Pento Portfolio Strategies
MAR 14, 2018
When interest rates are near zero, anyone who can get debt can afford anything. When your monthly interest payments are close to non-existent, piling on additional debt is painless. That it spells near-to-medium term future disaster is immaterial, right? Embrace today’s pleasure. Ignore tomorrow’s pain.
It’s all but become the official American mantra.
With mortgage rates now more than half a percentage higher than at the start of the year, homebuyers are already getting priced out of an overvalued real estate market.
This means that just by waiting a couple of months to buy a home, someone buying the typical U.S. home would be paying an extra $564 per year on their mortgage. Over the lifespan of a 30-year mortgage, that adds up to nearly $17,000, according to Zillow.
The rise in mortgage rates has caused purchase applications to fall to a level that is now just 1% above the year ago period. The current trajectory clearly shows the YOY change should soon be negative; and as housing goes into recession the economy is sure to follow.
In fact, year-on-year, Existing Home Sales were down 4.8%, the largest decline since August 2014. Prices also dropped considerably in January; the median selling price fell by 2.4%.
It's hard to make the argument that any group has been deleveraging. What this all means is that the debt-disabled economy is more susceptible to rising rates than ever before. In other words, the bursting of the greatest economic distortion in history—the worldwide bond bubble—is now slamming into the most massive accumulation of global debt ever recorded. To be specific, debt has surged to the unprecedented level of 330% of global GDP.