Rising 10-year Treasury yields, recently set at 5.3 percent in a solid auction amid $40 trillion of federal debt and ongoing deficits, are pushing 30-year mortgage rates toward 7.4 percent, well above the sub-3 percent levels artificially suppressed by Federal Reserve purchases of mortgage-backed securities after the financial crisis.

The resulting “lock-in” effect and decline in sales are widely blamed on rates that are historically normal, yet the article contends the deeper problem is home prices that remain too high for those rates; monthly payments fall as readily when prices decline as when rates do, so sellers still hoping for a return to ultra-low rates are delaying the necessary adjustment.

Markets function when prices adjust to lending costs, incomes and demographics; homebuilders are already cutting prices and offering buydowns, and existing-home sellers will eventually do the same, allowing both current owners and first-time buyers to transact once asking prices match the realities of 7 percent mortgages rather than relying on further central-bank intervention.

One hears a lot these days from real estate agents and other observers of real estate markets who are complaining that mortgage rates are too high, and therefore no one is buying. But if we take a closer look, we find that the problem is no more high interest rates than it is high prices. Moreover, we’re likely to find in the near future that it’s a lot easier to simply get sellers to lower prices than it is so get mortgage rates to come down to their ultra-low levels of a few years ago.

To understand this better, let’s begin with a look at 10-year Treasury bonds. 

On Wednesday, The US government sold $39 bilion worth of 10-year notes to investors, with the high yield for the auction at 5.3 percent. There was solid demand at the auction and put to rest some fears that a rapid bond sell-off might spiral as demand for bonds deteriorated. So, Wednesday’s auction showed that bonds are unlikely to be dumped wholesale in the near future. 

Yet, the auction hardly showed that investors are clamoring for Treasurys at low yields. After all, the auction established a new higher yield for new debt, at 5.3 percent, and well above where yields were just a year ago. In other words, there were indeed buyers for the bonds at the auction, but investors were demanding a higher return to make bond-buying worth it. It is always possible to get investors to buy bonds when the price is low enough and the yield is high enough. Investors do buy so-called “junk bonds,” after all. All that is necessary is a high-enough yield. 

Nor does this upward surge in the 10-year yield appear to be a mere temporary blip in the data. Bond yields tend to move in fairly long cycles. The US government is now $40 trillion in debt, and is adding approximately $2 trillion more per year. That’s going to require a lot of new Treasurys hitting the market as the Federal government must continually take on more debt and refinance the debt it has. 

Yes, the central bank can attempt to bring down interest rates somewhat by inflating the currency to buy up debt and create artificial demand. But there are political limits to how much inflation the regime can get away with.

So, we should........

© Eurasia Review