Not Your Father's Housing Market
This week, as mortgage rates rose to their highest level in more than four years, real estate insiders reassured the public that higher interest rates would not hurt the housing market. Their claims were based on the fact that even though rates had risen, they never-the-less remain low in historic terms. While this may be true, it is completely irrelevant to today's historically unprecedented real estate market.
Although current mortgage rates
are still historically low, underlying mortgage balances certainly
are not. Several years of artificially low interest rates, combined
with lax lending standards and the get-rich-quick mindset, have
resulted in homeowners assuming mortgage balances unprecedented
in history, both in absolute terms and relative to their incomes.
For most, such balances have been sustainable only as direct
result of extremely low interest rates, and in many cases temporary
teaser rates. Today's stratospheric real estate prices cannot
be maintained without these supports. As rock-bottom rates fade
away, housing prices must return to earth.
Compounding the problem is the record number of families who now own vacation homes, or "investment" properties that produce negative cash flows. This means that higher interest rates will be particularly burdensome as many households now have multiple mortgages to service.
Even more troubling is the significant number of borrowers who relied on adjustable rate mortgages, or worse, temporarily low teaser rates to qualify for their loans. When those mortgages reset at today's higher levels (or tomorrow's even higher ones) and in some cases are applied to even larger loan balances as a result of negative amortization, the payment shocks will be that much more intense.
Furthermore, the fact that mortgage rates are still historically low merely indicates just how much higher they could potentially rise. In addition, given the low supply of domestic savings, accelerating inflation, and a wave of mortgage defaults likely to further suppress mortgage credit, mortgage rates are likely to rise to historically high levels. Applying high mortgage rates to today's extremely high mortgage balances is like putting a match to gasoline. If sky-high prices were merely the inverse of extremely low interest rates, a sharp rise in the former implies an equally severe collapse in the latter.
In addition, this week's action in the bond, precious metals, energy, and foreign exchange markets, which included simultaneous declines in both bonds and the dollar and break-outs in gold, silver, and crude oil, (all of which I am on the record as having accurately predicted) indicate that a major inflection point could be developing; one which would either send the dollar though the floor, interest rates through the ceiling, or a combination of both. Either scenario is bearish for real estate and bullish for gold, and could turn the American dream into a nightmare a lot sooner than even most housing bears believe possible.
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Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange