I was listening to a financial news report on the radio the other day and picked up on someone (regrettably I did not get their name) who was mentioning that the Treasury was having a difficult time selling bonds to cover Government operations. The implication being that no one wanted the U.S. debt at the rates being offered and in this case the Treasury purchased the bonds. I believe that is what is affectionately referred to “monetizing” our debt.
I decided to take a look around and see what might be happening in the bond market, because… and pay close attention here… the 10 year Treasury bond yield is what drives conventional mortgage rates. Typically, mortgage rates are 2 to 2.5 percentage points higher then the 10 year Treasury bond yield. For instance, the current yield is 3.77 and 30 year fixed mortgages are at about 5.14%
As I was searching I found this chart (below) that predicts that in July of this year the 10 year bond rate will be around 4.05%.
Not bad all things being considered, especially the impact of the Government either buying its own debt…(don’t you wish you could do that?) or having to offer a higher yields to entice investors to buy our debt.
Continuing my search, I discovered this Bloomberg article discussing a Morgan Stanly analysis that predicts the 10 bond yield will make it to 5.5%. Everything you need to know as a real estate investor is in the second paragraph. Simply put… if the yield tops 5.5% fully expect that mortgage rates are heading higher and could attain an 8% or higher level.
If you are a home buyer… this is not good news!
For those investors who cater to home buyers, this could be even worse news; but if you are a landlord this may be the best news to come along in a very long time.
Let me explain.
It should be obvious that as mortgage interest rates increase more and more, individuals will be pushed out of the market because their income, or more specifically their Debt-to-Income Ratio, will not support the payments based on an 8% mortgage, all other things being equal.
So, fewer and fewer home buyers will be able to afford to purchase a home.
This news is troubling for investors, because if home buyers can’t afford higher mortgage payments, properties are going to sit longer, tying up precious capital and negatively affecting profits, and…
For landlords the good news it that with fewer home buyers the demand for rentals will help stabilize current rental rates and decrease vacancies.
Will the 10 year yield hit 5.5% or more? I can’t be certain.
But as an investor, it would be prudent to pay close attention to what our treasury is doing because your entire game plan can be disrupted, and you don’t want to be standing around scratching your head wondering what just happened.
Chart: Financial Forecast CenterHow 10 Year Treasuries Will Affect Real Estate Markets, Investors, & the Economy by Peter Giardini