It’s official, divergence is the new norm
Today's Financial News - Posted June 10, 2009
If you think the real estate industry is finally on the mend, you better check the data one more time. Now that interest rates are on the rise, home prices will have to drop once again. But prepare your portfolio and you will have nothing to worry about.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): Investors better get used to a new theme on Wall Street. As the economy emerges from its defensive shell and money begins to flow to the areas of least resistance, reading and hearing the term “divergence” will be a common occurrence.
Anybody that has ever sat through a basic economics course knows money always heads to the areas that offer the most beneficial risk/reward structure. If two potential investments have the same risk, the choice with the highest return possibility will always be the winner.
The real estate industry is obviously not immune to the phenomenon.
As mortgage rates continue to climb – they’re up almost a full percentage point in the few months – investors will begin to rethink their plans. It is horrible news for a real estate industry that is praying it has seen the worst of the decline.
When mortgage rates were at or below historic lows, the risk/return ratio was the most attractive it has ever been in most of our lifetimes. With 30-year rates as low as 4.61%, Americans realized they had a great deal on their hands, even if home prices were still dropping.
But now that rates are back above 5.5% and rising, the situation has changed dramatically. Even a 100-basis point surge has had profound effects on the mortgage market. Potential buyers lost an estimated 10% of their buying power. Instead of looking at a $200,000 house, now they can afford a home worth $180,000.
Refinancers have come and gone
The folks with fixed mortgages in the 6%, 7% and even 8% range were the ones truly taking advantage of the historic-low rates. When rates dipped towards Obama’s 4% target (still a pipe dream) homeowners lined up to refinance at the low rates.
But now that rates have gone higher, the gush of activity has dried up. The Mortgage Bankers Association’s refinancing index recently slumped by 11% to a seven-month low. Even with the slowdown, refinancing makes up nearly 60% of all mortgage activity, proving the real estate market is nowhere close to healthy.
While rising interest rates are bad for the folks buying, building and selling homes, it is great news for other folks. Commodities, international investments and even select banking stocks will surge as interest rates fall.
For some I-told-you-so proof, the Treasury just finalized an “awful” bond auction, selling 10-year notes at 3.99%. The market dropped nearly 70 points on the news. Meanwhile, a recent recommendation to TFN Strategic Trader subscribers designed to take advantage of the situation is up 236%.
The next six months will be a fight between the “haves” and the “have nots.” Investors positioned to take advantage of rising rates will do well. But on the opposite end of the divergence spectrum, folks that took the Feds word and said rates would remain low are going to be wondering what in the world just happened.
It is not over yet. The real estate industry is going to take it on the chin once again. If this nation is truly dependent on home values rising, this recession is not going anywhere anytime soon.
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