ZERO PERCENT, OR NEGATIVE, INTEREST RATES: AN INTERESTING POSSIBILITY - Chernov Team

ZERO PERCENT, OR NEGATIVE, INTEREST RATES: AN INTERESTING POSSIBILITY

Recently, President Donald Trump Tweeted “INTEREST COST COULD BE BROUGHT WAY DOWN”, in reference to his stated desire that the Fed reduce the interest rates to zero, or even negative. While this isn’t likely to occur (the Fed has consistently pushed back against the notion of them becoming a part of the political process), it could drastically impact the housing market.

While the interest rate President Trump was referring to is not the same as mortgage rates, mortgage rates typically track the rates set by the Fed. Since the mortgage rates track the Fed’s interest rates, setting it to zero could be huge; as of yesterday the mortgage rate for a 30-year fixed rate mortgage (“FRM”) was 3.56%, going to zero would be a massive reduction ($10,000/year on a million dollar house for every 1% reduction).

The possibility of a negative rate has some people mildly confused; some believe they would end up getting money back from their lenders; this is not the case. In this fantasy scenario, the lender would forgive portions of the loan – you would simply end up paying less money over the loan’s life.

This zero/negative loan rate concept is being tested in Denmark. Last month, one of Denmark’s largest banks offered 10-year mortgages with a -.5% interest rate. Another bank has announced it intends to offer a 20-year FRM with a 0% interest rate, and a 30-year FRM with a .5% mortgage rate. Analysts suspect that negative interest rates will have an adverse impact on savings, and people who believe savings are the key to retirement; if the rates are negative, people would be forced to pay the bank to hold onto their money (since the money is losing value) – there would be very little reason to save (if you do not know, the bank needs people to save money with them since they essentially draw from the funds available to them in an effort to grow its value).

Ultimately, this is an unlikely scenario. At the Chernov Team we understand that knowledge is power, and knowledge of how the market would behave under a distinct set of hypotheticals can be powerful knowledge indeed. At the Chernov Team we know that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.

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