The yield on Treasuries should be aroung 10%. It's obvious that government manipulation is keeping them low. Mortgage rates are based on the treasuries, The 10 year in particular. It is possible for them to keep rates articicially low for a few more years but when you stretch a rubberband to far it eventually breaks. Now before I continue just know I don't have any degrees in finance and economics. I'm just a guy with some rental properties and a failing car lot. That being said I am going to throw out a hypothetical possibility.
Everybody is talking about a 2nd stimulus, even Warren Buffet. The government is already 11TRILLION(11,000,000,000,000 damn that's a lot of zeroes) in the hole. In order to stimulate they have to borrow or print money. They will sell treasuries to the world to fund this stupid idea. Now if you are an investor in American government it looks like a high risk investment to lend money to someone already over their head in debt, while revenues and cash flows are on the decline. In order to create investment it will become evident that you would have to give a good return. So this will force the yields up in order for investors to fund our debt. So if the yield were forced to 10% that would mean mortgage rates at 11 to 13%. That would cut the values of homes in half. Add in the fact that it is going to take an increase in lending rates to motivate the banks to start lending again I think the Big Picture forces interest rates to rise in order for money to hit the street again. I'm sure people didn't expect double digit interest rates in the 80's, but it happened. Rates have been too low for too long. The economy won't recover until credit becomes available once again, and banks won't lend until the returns are worth it. Do as you choose but I am going to prepare for a high rate enviorment to hit sometime in the future.
As a contrarian investor this is a good thing if you are a real estate investor. High rates mean low prices. My philosophy of fully leveraged cash flow won't change so I just have to buy cheap. When rates lower someday and I can refi that will just make the cash flows even better. Intersting times are ahead indeed. Invest wisely.
Everybody is talking about a 2nd stimulus, even Warren Buffet. The government is already 11TRILLION(11,000,000,000,000 damn that's a lot of zeroes) in the hole. In order to stimulate they have to borrow or print money. They will sell treasuries to the world to fund this stupid idea. Now if you are an investor in American government it looks like a high risk investment to lend money to someone already over their head in debt, while revenues and cash flows are on the decline. In order to create investment it will become evident that you would have to give a good return. So this will force the yields up in order for investors to fund our debt. So if the yield were forced to 10% that would mean mortgage rates at 11 to 13%. That would cut the values of homes in half. Add in the fact that it is going to take an increase in lending rates to motivate the banks to start lending again I think the Big Picture forces interest rates to rise in order for money to hit the street again. I'm sure people didn't expect double digit interest rates in the 80's, but it happened. Rates have been too low for too long. The economy won't recover until credit becomes available once again, and banks won't lend until the returns are worth it. Do as you choose but I am going to prepare for a high rate enviorment to hit sometime in the future.
As a contrarian investor this is a good thing if you are a real estate investor. High rates mean low prices. My philosophy of fully leveraged cash flow won't change so I just have to buy cheap. When rates lower someday and I can refi that will just make the cash flows even better. Intersting times are ahead indeed. Invest wisely.
OK, I'm dumb. What does "fully leveraged cash flow" mean?
ReplyDeleteI'm with you that rates *should* rise. I went to the bank the other day to ask about CD rates and I think the highest they offered was something like 2.5% percent. It's just so low, it's barely worth it. Is the Fed keeping rates low like this because they know it would sweep the leg out from under the housing market? That would collapse the whole house of cards, the banks would have to eat huge losses, but it's got to be done somehow.
The more I think about it the more I realize how fucked the entire system is. Do you think I'll need to get a variance to raise a cow in my backyard in the 'burbs?