Interest Rate Remedy – ‘with Side Effects’ (mortgage, home)

[rsmirnoff]

The drop in housing prices extends to the fourth month. After a five-month run-up in home prices starting last spring, prices have now fallen for four consecutive months – according to the S&P/Case-Shiller Home Price Index of 20 cities, a gauge of market values. In January, prices were down 0.4%, compared with December and have fallen 0.7% from a year earlier.

The government, in order to stabilize the decaying housing market, spent more than a trillion dollars buying assets and investing in mortgages securities. Whereas, the near-zero interest rate was also expected to push the housing market upwards. However, both gave out unsatisfactory results. Moreover, recent news of the government winding up its buying activities will create an adverse effect on the industry. However, there are no updates concerning a rise in interest rates.

Lower interest rates predict good progress for the economy as a whole, especially for borrowers who always hope for ‘inexpensive’ money. On the other hand, these low rates are terrible for savers, especially for retirees who want to convert their lifetime savings into lifetime income. It takes a surprisingly large amount of money to generate even a modest amount of recurring income.

People planning their retirement era are unwilling to invest in such annuities, so what do they do then? They make pensions. It gives them a fixed benefit regardless of changing interest rates, making it more valuable than the annuities.

The other side of the picture – no doubt pensions have a fixed yield, but the changing interest rate stimulates the inflation level, which in turn influences purchasing power and an individual’s average income. Low interest rates means more investments which in turn means more production and consequent demand for production. An increase of 0.79% (January 2010 – 2.63% and November 2009 – 1.84%) in inflation is clearly evident of this fact.

The conclusion – lower interest rates favor borrowers and the housing market as a whole. On the contrary, savings based earners are not getting much out of their investments. What do you suggest, what should such individuals do at this stage? How can the government stabilize the housing market along with increasing interest rates? Is there any other tool, apart from buying assets and mortgage securities?

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