble, that's a terrifying figure; the US interest-only share of the market during the crazy years of the real-estate bubble was single digits (5-8%). Australia is currently taking action to try to counter this, which is rocking their market presently. [2] The solid gains Canada made in their household wealth figures over the last decade? Almost entirely from their real estate bubble, which has produced a housing market that as a % of GDP is 2/3 larger than that of the US (the Canadian housing market is 2.5x the size of their economy, up from about 1.6x in 2007). They also can't afford significantly higher interest rates. New Zealand is similar to Australia, their housing market is 4x the size of their economy. The UK's housing market is 3x the size of their economy, or twice the ratio of the US. These countries are all fragile when it comes to higher interest rates on mortgages. Even the Swiss are in terrible shape, their household debt as a percentage of GDP is 50% higher than the US ratio. In the US, its households are in reasonably good shape on debt; US household debt to income figures are the best they've been in decades, essentially the lowest the US has on modern record. Its corporations have loaded up on debt over the last ten years, and of course the Federal Government has taken on immense debt over the same span of time. The US Government simply can't afford 4-5% interest rates on its soon to be $30 trillion in public debt; which is another way of saying: in the US we are never returning to normal interest rates, not under any circumstances. The Fed will go into perpetual QE mode, as Japan has, to guarantee that. Germany is a particular stand-out among high income nations when it comes to having low government debt, no real estate bubble, and no serious household debt to income ratio problem. [1] https://i.imgur.com/2Z0mzou.png https://i.imgur.com/2Z0mzou.png [2] https://www.bloomberg.com/news/articles/2018-04-15/tougher-lending-standards-put-australia-property-on-shaky-ground https://www.bloomberg.com/news/articles/2018-04-15/tougher-l...
cyberferret 9y ago
I recall a time of nearly 20% interest rates here in Australia a few decades ago. As far as I can remember, it was all just business as normal for most people. It all comes down to just how much debt you own. If I recall, people who were highly leveraged or had negatively geared property were hit the hardest. People with actual savings in the bank were actually happy with their interest returns being so high. Household debt was not as bad back then as it is nowadays, so I don't expect it to go as well if we ever hit those levels again tomorrow.
- anon84598 9y ago
  It's worth noting that most Australian mortgages use variable (i.e., non-fixed) interest rates, so when rates go up, everyone's payment increases. High interest rates in the US are beneficial to mortgage holders because most people use fixed-rate loans which means as inflation increases, your monthly payment decreases in real value.
  - kazinator 9y ago
    No such thing as fixed rate: fixed rate just means "variable, but in 3 or 5 year (or whatever) increments". The interest is a bar graph with bars that are several years wide, instead of a graph with one-month-wide bars. Fixed rates are not free; you pay extra for the fixing. The longer the fixing, the more you pay. It only makes sense to go fixed rate if you're very sure that the interest will climb over the next term. Not only that, that it will climb sufficiently enough to offset the cost of locking into the fixed rate so you still come out ahead. Once that term is up, you're no longer locked in; so you have to re-evaluate everything at the start of the next term. (You don't have to do this upfront, either; variable rate mortgages have the option to switch to fixed for the remainder of the term.) Anyway, people who go for fixed rate mortgages end up paying tens of thousands of dollars extra over the life of a mortgage, unless they are somehow able to game things in periods of rising interest. When I was signing up for a mortgage, the financial institution offered to cover the lawyer's fees for all the paperwork, running into the hundreds of dollars. That offer was quickly rescinded when it became apparent that I'm declining the fixed term mortgage and opting for variable. That's obviously because the fixed term is good for them; that's why they incentivized it. When some aspect of a deal is good for you, it's never incentivized.
mathattack 9y ago
Much higher mortgage payments. Run the math on a mortgage with 4% interest vs 8%.
- toasterlovin 9y ago
  My intuitive sense is that it should destroy the real estate market. Anything that I'm missing in that analysis?
  - matwood 9y ago
    Depends on how fast it rises, and if wages can keep up. Obviously the slower the better. But yeah, the optimal time to buy RE is when rates are high and then refi when they drop.
  - mhewett 9y ago
    History. In the late 1970s you could get 17% return on your savings account and mortgage rates were well above 10%. People still bought houses.
    - toasterlovin 9y ago
      I'm not talking about a steady state. I'm talking about the transition from a low interest rate regime to a high interest rate regime.
    - kazinator 9y ago
      If someone barely qualified for a mortgage in a 2% environment, and now suddenly is faced with 10%, that's a bit of a shakedown.
      - djrogers 9y ago
        Nobody, anywhere, ever, in the history of this topic, has suggested the fed would raise rates such that rates would 'suddenly' jump to 10%. That's the straw-iest of straw-men.
  - 9y ago
baybal2 9y ago
We live in weird time. If rates were to hit 80ies era level, 1 out of every 3 countries will default. For this reason they wouldn't. I thank myself for making a decision in my teenage years to keep half of my savings in metals. It was unbelievably wise for a 15 years old me.
- matwood 9y ago
  > If rates were to hit 80ies era level, 1 out of every 3 country will default. Huh? Are you saying 1/3 of mortgages are variable rate?
  - baybal2 9y ago
    I'm talking about government debt, not private. Though, a chain reaction , if it is to happen, will reach pretty much all and everything including private mortgages. If you have a fixed rate one, you may well read the fine script better. Quite a few banks put a no reservations callback clause in the loan agreement. If an individual gets his mortgage called back, for an average Joe the only way to get through that would be to get another loan, and at a higher rate.
dredmorbius 9y ago
Debt becomes more expensive. If interest rates go very high, that can be crippling. That's probably unlikely. There will likely be less money pursuing assets (real estate may be affected), and business ventures (start-ups). Given trends of the past decade, both are likely healthy changes, though SV types may be impacted.
lrem 9y ago
Imagine this was done quickly: 1: everyone who's got a borderline repayable mortgage to get anything in the overheated market and hasn't increased earnings by some 20-30% since then goes bust. This creates a wave of increased supply. 2: everyone's willing to buy gets way less loan amount for same repayments. This severely reduces demand at current prices. 3: 1+2 force prices down, meaning some people end up owning banks more than their house is worth. In the US the banks are in trouble, as people start walking away from their mortgages. In the EU such people are stuck with negative equity. Such a scenario is outright disastrous, so no sane government will try it. So, the only way out of low rates is to increase this gradually enough to not create visible waves. Which means all 3 happen, but at a magnitude where most people do not notice.
- cortesoft 9y ago
  Wait, isn't your number 1 the exact opposite, unless you got a variable rate mortgage? If you got a fixed rate mortgage, inflation is your friend, since inflation will decrease your debt.
  - mattmanser 9y ago
    In the UK mortgages aren't fixed for the lifetime of the mortgage. Not sure about the rest of the EU. Ours are like 3/4/5 year fixed rate then revert to a bad variable rate, at which point you get a new mortgage.
    - Xylakant 9y ago
      In Germany, 10 year fixed mortgages are common, though shorter terms get you lower interest.
      - eCa 9y ago
        In Sweden, lots of mortgages are adjusted every three months, and I would assume (though not certain) that a majority of mortgages are fixed on no more than two-three years.
skookumchuck 9y ago
A lot of misinformation and propaganda about the cause of it. See the 1970's in America. (Usually, greedy businessmen, greedy unions, and speculators are blamed.)
cs702 9y ago
For starters, the present value of all long-lived assets will come down -- stocks, bonds, real estate, you name it. As Warren Buffett explains: "[Interest rates] act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That's because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Conversely, if government interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate. Consequently, every time the risk-free rate moves by one basis point--by 0.01%--the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. Nonetheless, the effect--like the invisible pull of gravity--is constantly there." Source: "Mr. Buffett on the Stock Market," November 22, 1999 -- http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm http://archive.fortune.com/magazines/fortune/fortune_archive...
- deleted 9y ago
  [deleted]
- HillaryBriss 9y ago
  > the present value of all long-lived assets will come down we can consider 'value' but also recognize that actual market price is another thing. real estate prices can continue to go up and at times actually have gone up in environments where interest rates were rising. as Buffet points out, there are additional important variables.
- adrianratnapala 9y ago
  While this make sense, I must put my skeptical-of-all-economics hat on when I see this: > People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In [other cases], other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. In the case of bonds, it is just a mathematical identity, since the the interest rate can be nothing other than a relation between the face value and current price. In all the non-tautological cases, Buffet admits that the effect is "obscured". Which is to say that it is just another reasonable sounding humanities-theory that is difficult to check empirically.
Lerc 9y ago
It always amused me that the thing that dated Die Hard so much was this line “When they touch down, we'll blow up the roof, they'll spend a month sifting through rubble, and by the time they work out what went wrong, we'll be sitting on a beach, earning twenty percent. Of all of the crazy things in the film, Twenty percent seems the most unimaginable to people who have only experienced recent times.
Taniwha 9y ago
people who have leveraged themselves to the hilt to buy expensive real estate and are just managing to pay the mortgage will be screwed, when their monthly payment doubles or triples they'll have to unload, at the same time as everyone else in the same position depressing the market - there will be crying, the gnashing of teeth, and bankruptcies among those who don't sell quickly enough. Remember your parents bought their house and paid these higher interest rates, house prices were lower than now partly because people could only afford so much of a mortgage. If you live in the US, where you can lock in a 30yr rate, and you haven't you need to do it now, if you live in the rest of the world where mostly you can't you're screwed
SamBam 9y ago
All of a sudden the idea of having a "savings account" along side your "checking account," and buying "CDs" will make a whole lot more sense. The average savings account interests are currently around 0.02% APY. Those kinds of numbers make savings accounts meaningless--people just use them as a second account to help their budgeting. CDs are not much better, at 2.5% for a 5-year. Compare that to 8% APY for savings accounts and 12% APY 5-year CDs in the 1980s, and you'll understand why they exist at all. People actually had a reason to chose interest-bearing savings accounts.
- ataturk 9y ago
  Sometime in the early '90s I remember my GF's dad boasting about a 5-year CD he got with a 15% rate. Yeah. It was a weird time and I don't feel like it was a very prosperous time. California had a major housing bust in the early '90s. The Clinton years kinda sucked, honestly.

I'm not familiar with a world where interest rates and inflation aren't low. What should I expect?

deleted 9y ago

[deleted]

jdblair 9y ago

Loans cost more. The interest rate on my first mortgage (in the 90's) was 7%.

refurb 9y ago
Back in the 1970's a 12% interest rate on your mortgage was considered pretty good! It basically reduces buying power for real estate. Using the google mortgage calculator and assuming a $1500 max monthly payment. At a 3.92% (today) rate you can borrow ~$320K At an 8% rate you can borrow ~$200K A 38% decrease in buying power. It's already happening in Canada as the gov't is trying to slow down the real estate market by making buyer qualify at a rate 2% higher than what it is today.
- smnrchrds 9y ago
  > as the gov't is trying to slow down the real estate market This is not the reason for mortgage stress test, just one of its effects. The main reason for the regulation is to avoid a tsunami of bankruptcies when interest rates eventually increase.
  - encoderer 9y ago
    These are not fixed rate loans?
    - winthrowe 9y ago
      You can't really get a rate fixed over the entire amortization period in Canada, our 'fixed rate' mortgages are a 5 year lockin typically.
    - kylemuir 9y ago
      When those fixed rates end and they have to refix a ton of overleveraged people will force mortgagee sales. In Auckland there's been talk of that for at least 5-6 years. For example, people I personally know only earn $80-90k/yr and yet own a $500k house (absolute entry level livable house in Auckland). They also got in under our old rules which meant they only needed 5% deposit instead of the 20% required now. They're only being propped up by their record low interest rates. If those interest rates went up 2-3% they'd be in serious trouble. EDIT: for more context the average fixed period for any home loan in NZ is roughly 2-3 yrs. The term is a 30 year term typically.
      - encoderer 9y ago
        In USA it’s common for loans to be fixed rate for life of loan.
- Retric 9y ago
  It also made the idea of a starter home more meaningful. Your monthly payments quickly became meaningless especially if you got any kind of a promotion. At 5% inflation if you pay 1000$/month in year 0 it feels like 614$ / month in year 10 and 377$ / month in year 20. At 1-2% inflation the loss of the interest tax deduction over time as you pay more principle and less interest means home lone feels about as expensive in year 0 and year 20.
  - shostack 9y ago
    Right, but isn't the distinction that you are paying principle, which in essence buying equity? It isn't free cash flow, but there's a big difference between putting money towards principle and paying a bank interest.
    - Retric 9y ago
      I am not saying it's reasonable or unreasonable for home interest to be tax free. Just that the difference impacts your disposable income.
- toasterlovin 9y ago
  > It basically reduces buying power for real estate. But real estate is unlike a lot of other goods in that it's value is significantly driven by what other people are willing to pay, rather than what it intrinsically costs to produce. Thus, as your buying power goes down, so does everybody else's.

trustno1 9y ago

> inflation aren't low Inflation is only low if you trust how the Federal Reserve is calculating it. Personally, I think the weightings they assign to various categories are intentionally incorrect. Anyone who lived through 2008 knows better than to think inflation was sub-2% -- yet many savings accounts have been paying 0.01% interest for over a decade. The fed's monetary policy is taxation without representation.

dannyw 9y ago
The Fed doesn’t calculate CPI, but CPI ‘adjustments’ are indeed fundamentally cherry picked to lower the rate. There are a bunch of crazy mechanics like “hedonistic substitution”, min() functions, and adjustments that by definition can only adjust the rate down and not up (eg ‘quality increase’ in basket of goods = adjust CPI down by the ‘quality increase factor’, but quality decrease does not adjust CPI upwards). People use the million prices project to argue CPI is correct, but misses the point that the project uses a regresssion model to automatically multiply their index by an adjustment factor to match CPI - and that adjustment factor has only gotten smaller and smaller (ie their index reports higher inflation growth than CPI) as time went on.

samsonradu 9y ago

Me neither, but I tend to think we'll not find out very soon. The article is heavily biased towards the US economy, meanwhile the EU, Japan still struggle with ~0% yields. Hell, Japan's been doing it since 1992.

adventured 9y ago

It's almost guaranteed we are not leaving a world of low interest rates (vs historical norms of the past 30 or 50 years). Most of the global economy is loaded up on debt: Japan, China, the US, large parts of Europe. These days it's the exception when a country has a modest debt context, whether at the government level, corporate level, or household level. Countries that we normally think of as very well off, such as Denmark, Sweden and the Netherlands are among the most indebted people on earth in terms of household debt to income. They can't afford much higher interest rates at all, it would collapse their housing markets and shatter their household finances. Australia is in the same boat, two years ago nearly 1/2 of all new Australian mortgages were interest only mortgages; over the last 10 years, the average has been about 35% of all new Australian mortgages have been interest only (in a nation where their housing market is 4x the size of the economy; by comparison, the US housing market is 1.5x the size of its economy). As of a year ago, in total around 39% of all outstanding Australian residential loan balances were interest only. [1] For those that recall the US real-estate bubble, that's a terrifying figure; the US interest-only share of the market during the crazy years of the real-estate bubble was single digits (5-8%). Australia is currently taking action to try to counter this, which is rocking their market presently. [2] The solid gains Canada made in their household wealth figures over the last decade? Almost entirely from their real estate bubble, which has produced a housing market that as a % of GDP is 2/3 larger than that of the US (the Canadian housing market is 2.5x the size of their economy, up from about 1.6x in 2007). They also can't afford significantly higher interest rates. New Zealand is similar to Australia, their housing market is 4x the size of their economy. The UK's housing market is 3x the size of their economy, or twice the ratio of the US. These countries are all fragile when it comes to higher interest rates on mortgages. Even the Swiss are in terrible shape, their household debt as a percentage of GDP is 50% higher than the US ratio. In the US, its households are in reasonably good shape on debt; US household debt to income figures are the best they've been in decades, essentially the lowest the US has on modern record. Its corporations have loaded up on debt over the last ten years, and of course the Federal Government has taken on immense debt over the same span of time. The US Government simply can't afford 4-5% interest rates on its soon to be $30 trillion in public debt; which is another way of saying: in the US we are never returning to normal interest rates, not under any circumstances. The Fed will go into perpetual QE mode, as Japan has, to guarantee that. Germany is a particular stand-out among high income nations when it comes to having low government debt, no real estate bubble, and no serious household debt to income ratio problem. [1] https://i.imgur.com/2Z0mzou.png https://i.imgur.com/2Z0mzou.png [2] https://www.bloomberg.com/news/articles/2018-04-15/tougher-lending-standards-put-australia-property-on-shaky-ground https://www.bloomberg.com/news/articles/2018-04-15/tougher-l...

cyberferret 9y ago

I recall a time of nearly 20% interest rates here in Australia a few decades ago. As far as I can remember, it was all just business as normal for most people. It all comes down to just how much debt you own. If I recall, people who were highly leveraged or had negatively geared property were hit the hardest. People with actual savings in the bank were actually happy with their interest returns being so high. Household debt was not as bad back then as it is nowadays, so I don't expect it to go as well if we ever hit those levels again tomorrow.

anon84598 9y ago
It's worth noting that most Australian mortgages use variable (i.e., non-fixed) interest rates, so when rates go up, everyone's payment increases. High interest rates in the US are beneficial to mortgage holders because most people use fixed-rate loans which means as inflation increases, your monthly payment decreases in real value.
- kazinator 9y ago
  No such thing as fixed rate: fixed rate just means "variable, but in 3 or 5 year (or whatever) increments". The interest is a bar graph with bars that are several years wide, instead of a graph with one-month-wide bars. Fixed rates are not free; you pay extra for the fixing. The longer the fixing, the more you pay. It only makes sense to go fixed rate if you're very sure that the interest will climb over the next term. Not only that, that it will climb sufficiently enough to offset the cost of locking into the fixed rate so you still come out ahead. Once that term is up, you're no longer locked in; so you have to re-evaluate everything at the start of the next term. (You don't have to do this upfront, either; variable rate mortgages have the option to switch to fixed for the remainder of the term.) Anyway, people who go for fixed rate mortgages end up paying tens of thousands of dollars extra over the life of a mortgage, unless they are somehow able to game things in periods of rising interest. When I was signing up for a mortgage, the financial institution offered to cover the lawyer's fees for all the paperwork, running into the hundreds of dollars. That offer was quickly rescinded when it became apparent that I'm declining the fixed term mortgage and opting for variable. That's obviously because the fixed term is good for them; that's why they incentivized it. When some aspect of a deal is good for you, it's never incentivized.

mathattack 9y ago

Much higher mortgage payments. Run the math on a mortgage with 4% interest vs 8%.

toasterlovin 9y ago
My intuitive sense is that it should destroy the real estate market. Anything that I'm missing in that analysis?
- matwood 9y ago
  Depends on how fast it rises, and if wages can keep up. Obviously the slower the better. But yeah, the optimal time to buy RE is when rates are high and then refi when they drop.
- mhewett 9y ago
  History. In the late 1970s you could get 17% return on your savings account and mortgage rates were well above 10%. People still bought houses.
  - toasterlovin 9y ago
    I'm not talking about a steady state. I'm talking about the transition from a low interest rate regime to a high interest rate regime.
  - kazinator 9y ago
    If someone barely qualified for a mortgage in a 2% environment, and now suddenly is faced with 10%, that's a bit of a shakedown.
    - djrogers 9y ago
      Nobody, anywhere, ever, in the history of this topic, has suggested the fed would raise rates such that rates would 'suddenly' jump to 10%. That's the straw-iest of straw-men.
- 9y ago

baybal2 9y ago

We live in weird time. If rates were to hit 80ies era level, 1 out of every 3 countries will default. For this reason they wouldn't. I thank myself for making a decision in my teenage years to keep half of my savings in metals. It was unbelievably wise for a 15 years old me.

matwood 9y ago
> If rates were to hit 80ies era level, 1 out of every 3 country will default. Huh? Are you saying 1/3 of mortgages are variable rate?
- baybal2 9y ago
  I'm talking about government debt, not private. Though, a chain reaction , if it is to happen, will reach pretty much all and everything including private mortgages. If you have a fixed rate one, you may well read the fine script better. Quite a few banks put a no reservations callback clause in the loan agreement. If an individual gets his mortgage called back, for an average Joe the only way to get through that would be to get another loan, and at a higher rate.

dredmorbius 9y ago

Debt becomes more expensive. If interest rates go very high, that can be crippling. That's probably unlikely. There will likely be less money pursuing assets (real estate may be affected), and business ventures (start-ups). Given trends of the past decade, both are likely healthy changes, though SV types may be impacted.

lrem 9y ago

Imagine this was done quickly: 1: everyone who's got a borderline repayable mortgage to get anything in the overheated market and hasn't increased earnings by some 20-30% since then goes bust. This creates a wave of increased supply. 2: everyone's willing to buy gets way less loan amount for same repayments. This severely reduces demand at current prices. 3: 1+2 force prices down, meaning some people end up owning banks more than their house is worth. In the US the banks are in trouble, as people start walking away from their mortgages. In the EU such people are stuck with negative equity. Such a scenario is outright disastrous, so no sane government will try it. So, the only way out of low rates is to increase this gradually enough to not create visible waves. Which means all 3 happen, but at a magnitude where most people do not notice.

cortesoft 9y ago
Wait, isn't your number 1 the exact opposite, unless you got a variable rate mortgage? If you got a fixed rate mortgage, inflation is your friend, since inflation will decrease your debt.
- mattmanser 9y ago
  In the UK mortgages aren't fixed for the lifetime of the mortgage. Not sure about the rest of the EU. Ours are like 3/4/5 year fixed rate then revert to a bad variable rate, at which point you get a new mortgage.
  - Xylakant 9y ago
    In Germany, 10 year fixed mortgages are common, though shorter terms get you lower interest.
    - eCa 9y ago
      In Sweden, lots of mortgages are adjusted every three months, and I would assume (though not certain) that a majority of mortgages are fixed on no more than two-three years.

skookumchuck 9y ago

A lot of misinformation and propaganda about the cause of it. See the 1970's in America. (Usually, greedy businessmen, greedy unions, and speculators are blamed.)

cs702 9y ago

For starters, the present value of all long-lived assets will come down -- stocks, bonds, real estate, you name it. As Warren Buffett explains: "[Interest rates] act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That's because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Conversely, if government interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate. Consequently, every time the risk-free rate moves by one basis point--by 0.01%--the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. Nonetheless, the effect--like the invisible pull of gravity--is constantly there." Source: "Mr. Buffett on the Stock Market," November 22, 1999 -- http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm http://archive.fortune.com/magazines/fortune/fortune_archive...

deleted 9y ago
[deleted]
HillaryBriss 9y ago
> the present value of all long-lived assets will come down we can consider 'value' but also recognize that actual market price is another thing. real estate prices can continue to go up and at times actually have gone up in environments where interest rates were rising. as Buffet points out, there are additional important variables.
adrianratnapala 9y ago
While this make sense, I must put my skeptical-of-all-economics hat on when I see this: > People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In [other cases], other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. In the case of bonds, it is just a mathematical identity, since the the interest rate can be nothing other than a relation between the face value and current price. In all the non-tautological cases, Buffet admits that the effect is "obscured". Which is to say that it is just another reasonable sounding humanities-theory that is difficult to check empirically.

Lerc 9y ago

It always amused me that the thing that dated Die Hard so much was this line “When they touch down, we'll blow up the roof, they'll spend a month sifting through rubble, and by the time they work out what went wrong, we'll be sitting on a beach, earning twenty percent. Of all of the crazy things in the film, Twenty percent seems the most unimaginable to people who have only experienced recent times.

Taniwha 9y ago

people who have leveraged themselves to the hilt to buy expensive real estate and are just managing to pay the mortgage will be screwed, when their monthly payment doubles or triples they'll have to unload, at the same time as everyone else in the same position depressing the market - there will be crying, the gnashing of teeth, and bankruptcies among those who don't sell quickly enough. Remember your parents bought their house and paid these higher interest rates, house prices were lower than now partly because people could only afford so much of a mortgage. If you live in the US, where you can lock in a 30yr rate, and you haven't you need to do it now, if you live in the rest of the world where mostly you can't you're screwed

SamBam 9y ago

All of a sudden the idea of having a "savings account" along side your "checking account," and buying "CDs" will make a whole lot more sense. The average savings account interests are currently around 0.02% APY. Those kinds of numbers make savings accounts meaningless--people just use them as a second account to help their budgeting. CDs are not much better, at 2.5% for a 5-year. Compare that to 8% APY for savings accounts and 12% APY 5-year CDs in the 1980s, and you'll understand why they exist at all. People actually had a reason to chose interest-bearing savings accounts.

ataturk 9y ago
Sometime in the early '90s I remember my GF's dad boasting about a 5-year CD he got with a 15% rate. Yeah. It was a weird time and I don't feel like it was a very prosperous time. California had a major housing bust in the early '90s. The Clinton years kinda sucked, honestly.