That's Not Necessarily Good News

Many of our colleagues remain convinced that low-interest rates are vital to rejuvenating home sales (particularly in existing homes) and keeping housing starts on an upward trajectory. But we think that boat has long sailed. We say that because low interest rates are indicative of the issues we mention above: geopolitical upheaval, slow global economic growth, and weakness in employment growth in a key U.S. demographic.

In addition, low rates are indicative of banks that are flush with cash and simply aren't seeing the opportunities to put that cash to use. Bloomberg reports that banks have accumulated so much cash that deposits exceed loans by a record amount. Banks make money lending, and are motivated to make loans when the opportunity arises. Instead, they've been plowing money into low-yield Treasury securities. That tells us two things: A dearth of lending means there is still a dearth of economic growth. On the other side of the coin, bank demand for Treasury securities will help keep interest rates – mortgage rates included – low.

When Federal Reserve officials begin to back off their cautious talking points and begin to talk up the economy, interest rates will rise. But that will be a good thing, because we'll have an economy marked by more opportunities that can support higher interest rates and a more market-driven lending environment.

Information provided by Jessica Regan.

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