Perhaps the biggest effect of this recent rise in yields will be felt in the housing market. The real estate industry has more cheerleaders than the Dallas Cowboys, but I say don’t believe all the rah-rah hype. Realtors, mortgage lenders, home builders, retailers and investors are all hoping and praying that the worst in housing is behind us.
My opinion is that the worst is still yet to come. This new surge in rates has just made access to mortgage money much more costly. What fueled the boom in housing was the easy access to cheap money. Money is still relatively cheap, but not as cheap as it was four months ago. This will cause fewer people to be able to afford financing. Few buyers, more inventory, rising foreclosures and credit tightening all lead to lower home prices.
Long-time readers know I have been commenting on the housing market bubble for years. I hold a strong opinion that when people are allowed to borrow massive sums of money at relatively cheap prices, they are apt to easily get in over their heads. This is where I think real estate in America stands today.
We are in a period where many, many people own more home then they can afford. This problem is not just in the so-called subprime market. It’s in all price ranges and economic classes.
Today, we are seeing a glut of homes on the market, a wave of foreclosures that’s just beginning to hit shore, and now, thanks to the current spike in bond yields, a sharp rise in the cost of money.
What this adds up to is lower home prices across the country for the next several years. That’s good if you currently are renting your dwelling and are looking to buy a home soon. Of course, the pending decline in home prices will probably be at least partially offset by the higher interest rates you’ll have to pay on that mortgage.
For those who are banking on rising real estate values to get you up to the next level of financial security, well, you may be in for a lot longer wait than you’d originally anticipated.
There’s no doubt that higher interest rates will take the wind right out of the sails of the housing market, which already had to aggressively tack back and forth just to get enough air to keep up a modest pace.