The Housing Market Is Completely F*d
In a Nutshell
Mortgage rates at 7.5% plus rising Treasury yields above 5% now exceed rental yields, making government bonds more attractive than property for the first time in decades. This has triggered a collapse in mortgage applications to early-1990s levels, 53% more sellers than buyers, and builders cutting prices—house prices must fall ~14% to restore affordability. Meanwhile, the U.S. is paying $3B daily in interest on $40T+ debt, with $1T already spent on interest this year, creating a self-reinforcing cycle of higher rates, debt costs, and housing market contraction.
These notes were generated by AI and may contain inaccuracies.
Mortgage rates have jumped to nearly 7.5 percent. Long-term Treasury bond yields have risen to levels not seen in more than 20 years. Borrowing has become significantly more expensive. Due to the rapid rise in interest rates, investors can now earn more from government bonds than from rental properties. When enough investors recognize this, the consequences for housing can be enormous.
The United States borrows money by issuing Treasury bonds, which promise fixed interest payments and return of principal at maturity. Treasury bonds are viewed as a risk-free rate of return since the government is unlikely to default. Pension funds, insurance companies, retirees, and banks buy these bonds as a safe store of capital.
Bond prices and bond yields move in opposite directions. When investors buy bonds, prices rise and yields fall. When investors sell bonds, prices fall and yields rise. For example, if a bond worth $100 pays $5 in interest and demand rises, the price could increase to $125, dropping the return to 4%. If demand falls, investors may pay only $80 for the same $5 interest, raising the return to 6.25%.
Rising yields signal that investors are selling government bonds and demand is low, requiring higher returns to attract buyers.
The United States is the world's largest borrower. Rising interest rates increase the cost of national debt, requiring refinancing at higher rates. Investors demand higher returns to compensate for additional risk. This process continues until something collapses.
Bond prices are falling because investors are unwilling to lend at previous interest rates. Factors include inflation, rising oil prices, government spending, growing deficits, and massive debt refinancing needs.
Inflation has remained above 2.5% for 65 consecutive months. Oil prices have risen above $100 per barrel, with Bank of America warning they could reach $150. The Federal Reserve must act aggressively to control prices.
Negotiations to reopen the Strait of Hormuz have collapsed, and reports indicate potential further conflicts after midterm elections, which could push oil prices, inflation, and interest rates higher.
The United States runs an annual deficit of approximately two trillion dollars. The Treasury must issue new debt at a time when buyers demand higher returns.
Market fluctuations of 20% are irrelevant without sufficient savings to capitalize on opportunities. Tracking all expenses helps identify unnecessary spending. Rocket Money is a personal finance app that consolidates financial accounts, tracks spending, builds budgets, and identifies recurring subscriptions. The app recently launched Rowan, an AI-powered financial assistant available via text message that alerts users to high fees, overspending, low balances, and savings opportunities.
When mortgage rates rise quickly, sales decline before house prices. Mortgage applications have fallen to levels not seen since the early 1990s. Redfin reports 53% more sellers than buyers, the largest gap in their records. In Nashville, Miami, Houston, Orlando, and Las Vegas, there are more than two sellers per buyer. Nearly half of sellers in these markets are making concessions.
38% of home builders cut prices this month, and the average price of a new home is down 8.8% from a year ago. Average home prices nationwide remain 2.1% higher than last year, but adjusted for 3.4% inflation, house prices are falling.
If mortgage rates remain above 7% or rise further, it becomes impossible for average buyers with average incomes to purchase average homes. Property owners may prefer government bonds over rental properties for the first time in 20 years. House prices would need to fall approximately 14% for buyers to achieve the same monthly payments as earlier this year.
The United States has surpassed $40 trillion in debt less than five months after crossing $39 trillion. In the first 11 months of the fiscal year, over $1 trillion was paid in interest alone, exceeding spending on medical care and the military. This equates to more than $3 billion daily in interest payments.
Much of the debt was issued at low rates and is maturing, requiring refinancing at current high rates. Every 1% increase on $32 trillion owed to the public adds $320 billion in annual interest.
Long-term Treasury funds have closed at their lowest price in history, down more than 50% from their 2020 peak. For decades, retirees were advised that bonds are safe assets, but this assumption has been challenged.
Bonds now compete with stocks. S&P 500 companies are expected to earn $5.20 per $100 invested, while Treasury bonds also pay $5.20 guaranteed. Investors face a choice between potential stock market returns of 7% versus guaranteed returns exceeding 5% from government debt.
Bonds now compete with rental properties. A $500,000 investment in government bonds yields $26,000 annually, while a rental property might generate $24,000 with additional risks from tenants, insurance, and property taxes. Real estate investment has fallen by approximately half over the past four years according to Reventure Consulting.
Best-case scenario: Negotiations reopen the Strait of Hormuz, oil prices fall, inflation decreases, the Federal Reserve avoids further rate increases, and conditions gradually normalize.
Worst-case scenario: Oil remains above $100, conflicts escalate, the Federal Reserve raises rates further, mortgages reach 8%, and housing, stock, and retirement markets are severely damaged.
This situation differs from 2008. Today's homeowners hold substantial equity and low-interest mortgages they are reluctant to relinquish. Many will choose not to sell rather than accept losses. Markets with abundant new construction, seller-heavy inventories, and cash-flow-focused investors will face greater pressure than inventory-constrained markets.
The primary risk is time. Prolonged high mortgage rates above 7% allow inventory to accumulate, forcing impatient sellers to lower prices and giving buyers increased bargaining power. Buyers should be patient and make reasonable offers based on their financial situation.
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