Pretty much everyone is saying that interest rates are going up in the US and are going to go up soon. Alan Greenspan just came out today saying people are going to be surprised how quickly they go up.
I wouldn't say that.
According to Bloomberg's interest rate predictor the probability of a hike before the end of the year, ie the definition of soon, is less than 50%.
Even if you go out to the end of 2017 you still only get to 67% probability of a fed hike. And 67% is a far cry from "pretty much everyone".
And even with all of that, the most predicted rate hike is a minuscule 0.25% to 0.5%.
Now, I agree that this is all up for debate and markets can definitely get this wrong, but I stand by my assertion that low rates are here to stay. I really don't think the years of 5-8% rates are coming back any time soon.
But I'm always willing to change my mind if someone can convince me, so back to you.....What makes you think that this era of low rates is going to end?
I don't work in the financial industry, but just as a bystander it seems clear to me that there are a lot of bond traders, like Bill Gross, who have strong interests in rates going up significantly. Just like small-cap, pump-and-dump scammers, they're trying to move markets with their sophist predictions.
I don't think there's much of a dispute that there'll be a regression to some mean. But judging by where people are actually putting their money, the time horizon appears to be much further away than many of the pundits would have us believe.
Also, Japan....
One reason to raise rates is that they were set as low as they were for emergency purposes. The emergency itself is over, so time to start increasing them a little.
Typically lowering interest rates pushes inflation higher. When your economy is sluggish, that's a good thing, but once it picks up steam, it can cause runaway inflation.
The challenge raised is that there is a delay in the response of the economy. Usually interest rates aren't increased dramatically until inflation is already underway. Otherwise, if you raise rates when the economy is only doing "a little" better, you risk squashing the growth.
So what happens is that inflation starts to go up and by the time the Fed has the balls to really raise rates (because it's plainly obvious the economy is doing well), it's too late and you really overshoot your inflation target which causes rates to rise dramatically.
Overall, I would agree that it seems unlikely interest rates will go up in the near future. However, that can change really quickly.
Back in 1979, the interest rate when up 400 basis points from 10% to 14% in less than a year.
Not to mention responsibility for setting up with swindle that is currently used as an excuse by those who want to feed Social Security to the ibankers.
The key to 'seeing it coming' of course, is to first willingly accept the possibility that something might happen, and then actually look into it. The issue was that many people were just not entertaining the possibility at all, and therefore not bothering to look into it. The information was all there for anybody to see, but this was a case of people missing the gorilla in the room because they were too busy paying attention to the game[0].
[0] http://www.livescience.com/6727-invisible-gorilla-test-shows...
Housing prices have to track rent, to some degree, and vice-versa. One of them will change to match the other and wages were not going up...
All the ARMs and layers of CDOs are irrelevant. They multiplied the results but didn't change the underlying issue. Leverage doesn't help you when the fulcrum shifts.
The Adjustable Rate Mortgages offered by for example First Republic Bank are referenced to one-month LIBOR, and it went from 1.11% in May 2004 to 5.11% in May 2006, i.e. 4%-points in 2 years.
On a $1M mortgage, that's $40k per year in swing over two years (typically deductible, so you'd have to factor in your marginal tax rate to get effective cost).
http://www.macrotrends.net/1433/historical-libor-rates-chart
We haven't even been able to get inflation up past 1.7%.
The Fed, setting interest rates way below the actual inflation, is actually taking money from savers and retirees (rather than rewarding them), or forcing them to be reckless with their money by investing in principal-at-risk investments (which they should not at their age)
I'd like to point out as the other poster did that you shouldn't look at housing in development constrained areas (though that's a very interesting sidebar to the whole thing - how much of development constraint exists to prop up housing prices)?
Incidentally "official" inflation in the SF Area is 2.7%, still not 3-7%. (http://www.bls.gov/regions/west/news-release/consumerpricein...)
(Edit since I'm fixing a typo: Look at the treasury yield curve. Has it gotten steeper, which would indicate an expectation of rising rates? No. The 30 year rate has been falling the last few years.)