If there’s one phrase Cambridge Realty Capital President Jeffrey Davis has heard more than any other in his business, it’s this: “I’m waiting to see if interest rates drop…” Oft uttered by those who are either thinking of borrowing or have floating rates, they are frequently followed by words of regret over missed opportunities because rates rise instead of falling. Davis is always quick to caution against using if/then reasoning when making borrowing decisions, because “no one, not even the experts can consistently and accurately predict what interest rates will do at any given time.”
Trying to predict what interest rates will do, he contends, is similar to predicting the weather. “The best that the average person can do is speculate,” he stated. Better, he contends, is looking to the experts, meteorologists, to plan for the weather tomorrow, next week or next month. “Meteorologists have studied the science behind weather. They continually watch the skies, take measurements and make calculations based on evidence in order to predict what the weather is going to be,” Davis stated. “And even with all of their expertise, education, tools, and access to facts and information, meteorologists still sometimes get it wrong.”
So, too, are interest rates and the experts that try to forecast rate movement. “Experts are educated, understand historical patterns, have access to data and thoroughly study that data on a continuous basis. They make informed guesses based on all of those factors, but at the end of the day, an unforeseen event can completely change the trajectory of interest rates and render an expert opinion moot.
Case in point: the emergence of Covid-19 (coronavirus). “No one saw this coming,” Davis attested, not even medical professionals, and certainly not economists. Coronavirus wreaked havoc not just in science and healthcare, but also in the world marketplace. Davis points out that the US interest rate in January of 2019 was 2.66 percent, compared to the rate at the end of January of 2020, when Covid-19 first came to public light, at 1.51%. “Specifically, the last year has seen in excess of a 1.5 percent drop in long-term bond rates, with the majority coming over the last 30 days due to the coronavirus,” Davis added. Governments and banks around the world responded to the coronavirus crisis by lowering interest rates in an effort to stave off a potential economic crash. “Could anyone, expert or not, have predicted this?” Davis asked. “Not likely.”
Pandemic notwithstanding, Davis pointed out that there have been numerous events in recent history that have played a role in interest rate movement. Some, like Brexit, were unique and specific. Others, such as housing starts, government spending, emerging markets, and unemployment rates, were more garden-variety events that can occur at any time but are still extremely difficult to predict.
So, what can borrowers take away from this turn of events at this time in history? “Act now,” Davis urges. It’s a phrase, almost a mantra, he uses regularly. “Rather than speculating whether interest rates are going to drop further or falling back on if [a particular event happens] then [I will take a certain action] reasoning, take advantage of what is happening right now today.” Davis went on, “When markets change dramatically due to global challenges such as coronavirus, it’s always a signal to pay attention and take advantage of the drop that may occur.” As for those with existing loan commitments, Davis advises: “Review your agreement and see what abilities you have to pay it off, as the amount of money that can be saved over the term of the loan may be significant and should be able to justify any modest prepayment penalty that exists.”