The Beginning of the End: Rising Interest Rates

Harry S. Dent | Monday, August 26, 2013 >>

Last Friday, August 23, this shocking number hit the newswires:

New home sales fell by 13.4%, the worst decline since May 2010.

This comes after July’s existing home sales increased.

While this report shocked everyone else, we were not in the least bit surprised. To us, new home sales are the red herring of the so-called “housing recovery.”

Industry experts, commentators, builders and average Joes have been watching this number move up with growing delight. “Things are getting better. Thank God!”

But we didn’t view the number that way. To us, the only thing driving existing home sales were speculators… and they’re NOT the people real estate needs to truly find its legs again…

Look at this chart…

See larger image

To risk sounding like a looped recording, we’ve argued throughout 2013 that the rise in home prices is bogus. That it’s just another impact of the endless Quantitative Easing (QE) and money-printing lunacy.

These reckless policies and practices have kept the economy from melting down again since 2008, yes, but it’s done us no favors. It’s only managed to create a measly 2% real growth in the economy.

About $2 trillion in monetary and fiscal deficits and all we get is 2% growth and 1% to 2% inflation?! That’s pathetic. It’s a sign of how weak the demographic fundamentals are… and how great the pressure is from unprecedented debt at all levels (government, financial, consumer and business).

Regardless, all that QE money must go somewhere. It’s not going into consumers’ pockets. Businesses aren’t using it to increase lending. Instead, financial institutions, from banks to pension funds to hedge funds, are using that money to speculate.

And they’ve been focusing that speculation on the real-estate market, existing homes in particular. Their modus operandi: Buy homes in foreclosure or in short sales… especially those near or below construction costs… and then flip them or rent them out for a positive cash flow.

So real-estate prices have been rising. And people have been getting more and more excited.

But ask yourself this: How long can this last if real buyers aren’t coming into the market?

The answer is simple: Not very long. And now, with steadily rising interest rates, we’re beginning to see the cracks we already knew were there…

Long-term interest rates have risen from 1.38% on the 10-year Treasury bond to 2.92% recently.

Thirty-year mortgage rates are now up from 3.4% to 4.7% and rising.

The average mortgage payment has gone from $566 to $766. That’s a 35% increase.

And this is just the beginning.

We estimate that the 10-year Treasury bond is headed to 3.8% or higher in the next six to nine months. That would raise mortgage rates to near 6%, making the average payment as high as $1,000.

What do you think that’s going to do to the housing “recovery?”

You got it. It’s going to knock all the wind out of it.

Then there’s this: Mortgage applications for purchases have been flat since 2010. That means the young families who buy homes to actually live in and raise their kids in aren’t out on the real-estate dance floor.

All of this tells us – and has told us for months now – that this housing “recovery” is utter B.S. It’s just another perversion from the endless stimulus… another bubble to burst again… just like commodities have done and stocks will do (likely by early 2014).

If home sales are beginning to slow due to rising mortgage rates and diminishing speculation, which we believe is happening, then this is the beginning of the end.

The Fed is losing control over longer-term interest rates as investors anticipate the withdrawal of QE. With the printing press effectively out of the way, we’ll quickly fall back into reality, where home prices crumble and stock valuations deteriorate.

We have been waiting for this sign.

It says that the economy is likely to slow ahead and stocks are likely to peak by early 2014.

Are you ready for the next great crash?

Harry

Managing Editor’s Note: If you haven’t yet reserved your seat for our November 6 to 8 Irrational Economics Summit in La Jolla, where Harry and Rodney will talk in detail about the crash ahead and ways to thrive and prosper in a world turned upside down, you still have time to do so before the price goes up. To secure your $200 discount, click here now. Hope to see you there. – Teresa

 

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Categories: Housing Market

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.