Mortgage Rate at 8%: Investments to Avoid Now

Higher-for-longer interest-rate policy has led to some first-time-in-a-long-time market stats. For example, the 10-year Treasury bond yield broke above 5% on Friday for the first time since 2007.

However, that’s not the only startling statistic that investors should pay attention to now. Sure, the 5% bond yield is impactful, but there’s another figure that’s bound to have ripple effects across multiple sectors of the economy and markets.

The 30-year mortgage rate goes vertical

The following chart, courtesy of BarChart.com, isn’t of some artificial intelligence stock or cryptocurrency. It’s actually a chart of the 30-year fixed annual mortgage interest rate, which jumped to its highest level since the beginning of the century:

If an 8.24% mortgage rate doesn’t startle you, then perhaps you haven’t had the delightful experience of trying to purchase a home recently. It wasn’t too bad a few years ago, when the mortgage rate was 3% or 4%.

Now it’s a different story entirely. Housing inventories are extremely tight, and current homeowners aren’t selling. Who could blame them really? It just doesn’t make sense to sell a home with a low interest rate, only to move into a new home and pay an interest rate that’s twice as high.

Pay particular attention to the steepness of the incline in the chart. It’s not as if mortgage rates climbed gradually and gave people much time to prepare. If you’re not shocked yet, here are some more frightening figures, courtesy of The Kobeissi Letter:

I can’t personally vouch for the accuracy of other people’s social-media postings. However, if the median homebuyer payment is nearly $3,000 per month, it’s probably reasonable to conclude that this story won’t have a happy ending.

This situation just doesn’t seem sustainable for the long term. I expect that either home prices and interest payments will come down gradually, or they’ll plummet sharply via a housing-market crash.

I’m certainly not hoping for a crash, but it’s hard to be optimistic now. The median price of a newly sold home in the U.S. is now a whopping $416,100, and the median down payment on a home exceeds $25,000.

Douglas Boneparth, certified financial planner and co-author of The Millennial Money Fix, offers an expert opinion that sums up the plight of hopeful homeowners.

“Buying a home has never been harder for your average American… and it doesn’t look like that’s really changing anytime soon,” Boneparth warned.

When will the pain pass?

It’s not difficult to find more troubling tidbits to bolster the bear case. For instance, Redfin (NASDAQ:RDFN) reported that the typical homebuyer’s monthly mortgage payment in the U.S. is $2,866, up from $1,581 in August 2020.

However, the typical home price was $329,000, and the average interest rate was just 2.94% in August of 2020. It literally took a global pandemic to get home prices to that level.

If you’re looking for solace from Matthew Graham, chief operating officer at Mortgage News Daily, don’t hold your breath.

Graham conveyed an unsettling insight from professionals in the thick of the housing market, declaring, “I don’t think anybody in my community of mortgage originators would disagree that in many ways, this is worse than the great financial crisis in terms of volume and activity.”

Presumably, Graham means ultra-low home buying and selling volume/activity. On the other hand, Melissa Cohn, regional vice president of William Raveis Mortgage in New York, offered a note of hope amid the bearish chorus.

“People should know that this pain shall pass… In the next year or two years, interest rates will be lower, and people will have the ability to refinance,” Cohn predicted.

In one sense, Cohn’s forecast is indisputable; all pain passes sooner or later. I’ll also concede that the Federal Reserve isn’t likely to hold interest rates at their current levels for two full years from now.

That’s a long way off though, and there could be a whole lot of pain until then. Therefore, I’m staying far away from stocks that are highly sensitive to the current pressures in the real-estate market. These include Realty Income Corp. (NYSE:O), Simon Property Group (NYSE:SPG), Mid-America Apartment Communities (NYSE:MAA), and Rocket Companies (NYSE:RKT).

I’m not suggesting that these companies are toxic. Rather, I’m just trying to sidestep potential problems and patiently wait for the pain to pass, at which point I might be a buyer at depressed prices.