Are you looking to buy a new car? Don't paycash .
A 48-monthloan for a new car is currently just 2.58%,
according to Bankrate.com. That's below the historical rate
ofinflation (going back over the past half century). By the time
your loan is paid off in four years, the inflation rate could
exceed that 2.58% rate, meaning your real borrowing costs would
actually be less than zero percent.
But don't wait too long. Interest rates have begun to rebound
and are expected to rise gradually higher over the next few
years. That auto loan ratewill likely be closer to 5% in a few
In fact, thisissue is probably being discussed inboardrooms at
the top auto companies and just about any firm that relies on
low-costloans to spur demand. Corporate executives realize that
consumer confidence and spending trends remain challenged, even
with the aid of low interest rates. How will these
credit-dependent businesses fare when rates rise?
The Long And The Short Of It
It's crucial to distinguish between interest rates set by the
Federal Reserve and interest rates affected by economic
forces.The Fed controls so-called short rates, which, as I noted
last month, are likely to stay low for several years to come.
In contrast,bonds of longerduration (such as the
10-yearTreasury bond ) have their value determined bybond
traders, who tend to pursue higher rates whenever they see a
strengtheningeconomy . After all, economic expansion always
threatens to introduce inflationary pressures, and interest rates
need to reflect that possibility.
Who Feels The Pain?
In addition to automakers, several other industries are affected
by rising rates. The list starts with homebuilders.
For much of the pastyear , a 30-yearmortgage could be had for
3.35% to 3.65%. But recently, the rate suddenly moved above 4%,
andeconomists are warning consumers to brace for 5.5% mortgages
within a year or two -- as long as the U.S. economy strengthens
in 2014. (TheInternational Monetary Fund (
) predicts the U.S. economy will grow 1.7% this year and 2.7% in
What's the difference between amortgage rate of 3.5% and a
5.5% rate? Alot . If you buy a $300,000 home,put 20% down and
finance the other $240,000, your monthly payment would jump
nearly 27%, to $1,363. For people who barely qualified at that
lower monthly payment, the higher rate would price them out of
that home purchase.
This is all worth pondering if you are thinking aboutinvesting
in homebuilders. These firms appear poised for solid demand down
the road whenever the economy becomes truly healthy. But in the
nearterm , rising mortgage rates may lead to a slowdown in
demand, which as this chart indicates, few are anticipating right
The Housing Corollaries
Beyond the homebuilders, a number of firms have benefited from
rampant levels of home-pricespeculation , as buyers snap up cheap
homes, spruce them up and hope to flip them for a quickprofit
For example, these speculators often put in new flooring to
give their homes a fresher look, which has been a boon for
Lumber Liquidators Holdings (
. Thisstock has risen nearly 500% since the start of 2012 and now
trades for more than 40 times trailingearnings . But what happens
if rates rise and speculation activity slows? This isn't a stock
I'd want to be holding.
And tread lightly with the "white goods" appliance makers that
stimulate demand with cheap financing.
has seen itsshares double in the past year as consumers tap
low-costcredit lines for home improvements. How long can that
trend last as financing costs move higher?
The Corporate Angle
It's worthwhile to examine any consumer-facingstocks that you own
to see how much of theirsales aredependent on financing. And it's
also wise to look at other types of companies to see how
theirdebt is structured.
Many companies have wisely locked inlong-term debt at fixed
rates. But many other companies are heavily dependent on credit
lines and other forms of revolving debt that are tied to theLIBOR
, the London InterbankOvernight Rate . Borrowing with LIBOR in
recent years has been advantageous, but an increase in
thisbenchmark interest rate may be inevitable as the global
economy starts to mend.
Risks to Consider:
As anupside risk to interest rates, it's unclear if the
economy will continue to strengthen. If the economy remains weak,
then interest rates will likely remain near multigenerational
Action to Take -->
Remember that "investors think ahead," and though any interest
rate increases are likely to be gradual, investor anticipation of
such a move could happen more rapidly. So you shouldn't wait
until mortgage rates and other interest-sensitive financial
instruments have already made their move.
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