Rising Rates, Falling Real Estate – Part 2
In last week’s Alert, we discussed current threats to the real estate market due to the Federal Reserve raising interest rates and put today’s higher mortgage rates inthe broader context of how we got here (Stage One) and where we are today (Stage Two).
Now it’s time to delve into what is likely ahead for the evolving real estate market, both in the near term (Stage Three) and the longer-term future (Stage Four) – and more importantly, what to do about it.
Got a question or comment? Click here to schedule your no-cost call with Aftershock and Fake Money Real Danger coauthor Cindy Spitzer
Stage Three (next) – Eventually the Fed Quits Raising Rates
The Federal Reserve’s attempt to control inflation by raising interest rates will ultimately fail. In a normal (non-bubble) economy, such an approach would be harsh but survivable. However, in a bubble economy dependent on a vulnerable foundation of stock, bond, real estate, dollar, and debt bubbles, it is simply a no-can-do.
That’s because each of these bubbles depends on continued low interest rates for their ongoing support and survival. Pushing rates up a modest amount is doable; pushing interest rates up high enough to fully curtail nearly double-digit inflation ain’t going to work. To drop from today’s 8.2% inflation back down to 2% would take much higher interest rates hikes than the Fed will be able to do without popping the bubbles.
Therefore, so sooner or later (probably within months), the Fed is going to cry uncle and quit raising interest rates. While they do want to fight inflation, they don’t want to do so at the cost of destroying the stock, bond, and real estate markets.
Once the Fed is forced to quit raising rates and must return to massive money printing to keep interest rate low and the stock and bond bubbles going, we expect to see real estate under less downward pressure.
However, even if mortgage rates stop rising and decline to some extent, they are unlikely to return to their previous ultra-lows. The combination of higher mortgage rates and the scare from the Fed’s attempt to raise rates will make buyers less willing to stretch their incomes to buy too-expensive homes. Price will come down as more sellers need to sell.
Some areas, such as southern California, could face a prolonged downturn because prices rose very high, very fast, and buyers will be no longer willing to take a chance on homes that could potentially fall in value. In general, we don’t see real estate crashing in this stage, but big price growth will be a thing of the past and in most cases real estate values will dip.
Sellers should be prepared to lower their asking price, if necessary, or add some extras to stand out from the competition, such as more contribution to closing costs.
Buyers should avoid all adjustable-rate mortgages, no matter how appealing the lower rates may seem. As you will see in the next section below, future interest rates are poised to go higher – much higher – in Stage Four.
If you own investment residential or commercial property, we strongly recommend that you exit those investments prior to Stage Four. (Again, give us a call if you’d like to discuss.)
Stage Four (longer-term future) – Real Estate Plunges Over the Cliff
After they give up on raising interest rate to control inflation, the Fed’s strategy of keeping rates low with more and continued massive money printing, despite rising inflation, is also doomed to fail. That’s because once significant inflation sets in, it will only get worse as the Fed prints more and more money.
Once inflation is high enough, interest rates will automatically climb, regardless of Fed. The Fed’s inability to control inflation and rising interest rates will worry investors into greatly reducing their stock, bond, and real estate holdings. This will naturally cause all interest-rate-sensitive assets (stocks, bonds, real estate) to drop significantly.
If you own investment real estate and you are banking on holding onto it no matter what because you believe your tenants will keep paying, you may be surprised later when deep recession and rising unemployment make that increasingly less likely.
Making matters worse, as unemployment rises, courts will become increasingly backed up with many landlords seeking eviction, until the logjam leaves residential renters squatting without immediate consequences.
Most commercial real estate will also be in trouble due to falling consumer spending, failing business, and empty office space.
If you are still a landlord of residential or commercial real estate at this point, do not count on rental income and be prepared for very significant loss of equity.
Owners of investment real estate, as well as anyone who must sell their personal residence for whatever reason, should do so prior to the big plunge. Unlike stocks and bonds, real estate cannot be quickly liquidated with the click of a mouse. Therefore, selling before Stage Four is absolutely critical.
Homeowners with no loans or with fixed-rate mortgages can just stay put. You won’t be able to sell for much (or possibly at all) at this point, and everyone has to live somewhere. However, be prepared to see home values drop very significantly. Anyone holding an adjustable-rate mortgage in Stage Four will face rapidly rising monthly payments that will force most borrowers into default.
When Will Stage Four Hit?
No one knows the future or can “time” the market, but once you understand the general direction we are going (because it is the natural consequence of where we have been), then we can look for and identify some key indicators along the way that can show us what is coming.
For those who know what to look for, Stage Four is not going to suddenly appear out of the blue. Well before the stock, bond, and real estate markets go plunging over the waterfall, there will be may visible signs of the increasing rapids ahead:
· Rising double-digit inflation – Continued massive money printing, when it resumes, will keep interest rates low at first, but eventually push inflation higher.
· Rising interest rates that the Fed cannot control – Sustained high inflation will eventually push interest rates higher, regardless or the Fed. In fact, additional money printing by the Fed to try to keep rates low will only create even more inflation. The Fed will have to stop.
· Rising mortgage rates – Rising interest rates will drive mortgage rates higher.
· All interest-rate-sensitive assets, such as stocks and bonds, will flattening and then fall – By definition, interest-rate-sensitive assets will be negatively affected by rising interest rates.
· Non-interest-rate-sensitive assets, such as gold, will rise – With interest rates rising, non-interest-rate assets will become very attractive.
This last indicator is key. Once you see rising gold prices outperforming the S&P 500, even if the S&P is not yet falling, you will know the big cliff waterfall is dead ahead.
Again, it is critical to exit all investment real estate well before Stage Four.
After Investment Real Estate, Where Next?
In Stage Four, real estate values will plummet. But that certainly will not occur in a vacuum. As interest rates are forced higher due to rising inflation, ALL interest-rate-sensitive assets – including stocks and bonds – will hit the cliff.
That means you cannot simply move your real estate investments into other equally vulnerable markets and expect to stay safe. On the other hand, with inflation continuing to rise, simply staying in cash clearly won’t be the answer either.
We have written several bestselling books predicting these current and future problems – and more importantly, we know what to do about it. In fact, for each of the four stages described above, Ark Financial Management has a specific investment strategy to provide both protection and performance in alignment with your risk tolerance and investment needs. Details available on request.
Got a question or comment? Click here to schedule your no-cost call with Aftershock and Fake Money Real Danger coauthor Cindy Spitzer.