Rising Rates Rattle Real Estate: The 5% and 8% Milestones

Last updated: November 19, 2023

The numbers five and eight are making waves in the economic world. They represent the 5% yield on the 10-year T-bill and the 8% interest on the 30-year fixed-rate mortgage, respectively. Both figures are stirring up some historical ghosts.

Rising Rates Rattle Real Estate: The 5% and 8% Milestones
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The 10-year Treasury yield is toying with 5% for the first time since 2007. It’s been a swift climb from last year’s 4%, thanks to strong economic growth, elevated inflation, and a surge in government debt. These factors drive down bond prices, pushing yields higher and attracting buyers.

But why should you care about bond yields? Well, they directly impact your car loans, credit cards, student debt, and most importantly, mortgages.

The 30-year fixed rate mortgage is charging towards 8%, a figure not seen since the dot-com bubble burst in 2000. This milestone highlights the harsh reality of trying to buy a home today. Sky-high interest rates, soaring home prices, and a scarcity of homes on the market have led to a 13-year low in sales.

If you were to buy a median-priced home today with a 30-year fixed rate loan (currently 7.6%), your monthly principal and interest payment would be over $2,500. That’s nearly double the cost from just two years ago.

The monthly payment on an average home now eats up 40% of the median household income, making housing the least affordable it’s been since 1984. And there’s no sign of this changing anytime soon.

Andy Walden, vice president of enterprise research at ICE, suggests that to restore affordability, we’d need a 37% drop in home prices, a 4 percentage point decrease in mortgage rates, or a 60% rise in median household incomes.

So, what’s next? We’re in a pickle, but hopefully, it’s a transitional phase. As the saying goes, the best cure for high prices is high prices.

“The sudden, rapid increase in bond yields will dissuade business investment and spending, which threatens to knock the US economic expansion off course,” warned Moody’s researchers.

In essence, the yield surge is doing the Fed’s job. Wall Street seems to concur, with business investors betting that the central bank will maintain steady interest rates at its policy meeting next week.

In the face of these rising rates, it’s clear we’re in for a bumpy ride. But as with any roller coaster, there’s always the hope of a smoother path ahead.

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