The Proper Fix to Mend the Economy – Higher Interest Rates…Lower House Prices

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If the USA economy is to pick up then it needs higher interest rates and lower house prices. This may fly in the face of conventional thinking but the conventional fixes are not working as they are artificially created with government hand-outs that do not address the cause of the problems… They just treat the effects.

By trying to artificially keep house prices high, the demand is lower than it needs to be. First time buyers are the foundation and if their wages are not sufficient to buy a home then no amount of artificial stimulus packages will work in the long run.

House prices have to be affordable at all levels.

At the luxury end of the market house sales are stagnant in many areas. Until they come down to a realistic level sales will be scarce at best. Banks hold the key to lower prices as they hold many mortgages on houses and condos that should go into foreclosure, but they will not foreclose fully as they will be stuck with maintenance and taxes.

The banks are keeping many mortgages in limbo hoping prices will pick up. Well, people aren’t stupid and it is a buyers market. If the banks think they can bluff their way to getting higher prices then they need to think again.

To be fair, prices have come down somewhat, but they are not low enough yet. To create the demand, the banks, realtors and other sellers need to offer a bargain-basement sale on home prices and stop trying to live with half-bubble values. It is a hard pill to swallow for people who bought homes at inflated prices but if the economy is to get back on track then the medicine needs to be taken now, rather than later.

On the interest rate front, the Federal Reserve are keeping interest rates near zero, hoping lower rates will help home sales and businesses. They needed to bring rates down to zero due the financial melt-down crisis, but that is more or less dissipated. The weaker institutions are gone, making way for stronger ones to prosper. Lower rates award banks with bigger profits while squeezing the savers who feed the economy with their money. When short term rates were 2% a few years ago, bank mortgages were around the same price as they are today, so who is being helped by zero interest rates?

The corporate sector is doing fine and their results will not suffer by higher interest rates, for they are leaner and more efficient than ever and will produce higher profits in the coming quarters.

The big problem at this moment in time is the savers. They are the ones with the money, and they are not getting any interest and thus have little spending power. They need to get income from their savings and not dip into their capital.

Also, people saving to buy a home need to get higher interest, so they can afford to buy a new home in the not too distant future.

To get the USA economy ticking again, higher interest rates and lower housing prices may work wonders.

But that may take the fear bubble out of the Treasury notes and gold. It could take gold back down to $300 an ounce and give savers some money to spend from higher interests rates on their savings…now who would want that?