What does another rate cut mean to investors? It means that the Fed is making a serious attempt to curb the struggling real estate market. By lowering the fed funds target rate to 3.0%, the Fed has established a sincere effort to remedy their overzealous increases of the recent years. The theory behind raising rates 17 consecutive times, was to hedge against inflation. Inflation is extremely difficult to gage, and in all honesty, I have a hard time depending on the government to accurately gage inflation. In my opinion energy costs and gasoline are the major source of inflation in the country. As we continue to see interest rates cut, this will ultimately help the US economy and will ease some of the “inflation” that the average Joe feels.
I studied economics at the University of Illinois. The theory or idea that increasing interest rates curbs inflation may be valid, but I have another perspective. As rates go up, as they did from 2005 to 2006, this hurts the average American’s pocket book. Think about it. Credit card payments go up, home equity loan payments go up, and ultimately this cannibalizes the paychecks and pocket books of the American people. I understand the theory, I really do. My argument here is that we (and the Federal Reserve Bank) need to examine rates and inflation in a different way. Inflation is defined as the increase in the price of some set of goods and services in a given economy over a period of time. It is measured as the percentage rate of change of a price index.[1]
In my opinion, the price of milk, cars, food, etc. has not increased or “inflated” beyond a reasonable scope. The price of money however was “inflated” drastically from 2005 - 2006 and was kept artificially high in 2007. By the 7th time rates were increased, I felt as though the Governmet/Fed was egregiously overreacting. I predicted that this was a foolish move that would ultimately hurt the US economy. Many made the same prediction. Many people, as I do, feel that the Fed typically overreacts. It’s just my opinion, but the fed funds rate cuts to 1%(post 9-11) was aggressive. With all the uncertainty post 9-11, I did feel that it was deemed as necessary and prudent. The increases in fed funds rate (and ultimately the prime rate) from 2005 - 2006 was excessive, to say the least. Economic growth has slowed, the “R” word is everywhere..and here we are cutting rates again.
So what does all of this mean to us as investors. This means that the softening economy has forced the Fed to lower rates, which will cost the average Joe and the average investor less to own their home. Rates go down, prices tend to go up. We’ll see if this happens. It’s my opinion that 2008 will be a year full of incredible deals and incredible cash flow opportunities. I’d suggest fixing your rates with Prime for the remainder of the year, for short term real estate transactions. For your homes and your long term holds, I’d recommend locking in longer term products. I have a 30 yr. interest only loan on my home. Great product! The majority of my investment real estate is fixed at 7% until early 2009. If you are investing in our program today, First Choice Bank, will fund your purchases at 90% with a prime (Currently 6%) floating product.
I have said this over and over again, “NOW IS THE TIME TO BUY”. Our average foreclosures is priced at $100,000. At 6% interest only, your payment will be $500/mo. Add in your RE taxes and Insurance, and you’ll likely be around $750/mo. Our average rents are $1,100.
With just 10 purchases, you could be cash flowing $3,500/mo. This will likely take care of your personal mortgage and maybe even your car payments. But Josh, What if Prime jumps back up? Well that’s a great question. We don’t know when rates will go up, but if you were to fix rates now you may pay a slight premium. That being said, your cash flow situation will likely remain tremendous, as the mortgage crunch has forced first time home buyers to remain renters. Take advantage now, the opportunities are abundant.
