Would Higher Interest Rates
Derail Today's Housing Boom?
A key question for investors, including those who participate in real estate markets, is: “Where are interest rates headed?”
There is a great deal of speculation about who President Trump's pick for the next Fed chair is going to be - and he recently confirmed that he is "close to deciding. "
At a Capitol Hill lunch meeting on October 23th, Trump asked
for a Senate show of hands — a straw poll — on who that person should
be. Stanford economist John Taylor won, which sent some immediate
jitters through the bond market.
The yield on the 10-year Treasury Note climbed from 2.38% on the day of the poll to 2.45% three days later.
As per the chart below (source: PredictIt.org), you can see that John Taylor’s odds have risen significantly in the betting markets.
Why is this important?
It's because if Taylor were to
become the next Fed Chairman, he would
likely be an be an advocate for higher
interest rates - which is a suggestion
he made in a recent interview.
Taylor is well known for the
Fed interest rate rule that is named for him. The "Taylor rule" uses strict guidelines to decide where rates should be, and currently indicates the Fed Funds rate should be as high as 3.5%, which is almost triple the current rate of 1.25%.
Would Higher Interest Rates Derail
the Current Housing Boom?
I personally don't think a small jump in rates would make much of an immediate difference - but who cares what I think?
Instead, and as my Timing Letter subscribers know, I'm a trend-follower that relies on the market itself (i.e. the collective actions of buyers and sellers) to tell me whether housing prices are likely to rise or fall in the future.
Right now, for example, the 12-month trend for U.S. existing home sales
(which is one of the five key leading indicators I use to track real estate trends) looks like it may be in the process of rolling over to the downside. Existing home sales has historically has been one of the first leading signs of an approaching market peak.
Do weakening home sales worry me?
Sure they do - just like the possibility of rising interest rates "worries" me.
But as everyone knows who has heard me speak, I am always worried about the markets and my investments.
Why do I say that?
It's because history shows that no investment is permanently safe - and that's why I have adopted the wisdom of Larry Grove (the brilliant co-founder of Intel) who says "if you want to survive, it pays to be paranoid."
"Cutting Edge Strategies for
Buying Low at Market Cycle Bottoms"
If you have any suggestions/ideas, I would appreciate your input ...
and you can send them to Robert@RealEstateTiming.com