Why The Pundits Could be Wrong About Interest Rates

Today, why should companies increase capital spending and investment while demand is so low and unemployment figures are entrenched in double digits? A better question is: where is the money going to come from for growth and expansion since banks have tightened lending requirements considerably over the last two years? Certainly, the last thing we can afford today are higher interest rates; our housing markets would fall off another steep cliff and it won’t help people get back to work either. A 200 basis point or more increase in loan rates would be devastating for many Angelinos and our nation.

Five years ago in Los Angeles a family with lousy credit and virtually no savings could obtain a mortgage loan for $500,000-$600,000. Income, in many cases wasn’t even an issue for Angelinos. Banks approved and booked “stated-income” or “easy-qualifier” loans like clockwork. But now with the bubble bursting and the mortgage meltdown the rules of the game have changed big-time. Now you need to prove your income to lenders to get a loan and there are more stringent down payment requirements. It’s the way it should’ve always been. Today, many homebuyers from five or six years ago can’t refinance or raise a nickel because they’ve got no home equity left or their incomes never supported the $500,000 loan in the first place. Another problem is the new family seeking to buy a home from a previous five-year owner can’t get financing because their household incomes aren’t justifiable under the new rules either. Now compound that issue with the stock market’s collapse and many potential buyers simply don’t have sufficient funds for a down payment. Their stock portfolios aren’t what they used to be.  And, so today we have millions of “zombies” walking around who can no longer can qualify for loans that could’ve five or six years ago. A large portion of formerly“qualified” applicants for loans have simply been diced-away. Sure the zombies’ demand for money exists but most can’t obtain it on the new playing field. Because of this scenario, and that we’re facing a 26-year high in unemployment – I just don’t see how interest rates can rise soon.

Our country, our state and city have got enough problems to sort through today. I see too many obstacles for higher rates to kick-in soon. But if I’m wrong, and the pundits are right, and interest rates do skyrocket – you can expect another tidal wave of despair in banking and the housing and commercial real estate markets. And I think very few of us want to see that happen again