The state of the economy determines the future of interest rates -- and with the economy looking fragile, two local experts said they don’t expect interest rates to increase significantly anytime soon.
“Given that fragility, I think any upward pressure on interest rates will be mild because there’s too much uncertainty,” said Mark Riedy, executive director of the Burnham-Moores Center for Real Estate at the University of San Diego.
Riedy said he doesn’t expect the Federal Reserve to change its bond buying program and although it appears that the Federal Reserve is leading interest rate changes, it’s “really just anticipating and accommodating them,” Riedy said.
It anticipates changes in employment and income and sets its terms of buying securities to facilitate employment growth -- not inflation, he added.
“I don’t see a strong global recovery. I think the U.S. recovery is fragile and the Federal Reserve will bide its time and not cut way back on purchases,” Riedy said.
Mark Goldman, professor at San Diego State University, a senior loan officer with C2 Financial Corporation and a principal of The London Group, said he also expects quantitative easing to continue.
“For the next six months, I think quantitative easing will continue and rates will remain in the range they’ve been in for the past six months,” Goldman said.
He added that the economy is still vulnerable, especially after Congress “spooked the markets” with the shutdown.
There continues to be doubt cast “on the veracity of our recovery, and so I think there’s going to be less willingness for businesses to invest capital in the future for growth in the economy,” Goldman said. “I see us limping along here. In the near term -- the next three to five years -- we’ll see more of the same. Interest rates and the economy are related. When the economy is going gangbusters, we see inflation and higher interest rates.”
If there is a lot of money available, there’s a huge supply and limited demand, which causes prices to go down. Demand would be driven up by a vigorous economy, Goldman said, and he doesn’t expect the economy to get that invigorated in the next three to five years.
“As long as economic growth remains somewhat slow, I think we’ll see interest rates remain low,” Goldman said.
Goldman said he has seen loan production drop off 30 to 40 percent in the last half of this year. Wells Fargo (NYSE: WFC) announced recently that it laid off mortgage employees due to a decline in its refinance business.
The California Association of Realtors reported that mortgage rates have been on the rise for five months, with the 30-year, fixed-mortgage interest rate averaging 4.49 percent, up from 4.46 percent in August 2013 and up from 3.47 percent in September 2012, according to Freddie Mac. Adjustable-mortgage interest rates in September averaged 2.67 percent, up from 2.65 in August and up from 2.60 percent in September 2012.
Low interest rates are good for those who get those rates, but they’re meant to stimulate the economy and “that’s not working,” Goldman said. Housing creates jobs in construction and also carpet, furniture, raw materials, the people who deliver those materials – “what it takes to create a physical dwelling,” Goldman said.
“That’s why housing is always a good place to start to get the economy going,” Goldman said, but added that housing starts are low nationally and new employment is not in the higher-wage jobs.
“I don’t see any positive signals for this economy and so, as a result, I think we’ll remain in the doldrums -- and the doldrums mean low interest rates,” Goldman said.