Has the interest rate panic begun?

Panic is always a strong word. It evokes visions of people running around and screaming with very little forethought to their actions. I am not sure if this will be a panic, but interest rates are sure to get a lot of press in the days ahead. I guess the big question is whether or not we have seen the lows in interest rates for the foreseeable future. I would argue that we have. We all know that bonds (and therefore interest rates) move in long, broad, almost generational cycles. In my lifetime (50 years or 2 generations) the 10 year Treasury yield has gone from 4% to 14% to its current 2.25%.

50 yr chart of TNX

The likelihood of rates continuing to soar (the 40% move in a little over 20 trading sessions that they have made should be considered soaring) is pretty unlikely. That said, the action of the last couple of years should also tell us that we have seen the lows, at least for the current generations. Rates have been in a fairly steady decline since the highs made in the summer of 1981. Sure we have had hiccups and short-lived bounces, both up and down. However, overall rates have been in long-term, relatively orderly decline. (See the chart above) Take a look at a chart of the last 25 years or so.

25 yr chart of TNX

The move from 9% to our current levels is a big deal. That move has given us all sorts of fun stuff as rates were seemingly spiraling to zero (in short-term paper they got there). We got no-doc loans. We got no money down mortgages. We got the whole “Housing Bubble”. We got the “Great Recession”.  The first several years of the century were a crazy time. It made no sense. It was a dramatic departure from accepted norms. Instant communication gave way to shortened investment horizons and increased expectations. If  the validity of a particular investment was not evident almost immediately, it was considered wrong. But now we have begun to  stabilize. The 10 year Treasury has been trading more or less sideways for over 2 years.

2 yr TNX

Any of you that have been reading my posts these past many years will know that I love a good chart. The action on the chart of the 10 year for the last few years is telling me that we have built a pretty decent base at around 2%. It has begun the process of breaking out of that base. Of course anything is possible but the likelihood of us seeing sustained  yields under 2 is pretty slim. If it does slip back down, it probably won’t stay down there for very long.

So what does all this mean for Real Estate? Good question. While I wouldn’t expect rates to go straight up, it would seem that they are pretty likely to begin a gradual move higher over the next several years. If you are thinking about making a move and that move is going to be into a place where you think you will stay for 10 or more years, then moving sooner rather than later is probably not a bad idea. We will probably see rates swing up and down a bit, but the overall trend is going to be higher over time. Timing the bond market has always been an exercise of “hurry up and wait”. I saw that Bill Gross (the biggest bond portfolio manager on the planet) was saying to buy Treasuries this morning.  (Remember that bond prices and yields run counter to one another) I think in the very near term he is right. Rates do need to settle back down a bit. Perhaps they even make one of those little dips below 2%.  If they do then it will just be an opportunity to capitalize on the historically low rates that we are currently enjoying. Wouldn’t you love to be at a party in 5 years talking about your 3.6% fixed rate mortgage when the prevailing rates are 5%? You will feel like a genius. You will be a genius.

If you or anybody you know is thinking about buying or selling a home, give us a call. The time is right and we can help you find the place that is just right for you. We can be reached at 303-908-2330 or lizzandwillie@gmail.com

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