Headwinds on the Horizon for Real Estate?

Headwinds on the Horizon for Real Estate?

One of the biggest issues that many U.S. homeowners faced in the past decade was that their homes were underwater; this limited their ability to sell.  However, according to the S&P/Case-Shilling 20-City Home Price Index, in September 2016, U.S home prices surpassed what was set a decade ago.  With home prices surpassing their previous highs, more homeowners should be encouraged to put their homes on the market.  However, there is reason to believe that prices will soften because the cost of capital is increasing.

For the past several months, there have been pressures to sell long-term debt (e.g,. the 10-year U.S. Treasury).  The 15/30-year mortgage rates are tied to the 10-year Treasury because most homeowners either (i) tend to pay off their mortgage loans as result of selling, or (ii) refinance their mortgages within 10-years.  In the past several weeks, the yield on the 10-year Treasury has risen quickly because investors are trading out of long-term debt.

U.S. Treasuries have been under significant pressure after the U.S. election.  The market is pricing in stronger economy growth, higher inflation and that the Federal Reserve will raise short-term interest rates at a faster pace.  The catalyst behind economic expansion is greater spending, lower taxes and curb on regulations sought by Donald Trump.  Another reason behind the selloff is that contemplated economic expansion requires greater fiscal spending thereby more bonds will likely be issued putting pressure on debt market because of the increase in supply.

With that selloff, the yield price on the 10-year Treasury has increased, which has increased 15/30-year mortgage rates.  With loan costs becoming more expensive, buyers will, at some point, expect a corresponding decrease in selling prices. Sellers are generally slow to react to changing rates because they want to maximize the most from the the sale of their homes.  If, and as, rates continue to climb, there will be pressure on sellers to adjust their home prices downward, which is hard, because most sellers have been locked out from selling their homes and have seen other homes recently sell at record highs.

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