29 August 2010

The Name is Bond, James Bond

There's been a renewed cacophony about the market and home buying, both revolving around interest rates.  It is said that small time (retail) investors are abandoning stocks, and buying bonds.  It is also said that there's never been a better time to buy a house.

Phooey on both your houses.

Buying bonds when interest rates are near zero is silly, if you're interested in appreciation.  It's just OK if you're interested in perceived rate of return.  Bonds have a fixed coupon, and the implied interest rate results from bond price.  Bond price and perceived interest rate fluctuate with controlled interest rates, notably, of course, what our Fed does.  Greenspan started the current insanity years ago.  Once interest rates return to normal (whatever that is, and long term hasn't always been higher than short term in our country's history), bond prices will plummet.

As I have mentioned before, the folks who made out like bandits with housing were those who bought while interest rates were at 10%+.  Why, you may ask?  Because as interest rates returned to more normal levels, prices appreciated (that old inverse relationship, again).  With rates at "historic" lows, but median income still in the toilet, prices are about as high as they can get.  The only pressure to raise prices will have to come from rising median income, and with the Tea Baggers flummoxing the Obamanauts, that's not going to happen in the lifetime of anyone currently alive.  Interest rates can only go up, thus driving down prices.  Today is the time to rent.  Don't buy.

No comments: