For most Americans, real estate makes up a significant portion of their wealth. After all, homeownership signifies an essential aspect of the American Dream.
Homeownership represents some degree of upward mobility. But in actuality, it often entails loads of debt. And as we saw in the last housing crisis a decade ago, real estate isn’t necessarily a safe investment.
The housing market peaked in 2006. Two years later, the global financial crisis and Great Recession followed; the housing market falling to new lows in 2011.
Housing prices have skyrocketed once again, fueled by cheap money and low-interest mortgages. It’s as if people already forgot about the massive foreclosure crisis and housing bubble that took place less than a decade ago.
In the years preceding the 2008 financial crisis, when the housing market was soaring, nobody thought that home prices would ever go down. What a strange illusion. Nobody anticipated a crash.
But to be fair, we should say that nobody was looking beneath the surface, the dynamics that were apparent (if you searched for them) but not glaringly obvious.
It should make you wonder: are there any hidden dangers lurking below the surface today that can devastate the housing market like 2008?
There is one clue that such a danger exists. Take a look at interest rates.
Rising Treasury Yields
Treasury yields on the two- and three-year are on the rise, jumping last week to 2.06% and 2.22% respectively.
But the rise of the ten-year treasury yield to 2.66% is what concerns most homeowners and real estate investors.
The financial markets look at the ten-year rate as a benchmark; it’s implications having the most significant impact on mortgages.
To give you some perspective, the current ten-year yield has more than doubled since its 2016 low of 1.32%; a figure that has exceeded its 2014 levels.
This rise in yield may not have affected the stock market or specific bond markets, but its impact is beginning to be felt in the mortgage market. According to Wolf Street:
On Friday, the average 30-year fixed-rate mortgage with conforming loan balances ($417,000 or less) for top-tier borrowers, according to Mortgage News Daily, ended at 4.23%, the highest in nine months.
So what does this mean for the average homeowner? It depends on their financial capacity to meet their mortgage payments.
Let’s say you have a mortgage of $250,000. If interest on your payment jumps from 3.5% to 4.5%, this can mean a $144 increase in your monthly payment. Of course, you know that such an increase will vary according to the size of your mortgage.
And as you may or may not know, rising mortgage rates tend to push home prices down. As Fed rate hikes continue, and as long-term yields catch up with the rising curve of short-term yields, it’s likely that real mortgage rates will rise well above 4.5%.
Should we anticipate another housing crisis?
If you think about this trend in rising yields and its effect on real estate, it’s easy to see the likelihood that home prices will begin falling.
This means that a large number of homeowners, particularly new ones, may find themselves underwater; losing equity in their homes.
It also means that many homeowners may not be able to keep up with their mortgage payments.
In short, we may be facing another crisis in foreclosures.
Smart buyers may be waiting on the sidelines for home prices to drop. But this will only accelerate price declines, as sellers looking to get out will begin aggressively slashing prices to attract buyers.
And the unintended consequences of those actions would be to accelerate drops in equity...potentially increasing the risk of more foreclosures.
So with Americans’ primary source of wealth under threat and in decline, is there any asset that will appreciate while everything else falls?
Yes, there is, and your best bet is to buy gold. Gold is immune to inflation, Treasury yields, and stock market declines. It can’t be inflated or manipulated, and it is the only safe-haven source of “real money” whose intrinsic value cannot be eroded.