The already struggling U.S. housing market recovery took it on the chin this week…
While most investors were focused on the collapsing stock market, courtesy of the Fed’s announcement Wednesday that it would pull back on its $85.0-trillion-a-month paper money printing program some time later this year, bond yields rose sharply.
The yield on the bellwether 10-year U.S. Treasury bill has jumped almost 50% over the past 12 months—and that means mortgage rates are rising sharply. This should be of no surprise to my readers, as I have been warning about higher interest rates for some time now. (See “Gone Are the Days When the U.S. Bond Market Was the Place to Be.”)
If there is one factor that affects activity in the housing market the most, it is interest rates. That’s why the nail in the coffin for the housing market might now be in.
The National Association of Realtors reports first-time home buyers accounted for only 28% of all the existing-home purchases in the U.S. housing market in May. What’s even more troubling is that they have been declining in number. In April, first-time home buyers accounted for 29% of purchases; and in the same period a year ago, they bought 34% of all existing homes in the U.S. housing market. (Source: National Association of Realtors, June 20, 2013.)
Looking forward, I won’t be surprised to see the number of first-time home buyers decline even further, because the Federal Reserve has pulled the rug right out from under their feet by saying it may pull back on its quantitative easing later this year, thus pushing mortgage rates sharply higher.
The standard 30-year fixed mortgage rate jumped to 4.24% today, up from only 3.67% a month ago.
As I have been writing, the U.S. housing market has been propped up this year by institutional investors moving in and buying single-family homes for the sole purpose of renting them out—for investment purposes. Institutional investors became major buyers of single-family homes in key areas of the U.S. housing market and even bid up prices.
But now that yields across the board are rising, is the housing market that attractive to institutional investors? Money flows to the highest and safest returns. With rates rising, the big-money guys might finally have other investment alternatives to look at. Combine less focus on the housing market from institutional investors with declining demand from first-time buyers and rising interest rates, and quickly the housing recovery becomes a has-been.