Rising Interest Rates and Rising Stock Market Do Not Compute!

 Do we need a "wake up call"?  Since the beginning of the year to present, interest rates on 10-year US Government Bonds have risen 3/4%, give or take a few basis points or so (100 basis point equal 1 % point). 

 SO WHAT? Well the current yield of the 10-year T-bond is the rate mortgages are based upon.  Rising rates also are one of the measurements that banks and mortgage lenders use to determine their willingness to make loans either for their portfolio or to sell in the open market.  Once mortgage originators find an unwillingness to buy mortgages, interest rates must rise to make the buyers willing to take on the potential of higher rates.  The Federal Reserve has been the buyer of last resort that has kept interest rates down.  The FED has failed to stop the dramatic rise in rates. The FED has not accelerated its buying of mortgages in the after market.  Pension funds and investment companies who are the normal sources of buyers of mortgages have been reluctant to buy mortgages.  This is especially the case in Jumbo Mortgages a dominant type of mortgages in the Bay Area.  

In the past 30 days, home buyers have been frustrated with Pre-qualification letters and stated rates changing.  Buyers are being forced to look at lower lending limits and higher interest rates.  This  has had the effect of forcing the buyers to either raise their cash deposit or down size their buying appetite in a new home, or lowering the offering price on their new home under loan contingency clauses in purchase offers.

Lower offering prices translate into lower prices for future listings.  That seems to be a non event in our area.

Why?  Thank the Initial Public Offer Market and the creation of SPAC, Special Purpose Acquisition Companies.  The SPAC can buy private companies eliminating the IPO and creating a new set of mega wealthy employees.  As with the IPO's the new wealth has been translated into greater wealth in the after market shares have taken prices to levels that the new companies out price the market value of companies that are seasoned and related to the same industry of the new company.

The rush into going public has made many Techies rich.  There has never been a case that the new wealth has not stopped the desire for a "Trophy Home".  That desire has created a new source of buyers.  Contractors and real estate agents today have gotten into the game of finding fixer-upper and dated homes in areas like Menlo Park, Palo Alto, Los Altos and related high end markets to knock them down and reoffer the new homes at $4-5 million where once a $1.7-2 million home once stood.  

This time, the newly wealthy techie is not going on a buying splurge to the degree their predecessors did.  They have adapted. 

Suburban homes and schooling have become their goals for their newly found wealth.  Mobile workforces have given a new living destination and living standards.

CANARY IN THE COAL MINE:  during the time of the industrial revolution when the United States and Europe where in the throes of expansion and growth, coal was the source of energy.  Coal mines were below ground, generally, and light was generated by kerosene lamps, or a related power source.  As they dug deeper the gases underground were both toxic and flammable, but initially undetectable to the human nose.  The danger was the gases were unnoticed until it was too late and death and an explosion occurred.  To solve the potential danger a canary was placed in a cage.  The "Early Warning System" of the mid 19th Century and forward.  When the Canary Died Get Out!!

Today's Canary in the Coal mine is rising interest rates and rising equity prices, which include home prices.  Homes are the unique item.  Home are like stock markets in rotation  Recently the major change in equities have been from growth stocks and tech stocks to basic industries.  A big shift will occur on Monday March 15 when index fund changes are forecasted to remove growth and replace them with basic industries.  So too is the shift from tightly congested cities and urban areas to small town and suburban communities where homes are larger, lots are larger communities safer and schools are better and the homes are cheaper.  The rising interest rates which will put a damper on buying the Menlo Park, Atherton. Los Altos or Palo Alto home will find buyers moving to El Dorado Hills, Loomis, Granite Bay and other Greater Sacramento area communities that are substantially lower priced with greater sized homes and lots with equal or better schools.  

The rising rates have been created by the perception that the end of the Pandemic and the the return us back to normal, pre pandemic times.  

The ability to work from home has changed the needs and desires of families. 

Rising rates have also affected by the government funding of multi trillion dollar budget items to help Americans cope and get out of the Pandemic fed economic crisis.  The budget from this funding comes from US Government Bond sales.  More bonds sold, higher interest rates.  Higher interest rates mean inflation, all which add to an affordability issue in homes.  Affordability that has only become more stressful and has been in existence for decades in the Bay Area.

Taxes will fund the spending and repay the extra debt load.  Whether it is property taxes, income taxes or sales taxes, the movement of populations made more flexible with a mobile workforce will accelerate the socio-economic movement of populations.  This will especially be the case in the Bay Area.

There was once a saying of "Go West Young Man", will now be "Go East Bay Area Resident".  Now the question is, who will go east?  The renters will go.  Looking at the weekend real estate section of the San Jose Mercury News there is a section where all California Counties are measured in population size, education, income and renters versus owners.  San Mateo and Santa Clara Counties are pretty equal in renters versus owners . Some 48% rent to 52% own.  A renter can buy in Loomis California a 5-6 bedroom 7000 SF house on 3 or so acres, swimming pool and solar system for $2,200,000.  The monthly payment is $7,660 with a 30 year 3.25% loan no points, 20% down.  Just about the same rent as a substantially smaller home and lot size of a 4 bedroom Menlo Park home.