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JLeslie's avatar

Why are interest rates so low?

Asked by JLeslie (62569points) December 16th, 2020
7 responses
“Great Question” (2points)

I need to buy a house and prices are so flipping high I can’t believe it. Maybe I’m getting old and my brain hasn’t kept up with inflation. Interest rates right now for a 30 year loan are 2.6%! I’m sure some people are happy about that, but I think that’s part of the reason prices continue to go up. It helps the builder, the seller, but does it really help the buyer? If the market dips down again the buyer still actually owns the house at the high price, and if they need to move they lose.

I understand some of it is supply and demand, but also being able to afford the payment is a big influence.

Articles on the real estate market keep saying it’s not like 12 years ago, but there have been other times in history where real estate markets go down temporarily.

Why are interest rates so low, and do you think it’s a good thing? Do you think they will go back up sometime soon?

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Answers

elbanditoroso's avatar

Because there is VERY LOW demand for loans. For several reasons:

- people are unemployed and not buying staff they can’t afford – no need for loans

- commercial construction (except for warehouses) is way down because there won’t be a need for large office buildings and corporate construction for some time since people are working from home

- demand is down in general because people saved money over the last couple years and are withstanding COVID to some degree without borrowing money

- small business are closing right and left, and new ones are NOT starting up, so there is less need for capital

Like you said, it’s supply and demand. When lots of people need to take out loans, the price of money goes up and interest rates reflect that. When no one needs to borrow money, the price of money goes down. That’s where we are now.

JLeslie's avatar

@elbanditoroso I did not expect that answer. I hadn’t thought of it at all in terms of demands for loans. I never thought or knew demand for borrowing ever had anything to do with it.

elbanditoroso's avatar

@JLeslie think of it this way. Let’s say you have a savings account or a Money Market account. If you do, you’ve seen Money Market interest rates drop for 2.25% a year ago, to maybe .40% today.

Why? The money market funds loan out your money to business and people that are borrowing. The are paid interest by the companies doing the borrowing. They pay you or me the 2% on our MM accounts, and pocket the rest. That’s how they make their money.

But if they don’t have companies to loan to (no demand) then they’re not getting much interest income, and there is less $$ for you or me to earn on our MM and savings accounts.

zenvelo's avatar

Remember that the Fed has been focusing on keeping the economy from completely collapsing from the pandemic, so has been willing to lend money at 0 % so that firms can stay open while business is down.

People aren’t spending their money on the usual consumer goods or vacations, so many people have been buying homes, or buying a larger place to accommodate teh family being home all the time.

People in urban areas such as New York and San Francisco have been buying houses outside the city. If you’re working from home, no need to consider a commute in your planning. Just yesterday, the San Francisco Chronicle has “one of the hottest real estate markets” is Lake Tahoe.

janbb's avatar

Housing prices are through the roof in my area because New Yorkers want second or first homes out of the city. I don’t think it’s a result of mortgage rates being low.

But yes, the main point is what @zenvelo says, the Feds lower interest rates in general when they want to stimulate the economy through lending.

kritiper's avatar

So that people will borrow money. The economy can’t do well unless the money is being moved around from person to person, business to business.

Dutchess_III's avatar

Interest is where lenders make their money. At this point they’re aiming for the Walmart business format….sell cheap but sell in bulk.

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