Will Rising Interest Rates Lower Home Prices?
In economics there are:
A – Laws
B – Patterns
C – Precedents
D – Coincidences
E – One-offs
If you were asked in 2019 what path a global pandemic would follow from the above choices you may have opted for B, C, or maybe even A.
But we really wound up with E, a One-Off.
A hundred years ago during the Spanish Flu Pandemic, we didn’t have a real marketplace for housing or mortgages and certainly not the ability to telecommute.
As COVID rolls off the end of history’s conveyor belt (applied here as a parable) we can see the next bagged item being tugged along is the Russian Ukraine war.
Behind the War bag, there is a heavy cardboard box bouncing along its lateral journey. It bumps the guardrail and threatens to topple over but the moving belt tugs the heavy end, rotating it as it moves along. The side now facing you is labeled INFLATION.
The supermarket cashier has her hand on the toggle switch that can stop the conveyor’s motor. You notice her name tag reads: Federal Reserve. As the box rotates precariously close to falling to the floor the clerk snaps off the switch. She readjusts “Inflation” back to the center and clicks back on the hidden electric motor.
Upon restarting the belt a tall cereal-type box spills backward. This box labeled “Yield Curve” falls flat on its face. The underside reads a single red-colored block-lettered word …. INVERTED.
You grab your phone and Google Inverted Yield Curve.
Images of a Georgian peanut farmer, vintage cars lined up at gas stations with tall signs of long since defunct service station brands.
Another image is an abundance of red L’s linked from foot to top in a step-down pattern of a plane-crash graph.
Startled you close the app as the cashier calls you out of your nostalgic reverie,
“Cash or Credit?”.
You peer in the fold of your inflation-worn wallet; pocket link and possibly some fortune cookie crumbs. You look back at the many items yet to be scanned for prices.
“That’d be credit” you answer.
The COVID bag spills as it hits the stationary ground in the collection area at the end of the check-out conveyor.
The scanner’s beep pulls your attention back. And you see at the beginning of the belt the most recently loaded box appears larger now.
The Mortgage Rates box has doubled in size in only a few seconds. Literally. How’s that even possible? You look again to verify – nope, you’re not mistaken, it’s distinctly growing.
On your phone, you search the web for “Housing Crash from Spiking Interest Rates”. The results don’t seem right. The last crash was the result of “Subprime Lending” everyone knows.
An image of Barney Frank appears and that relieves you. Slightly. The Dodd-Frank Act was the “protection” provided to the consumers so that we wouldn’t injure ourselves with the same weapon, twice.
A harsh scraping sound draws your attention to a frozen package too heavy to be tugged onto the belt. The package is soggy from its frozen thawing. The cardboard is weeping moisture. The diagonal jagged staple that connects the belt to itself to form the invisible conveyor loop catches the bottom of the box. Its weight provides the ballast to pull it aboard. The motor noise increases under strain. You look at the ceiling. Did the lights just dim?
You don’t remember buying a box this heavy.
The box label reads Non-QM.
There’s No Way you bought this. You don’t even know what Non-QM is.
“That item isn’t mine” you state to the cashier.
Cashier Federal Reserve rips the label off the box. You see the removed label was covering the brand “Sub Prime” in a yellowed aging font (this is where a member of the VC company investing franticly in Non-QM companies screws his fist into his palm).
The cashier replies, “We’re getting rid of these. Everyone must take one. And besides, we’ve paid for it on your behalf. Don’t you remember QE-1? The next generation is going to pay it ALL back!”
Exasperated you take a moment to process the whole scene from the bag landing pad through the stopped belt back to the staging area. What a shat shoe.
Behind the red plastic stick? Housing, labor market, office space, supply chain, Retail-Apocalypse 2, and baby formula all percolate like Mexican Jumping Beans.
You try to summarize the scene with a Google Search to the best of your ability.
An image appears of a shirtless Elon Musk riding a bareback horse through a vacant Nevada subdivision paved with cryptocurrency. Unfortunately, you can never “unsee” this.
The cashier looks at you sympathetically, “it’s OK” she says referring to the unpurchased goods, “you’re at your credit limit already.
A series of “one-off” events don’t allow us to apply rules or patterns to determine the outcome of the title question of this piece. But if you are told that there isn’t enough supply (or inventory) and therefore housing prices can’t go down, be wary of the motive of the source of that information.