Eviction Ends, Interest rates rising, Inflation and the possibility of China's Evergrande Default

 On September 30, 2021 the eviction moratorium ended.  The estimates I have is that there were 1.7 million homes in forbearance.  These are properties which have not made mortgage payments during the Pandemic.  1.7 million is down from over 7 million at the peak of the Pandemic.  There were 600,000 homes for sale in the U.S. at that time. The benefit today is that this is not 2007 during the financial crisis.  Home values have escalated at rates that have ben historic.  That would indicate that of the 1.7 million in forbearance a major portion should be able to refinance or re-negotiated to present-day mortgages.  Considering that interest rates are at historic lows; this gives the new mortgage payments a lower payment that previous loans in forbearance.  Those owners who are unable to afford have the benefit of a strong real estate market to sell their homes and pay off the debt and walk away with proceeds.  This was uncommon during the  Financial Crisis.

As the Law of Supply and Demand creates more inventory the affect on prices paid will still be above the home prices of Pre-Pandemic levels.  My evaluation is that the statistics of the U.S. cannot equally relate to Silicon Valley.  The strong housing market is backed by a strong economy.  If anything the affect of home prices will be either a stalling of prices or a slight decline.  Now the issue is who is in forbearance.  I find it highly doubtful that high end luxury housing will be affected.  The strength of the IPO market and Venture Capital Market along with the net worth of the owners of Luxury homes will not be affected.  There is no forbearance.  But there will be forbearance in the homes of workers laid off during the Pandemic.  That is where the sales will occur.  That is where opportunity exists.

The Federal Reserve (FED) has thought it best to keep rates low to keep our economy moving.  The return of semblance of economic growth has seen a slow growth in the market place as measured by 10-year government Bonds, which are not under the control of the Federal Reserve (FED) in pricing.  The FED has had a long term policy of buying bonds of all sorts in the after market to keep rates down and has accumulated a multi-trillion dollar balance sheet.  The FED has indicated that is will begin to cease it buying program.  As a result the after market has seen some slight increase in the interest rate of all bonds and mortgages.

As an example, a 10-year US Bond is a marker from which all bonds vary.  As the 10-year moves up mortgage rates will move up, in turn all rates of US bonds greater than 10 years move up,. That increase will affect corporate bonds and all bonds sold in the world that are US $ denominated.  The greatest rate paid are the bonds of low ratings.  In the US they are referred to as "Junk".  They are corporations who do not have the financial ability to hold out during economic crisis.

After US Junk there are the Foreign Debt Markets in US denominated Bonds.  Asia is one of the markets who have had historic failures; along with some South American countries like Argentina.  Asia relies on the US to buy goods manufactured in the Asian Countries.  When orders cease, the ability to pay in US$ is under threat.  Default is common and expected  irrespective of the corporation.  One default or expected default puts all corporations in the same bucket.  Now here is something the FED cannot manipulate or control. Buyers of Asian bonds will demand higher rates for the risk.  The higher rates will affect the "yield spread" of all $ denominated bonds.  This will eventually pull up rates down to the 10-year US Government Bond.  

The Greatest Risk in Asia is a Chinese Corporation name Evergrande.  Originally a property developer it grew to the largest developer in China not regulated by the Chinese Government, a capitalist creation like our own corporations.  Its growth moved into other areas other than real estate by debt growth.  The greatest risk now is a potential default of Evergrande in an interest payment.  Supposedly, not confirmed by myself, is the Evergrande gave the Chines holders of thee Chines debt apartments.  Here is one of the greatest risk in Chinese land development of apartments.  They are largely unoccupied and bought as investments.  Chinese buy real estate as a retirement plan.  They have no Social Security or Pension Schemes.

China's Government has already warned Government Banks to prepare for a default.  The next payment this past Thursday is a payment due on all US denominated debt.  No record of payment has been found in my research and the value of the debt is down some 75% per the Guardian.  In addition other Real Estate Developers are signaling warnings of potential defaults.  

These defaults will affect the interest rate market, and the supply chain of goods to and from China and other Asian countries.

Inflation is the last comment for me to address.  The inability to supply essentials as Silicon chips in Auto's and the fear shortage os essential of toilet paper has caused difficulties in the market.  The government attacks on oil based energy has caused shortages in in oil supply.  The recent storms in the gulf has stopped or limited production of oil and gas; as well as, forcing refineries which dominate the gulf coast to slow or stop.  Gas prices have gone up.  

Businesses which have been closed down during the pandemic start up with higher prices, both to make up for months of no income and higher wages to draw back past employees and higher product costs.  The thought that business will cut prices and inflation will dissolve is fool hearty.   Why would prices come down when a business has lost money and depleted savings for 18 months?

Inflation has an effect on interest rates.  Rates are higher from the fear the value of the bonds will be worth less.  Rising interest with inflation feed upon themselves.

The above comments are a BLACK SWAN of monumental proportions.  Will this affect housing?  Builders are not building as they have in the past, as they are concerned about rates and the cost of building supplies. 

We still have a seller's market throughout the US and most certainly in Silicon Valley. I cannot see the crisis in our economy, just a point in which the long and lasting price of assets stop, maybe pull back a bit or consolidate.

For buyers, this is your chance to look at the subjects in this Blog to help your find and buy a home at a low interest rate.  It is not the price of the property you buy.  It is the interest rate on the mortgage, I played with rates of mortgages and payments on homes that deprecated 20% with a 20% deposit and found that affordability is till in the hands of the buyer.  

The Perfect Storm that will create opportunity.