All of this talk about a “bright future” for real estate is just a bunch of nonsense. The yield on 10-year U.S. Treasuries is starting to rise aggressively again and, because mortgage rates tend to follow such increases, mortgage rates are going up. As monthly payments go up less people will be able to afford to buy homes at current prices and this will force home prices down. As such, another great real estate crash is inevitable. Let me explain further. Words: 995 ; Charts: 1
So writes Michael Snyder (theeconomiccollapseblog.com) in edited excerpts, or paraphrases from his original article* entitled Why Another Great Real Estate Crash Is Coming.
[The following article is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here – register here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Snyder goes on to say in further edited, and in some instances paraphrased, excerpts:
When mortgage rates reached all-time low levels late last year, it fueled a little “mini-bubble” in housing which was greatly celebrated by the mainstream media. Unfortunately, the tide is now turning. Interest rates are starting to move up steadily, even though the Federal Reserve has been trying very hard to keep that from happening.
Rising Yield on 10-year U.S. Treasuries
A few weeks ago, when Federal Reserve Chairman Ben Bernanke suggested that the Fed may start to “taper” the rate of quantitative easing eventually, the bond market had a conniption and the yield on 10-year U.S. Treasuries shot up dramatically. In an attempt to calm the market, the Fed stopped all talk of a “taper” and that helped settle things down for a brief period of time. Now, however, the yield on 10-year U.S. Treasuries is starting to rise aggressively again. Today it closed at 2.71%, and many analysts believe that it will go much higher. This is important for the housing market, because mortgage rates tend to follow the yield on 10-year U.S. Treasuries.
Rising Mortgage Rates
If mortgage rates keep rising like this, another great real estate crash is inevitable.
This wasn’t supposed to happen. Federal Reserve Chairman Ben Bernanke said that he could use quantitative easing to control long-term interest rates. He assured us that he could force mortgage rates down for an extended period of time and that this would lead to a housing recovery but now the Fed is losing control of long-term interest rates. If this continues, either the Federal Reserve will have to substantially increase the rate of quantitative easing or else watch mortgage rates rise to absolutely crippling levels.
Three months ago, the average rate on a 30 year mortgage was 3.35%. It’s now 4.39% from 4.31% last week. Rates are a full percentage point higher than in early May and, as the chart below shows, mortgage rates have a lot more room to go up…
As mortgage rates go up, so do monthly payments…If mortgage rates eventually return to “normal” levels it would be absolutely devastating to the housing market. As mortgage rates rise, less people will be able to afford to buy homes at current prices. This will force home prices down.
Affordability of Housing Rising
To a large degree, whether or not someone can afford to buy a particular home is determined by interest rates. A year ago, with the 30-year rate at 3.66%, the monthly payment on a 30-year, $300,000 mortgage at that rate would be $1374.07. If the 30-year rate rises to 8% (considered to be normal back in the year 2000), the monthly payment on a 30 year, $300,000 mortgage at that rate would be $2201.29.
We are already seeing rising rates impact the market. The number of mortgage applications has fallen for 11 of the past 12 weeks – the biggest 3 month decline in mortgage applications that we have witnessed since 2009.
Unless interest rates reverse course it appears that we are in the very early stages of another great real estate crash only this time, it might not be so easy for the big banks to swoop in and foreclose on everyone. [To prevent that from happening again,] Richmond, a city in California is taking…the controversial step of threatening to use eminent domain, the power to take private property for public use [and] other cities have also explored the idea.
Richmond has partnered with San Francisco-based Mortgage Resolution Partners on the plan. Letters have been sent to 32 servicers and trustees who hold the underwater loans. If they refuse the city’s offer, officials will condemn and seize the mortgages, then help homeowners to refinance.
Banks, the real estate industry and Wall Street are vehemently opposed to the idea, calling it “unconstitutional” and a violation or property rights, and something that will likely cause a flurry of lawsuits.
If more communities around the nation start using eminent domain to stop foreclosures, that is going to change the cost of doing business for mortgage lenders and it is likely going to mean more expensive mortgages for all the rest of us.
Homeownership Rate Down Dramatically
In any event, all of this talk about a “bright future” for real estate is just a bunch of nonsense. You can’t buy a home if you don’t have a good job and there are about 6 million less full-time jobs in America today than there was back in 2007. You can’t get blood out of a stone, and you can’t buy a house on a part-time income. The lack of breadwinner jobs is one of the primary reasons why the homeownership rate in the United States is now at its lowest level in nearly 18 years.
The Economy Is Not Growing
We aren’t going to produce good jobs if our economy is not growing and economic growth in the U.S. has been anemic at best, even if you believe the official numbers. We were originally told that the GDP growth number for the first quarter of 2013 was 2.4%. Then it was revised down to 1.8%. Now it has been revised down to 1.1%. Overall, since Barack Obama has been president, the average yearly rate of growth for the U.S. economy has been just over 1%. That isn’t very good at all.
According to the alternate GDP numbers compiled by John Williams of shadowstats.com, the U.S. economy has continually been in a recession since 2005 and now interest rates are rising rapidly, and that is very bad news for the U.S. economy.
I hope that you have your seatbelts buckled up tight, because it is going to be a bumpy ride.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://theeconomiccollapseblog.com/archives/tag/real-estate-market (Copyright © 2013 The Economic Collapse)
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