Is The Market Signaling
A Major Turn in Rates?
[Taken from the Nov 2016 issue of The Campbell Real Estate Timing Letter]
With U.S. interest rates at 200-year record lows, I presented evidence in the Sept 2016 issue of this Timing Letter as to why falling rates likely became a 3 statistical deviation event in early 2016 – i.e. a “bubble.” Based on the fact that all asset bubbles burst – which in turn forces asset values to “revert back to their longer-term norms” – I felt that we may be at or near the lows for rates during this market cycle.
What have mortgage rates done since July 2016?
After hitting a 22-month low on July 2016 (3.41%), the chart below shows how rates have risen to 3.54% on Nov 3, 2016 – a four-month high.
While mortgage rates have experienced a small uptick since July 2016, the more important 12-month trend for 30-year mortgage rates is still down.
Compared to Nov 2015 (3.98%), mortgage rates in Nov 2016 (3.54%) are still lower by almost half a percentage point.
I caution you, however, not to lose sight of the fact that bond prices (which move inversely to interest rates) are now in the nosebleed section of historical valuation – and any unexpected shock to the U.S. or global economic system could send rates sharply higher …
and the price of bonds (and real estate) sharply lower.
What are REIT Prices Telling Us?
Current real estate valuations are justified only if interest rates stay low – and if the Fed does raise rates in December as the financial markets currently expect (see page 4),
housing prices could start adjusting downward.
In fact, the Simon Property Group (SPG), – which is a Real Estate Investment Trust (REIT) with the largest market capitalization ($59.2 B) in the U.S. – is starting to smell a
Why do I say that?
It’s because when November 2016 started, the price of SPG has fallen 22% since August – as shown in the chart below.
This 22% correction represents the largest price decline for SPG in five years –
and the 2nd largest in 16 years.
The price of SPG fell 78% from 2007 to 2009 in the aftermath of the bubble bursting in the U.S. real estate market.
We will soon know if interest rates are getting ready to lift off after hitting a 200 year historic low. But what we do know is that along with the price of SPG, all equity REITs have been trading off in the last three months – and this may be a sign that we have entered a high-risk period for the U.S. real estate market.
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