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Real estate interest rates

10-Year Note Secular Range Forecast   Secular Inflation Forecast Average
4.0 - 5.5% USA 2.5%
3.0 - 4.5% Europe 1.5%
1.5-3.0% Japan 1.0%

“Better buy that house now, before interest rates go up,”
-Every realtor, everywhere, for the last quarter century.

Most realtors in America believe that the day they’re granted their real estate license, they also become experts in predicting interest rates…

And the prediction is always the same: interest rates are headed higher. Yet nobody bothers to check their quarter-century track record. Realtors have generally been wrong for a quarter century, as this chart of 25 years of mortgage rates shows:

As you can see, the 25-year trend has been down… almost relentlessly.

And any time rates actually do start to tick higher - as they are now - everyone gets in a panic.

If you’re going to trust someone’s interest rate crystal ball, it shouldn’t be your local real estate broker’s. Instead, you ought to trust Bill Gross’…

Bill Gross, if you don’t know, is the world’s biggest money manager. He controls at least $600 billion dollars, heading up the investments at PIMCO. Bill’s got most of that money in bonds, so his interest rate forecasts are incredibly important.

In his recent Investment Outlook newsletter, Bill shared with readers his interest rate forecast for now through 2010. Not surprisingly, it doesn’t fit at all with what your local realtor is telling you. Here’s what Bill believes is the range we’ll see between now and 2010:

Tack on an extra percent to make a guess about what mortgage rates might do over the next four years… putting them around 5.0% to 6.5%.

Bill comes to these conclusions logically. If you want to hear his explanation, grab a cup of something containing caffeine, and read the next two paragraphs:

“For now, the continuing influences of globalization, technology advances furthering productivity, and asset destabilization policies… probably will allow global inflation to remain in moderate range bound territory between 1-3% for most economies.

Global real yields then… should stay reasonably low – perhaps 2% on average (lower in Japan)… Combining inflation, real interest rate, and term premium considerations mentioned above we come to the range forecasts [above] for the secular timeframe from 2006 until 2010.”

Your realtor (and to be fair, everybody else you know) believes interest rates are headed higher.

Meanwhile, the world’s biggest investor thinks they’re at the high-end of their range for the next four years.

Who are you going to believe?

When “the crowd” is so one-sided in its opinion, as it is now about interest rates, the crowd is usually wrong.

I never make an interest rate bet. I don’t invest based on my guesses of future interest rates. But if you were to twist my arm, I’d side with the world’s biggest money manager and his multi-decade track record, instead of your realtor.

Who are you going to side with?

In early 2001 the commercial real estate market peaked, only to be followed by two years of struggle. This peak occurred when the Federal Reserve raised interest rates in an attempt to slow the United States economy. A renaissance followed two years later as a result of interest rates hitting new lows; in the Federal Reserve’s attempt to jump start the economy

This leads to two questions: how much impact do interest rates have on the health of the commercial real estate market, and does the overall wellbeing of the United States economy play a greater and more positive role in commercial real estate? Because interest rates and economic activity are not mutually exclusive, their effects play direct and indirect roles within the commercial real estate market

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