Extra1/12/2011 1:07 PM ET

Last chance to grab the cheap money

Interest rates are starting to rise as the era of cheap debt comes to an end. If you can afford to borrow and put that money to good use -- say, on a home or car -- new debt may actually save you money.

[Related content: Anthony Mirhaydari, debt, mortgage, cars, Federal Reserve]

By Anthony Mirhaydari

Over the past few months, I've focused on what I believe will be the most important economic development of the next few years: more expensive money. As I wrote just a couple of weeks ago, the cheap-money era is ending, with interest rates poised to move higher.

For many, especially those who are skeptical of the Federal Reserve's management of the economy, this couldn't come soon enough.

The worry over rising interest rates

We've seen the fiscal misfortune fashioned from ultralow interest rates and the excessive lending and risk-taking associated with them. Commodity price inflation. Asset bubbles. Bank bailouts. Government largesse. The boom-and-bust business cycle.

Yes, some of these things are continuing now as the Fed and other central banks print more money to juice the recovery.

Crude oil is flirting with $90 a barrel again. Gold is toying with $1,400. A tripling of onion prices is causing political strife in India, while Mexico has been forced to hedge the price of corn to prevent another round of tortilla riots.

But the end is near. The Japan deflation scenario is largely off the table. Inflation is set to rise thanks to the Fed's $600 billion "QE2" program and a stabilizing housing market. And interest rates look ready to move higher in sync with the 60-year cycle that seems to dictate the ebb and flow of the U.S. economy.

I've discussed the implications of all this from the perspective of investors.

Simply put, and considering your personal risk tolerances, the best advice is to avoid bonds and embrace stocks. The ravages of inflation will eat away at bond returns.

Stocks should benefit as a natural inflation hedge, and they're coming off of the worst 10-year performance since the 1930s.

But there's another angle.

For consumers, there are plenty of other ways to take advantage of this interest rate shift before borrowing costs rise.

That will usher in a period of austerity as households and governments cut debt loads, slow borrowing and learn to live within their means.

So before interest rates move seriously higher, you have one last chance to grab the cheap money and put it to good use. Here's how.

Yes, more debt

It may seem counterintuitive, but now is actually the time to look at ways of using credit. Long-term interest rates are up a bit, but they're basically as cheap as they've been since the 1950s. The reason it's counterintuitive is that household debt-to-income levels are still high -- but they've been coming down lately.

The Federal Reserve's financial obligations ratio, tracked in the chart above, combines debt payments with auto leases, rents, insurance and property taxes, then divides by disposable income.

That means that, thanks to ultralow interest rates, debt defaults and repayments, as well as reductions in expensive consumer credit, people have more borrowing capacity right now than they're given credit for.

We can see this at work in the economy. Back in September, I suggested the improvement in this measure of consumer spending power was responsible for a rebound in retail spending.

Indeed, from a low in the first quarter of 2009, personal consumption expenditures are up 4.6% and have pushed to new all-time highs through the third quarter. And according to the International Council of Shopping Centers, the 2010 holiday shopping season was the best since 2006.

Of course, I don't suggest going out and charging up your credit card.

The economy is still difficult, and your personal financial-obligations ratio may still be out of whack.

But, for a lot of people, it makes sense right now to borrow in the interest of reducing payments on their two largest expenditures: housing and cars.

Continued: Housing

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18Comments

Newest

1/15/2011 9:37 PM

Part 5

The only time refinancing for a lower rate works to your benefit is if you keep or shorten the amortization period. I.e., keep paying the original payment.

Note to webmaster: There is a serious problem with your spam detector.

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Acute Observer

1/15/2011 9:32 PM

Multiplying 30 years x 12 months x $561 = $201,960.

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Acute Observer

1/15/2011 9:30 PM

Multiplying 23 years x 12 months x $641 = $176,916.

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Acute Observer

1/15/2011 9:28 PM

Part 2

Well I crunched the numbers and my results show a LOSS of $25,044.

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Acute Observer

1/15/2011 9:26 PM

It wasn't spam. I was trying to post the following, so I'll try it in three separate posts.

Part 1

Re: "Crunching the numbers, and assuming a new 30-year loan term, refinancing now would cut our median homeowner's monthly payments to $561 from $641, for a savings of 12.5%.

"Over the life of the loan, that's a $28,800 savings."

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Acute Observer

1/15/2011 9:23 PM

Your post was blocked because it appears similar to spam or automated messages. If this is not the case, revise your post and try again.

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Fastback49

1/14/2011 11:41 PM

"Last chance to buy the cheap money" That sounds desparate to me and idiotic to boot. Wasn't cheap money the reason for the collapse in 2008? Most people will remember that or they should. How much are the banksters paying you to be a shill? I would hope people have learned their lesson and put away the credit cards and dreams of having it all today at tomorrow's expense. Like Todd suggested, how about living within your means. Yes, the banks would like to keep you a debt slave....Here is my advise...don't play that game...pay cash, pay down debt and Starve Goldman Sachs and the rest of the crooks. The only way you win is to not participate in the Ponzi.

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Todd

1/13/2011 8:21 PM

Outstanding propaganda for lending institutions, real estate and auto industries. Terrible advice for the average American who is re-learning the concept "live within your means" This kind of financial number crunching get's people into a mess and encourages unhealthy spending. If you take a loan for a car, you don't buy a car - you buy debt with a steering wheel. Don't expect to see the value of a shiny new car increase as you pay for it over the next few years. Have fun paying for all of this new "cheap debt" as the housing prices continue to fall.

I predict that average house prices will drop relative to any future interest hikes. Monthly payment is what drives housing prices and the average American homebuyer is already tapped.

My advice to those who are on track financially by creating a positive gap between income and expenses... stay the course continue to save. Don't feel the pressure to aquire any major items unless it is actually the right time to buy.

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Q Tip Assassin

1/13/2011 4:54 PM

Excellent article. I cannot understand why anyone is on the sidelines when it comes to buying a house.

How about continuing job insecurities... Being tied to a 30 yr mortgage when location flexibility is key to finding good work... Property taxes, lawn mowers, garden hoses, ladders...

Employers are still doing a lot a restructuring.

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Pepperdoo

1/13/2011 2:12 PM

Sorry Anthony, any kind of borrowing just to borrow is not right. Please work on your savings skills and come up with solid financial plans that have been proven to work that will help readers move forward and not backward.

You might want to read some of the postings in the Smart Spending message boards before it goes away. Those boards took me from a $27, 000.00 negative balance in 2007 to no consumer debt, all utilities paid 3 months ahead, 3 money market savings accounts, paid vehicle (Mustang GT and a Harley Davidson 2007 Ultra Classic) and the freedom to do whatever I want.

Borrowing means that someone is in control, and one ends up like a slave until the debt is paid.

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Sal Ution

1/13/2011 1:21 PM

Sorry Anthony, The article was good except for one thing: buying a new vehicle is absolutely the worst investment anyone can make - EVEN at low interest rates. People in distress just don't know how to budget their money. My idea is to learn to budget from the budget teacher dot com.

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disillusioned101

1/13/2011 1:19 PM

me2159,

I’m an expert on Real Estate market dynamics with skin in the game. Prices have been relative and contrived for generations. The market has been struggling to settle in at a new much much lower cash equilibrium price. The lenders are struggling against it to reinstate price supports to put us back on tread mills working for them. The lending industry sealed their own fate when they pushed prices to extremes using instruments like ARM’s and balloons to increase demand/prices by lowering the monthly payment thresholds in a bubble driven frenzy. The chicken’s have come home to roost.

Leverage now if you are in a speculative mood, but be aware of what you are gambling on. You are gambling that the government will be able to maintain price supports for the banks in the rental market in the face of austerity measures, declining wages (relatively speaking), and the weight of stubborn unemployment brought about by stagflation. The government cannot borrow and spend forever. When interest rates in the bond market take off like a rocket the entities with cash we be able to buy real estate at a fraction of today’s prices. Maybe?

One of the trends that I’m seeing with the upper crust (those owning 100 houses or more) is letting houses bought in price supported times go in the face of a strong rental market that can easily cover the mortgage (at least for now). They don't see prices reaching their purchase prices in their lifetimes. So, why deal with the management headaches so they pull out as much of their down payments as they can by renting the houses out, not making payments, and pocketing the rents accumulating cash. Hundreds of thousands of dollars a month in cash. At the same time they a dumping their inventories purchased at the bottom of the last dip (profit taking). You are betting against the smart money my friend. That is something I’ve learned never to do.

They know something about market dynamics that you apparently don’t. Everything is relative to future market conditions and contrived in the face of lender’s nefarious market activities.

Your choices are hyper inflation or stagflation. I’m hopping for the later and fearful/respectful at the same time. Speculators need to risk getting caught with wheel barrels full of cash in hyper inflation or laddering interest rates in stagflation hoping the rental market holds up. The only win win is for the very rich who buy with cash and can wait out a slump in the rental market without risk. Only they can avoid the risk born of the weight of the lenders nose plowing their portfolios with lender incompetence.

Place your bet’s folks the casino is open for business. I’m strapped on to the same missile you are holding on with one hand and waving my hat with the other. The future be dammed. It’s not the fall that kills you. It’s the landing.

<Signed> just another care taker for the banks

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me2159

1/13/2011 10:31 AM

Excellent article. I cannot understand why anyone is on the sidelines when it comes to buying a house. The prices are the lowest in seven years, the interest rates are at the 1950's levels and both can change swiftly. The pent up demand alone from young couples and singles is reaching the point where buying slightly before the bottom is smarter than waiting until everything starts going up again. And it will. Despite the doom and gloom in the media, no economy stays at a fixed level forever. And mortgage rates have ticked up at an almost daily rate increase as it did between Thanksgiving and Christmas. The party's over.

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Thrashers

1/13/2011 9:40 AM

Sorry Anthony, but once again your views on money, the economy and general fiscal policy are off target. Individuals, just like our government, need to get off this borrowing binge. They need to practice fiscal responsibility and GET OUT OF DEBT, NOT FURTHER INTO IT. This is why when you watch TV you hear all those advertisements saying "if you owe more than $10,000 we can settle your debt at less than 1/2 of what is owed". Why don't you listen to the Dave Ramsey show. He teaches people how to get out of debt and practice fiscal discipline, not to go borrow money because it is cheap.

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Delmar Fairchild (DelofBarron)

1/13/2011 9:33 AM

Those with no debt, if borrowing money in March of 2009, bought Ford or some other under valued stock, could have paid that debt off in less than a year and still had enough money left over to buy a new car. Ford was down to $1.32. Today is it up to over $18.00 and climbing.

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moneyhawk

1/13/2011 6:59 AM

Sorry, but borrowing and spending are never equal to prudent financial planning. If you are definitely going to buy an expensive item anyway, then yes, perhaps now is a good time. However, the author almost makes it sound as if buying a new car is a savvy investment. It's an expense, nothing more.

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disillusioned101

1/13/2011 5:11 AM

I agree, the only time anyone should borrow is when it makes them more then it costs and you're not speculating/gambling with it.

Unfortunately, Anthony is part of "the more you spend the more you save" generation.

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havasu46

1/12/2011 11:19 PM

Anthony, now's the time to start taking some bond and equity profits and setting them aside so you can start laddering CDs in 9-12 months as rates rise from 2% to 8% over the next 24-36 months. There's no such thing as good debt unless your return is greater than it costs.

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