On Monday the Commerce Department released data indicating a second straight month of weak home sales. Economists have cited “weather and the volatile nature of the new-home sales data” as the primary factors. Although given the recent rise in interest rates, as well as the reaction by the stock market, it’s worth considering the drop in sales might not be completely random, as well as what might occur should rates continue to rise.
“Following the significant disappointment of January’s existing home sales, hopes were high for a rebound in new home sales (+3.5% expected after December’s 9.3% plunge) but those hopes were crushed as January new home sales crashed 7.8% MoM.”
Certainly two months of data are not enough to declare an official end to the real estate bubble. But the fact that it has happened at the same time that interest rates have risen seems hardly a coincidence.
In fact as many in the Austrian Economics community have watched the stock, bond, and real estate bubbles get re-inflated following the last collapse of the housing market, rising interest rates have always loomed as one of the potential pins.
Why would the rising interest rates matter so much?
For the same reason they did prior to the collapse of the last housing bubble.
Back in 2004 after lowering rates to 1% for a year, former Federal Reserve Chairman Alan Greenspan began raising rates. As he continued to raise rates in the following years, many of the mortgage payments that had been affordable under the lower rates became too expensive.
Now the stock market has responded harshly to the higher rates in recent months, and a similar impact would naturally be expected in real estate. So if rates continue to rise, that puts a lot of pressure on the housing market.
Keep in mind that rates could continue to climb for a variety of reasons. They could rise because the Fed keeps raising its short-term rate. They could rise if the Fed actually follows through on its pledge to reduce the size of its balance sheet. And rates could also rise if bond investors stop buying the debt, which the Chinese have already hinted at doing.
In fact, short of more Federal Reserve easing, there’s every reason to believe that rates would indeed continue to climb. Of course if an increase in rates causes a crash in the real estate market, it’s likely that the Fed would ease yet again.
Either of which would leave us in an environment where owning hard assets like precious metals would seem preferable to dollars, treasuries, or broad based stock indices. Which is what makes this such a unique investing environment for gold and silver. At this point, virtually every possible outcome results in further exposure of just how fragile the current system is.
It’s unfortunate that no one asked new Federal Reserve Chairman Jerome Powell about this during his Congressional appearance on Tuesday. Because the Fed long ago backed itself into a corner in which it’s difficult to see a true exit plan. And if Powell really has a plan to unwind the last decade of policy without again crashing the system, I for one would sure love to know what it is.
So the markets will likely remain fixated on interest rates in the coming months, and rightly so. If rates continue to climb at anywhere near the current pace, watch out for continued declines in the real estate and stock markets.
Which is why owning precious metals as a hedge against a dying debt-based system continues to make a lot of sense. And keeping an eye on interest rates and real estate will provide important clues about the path to that ultimate outcome.
