The Markets & Homeownership
The Markets
Higher bond yields may be good for income investors for the first time in many years.
After more than a decade of near-zero interest rates, the “free money” era – a time when people and businesses could borrow money and repay it with very low (or no) interest – may be over.
Last year, rising inflation caused the Fed to begin raising the federal funds rate aggressively. Yields on bonds moved higher, too. At the end of last week, the yield on a one-year U.S. Treasury bill was 5.35 percent, up from only 0.40 percent at the start of 2022.
Many people thought rates and bond yields would come back down relatively quickly, but that school of thought is changing, reported Michael Mackenzie and Liz Capo McCormick of Bloomberg.
Higher bond yields may be good news for income-oriented investors who turned to dividend-paying stocks for income when bond yields were low. Now, those investors may be able to earn attractive yields with a blend of bonds as well.
Just Out of Reach
If you’ve ever stretched on tippy-toe trying to pluck an apple from a tree or pull a bowl from the highest kitchen shelf – and haven’t been able to reach it – then you’ve experienced a version of the frustration prospective homeowners are feeling.
In the United States, homeownership is an important means of accumulating wealth. Last week, Emily Peck of Axios wrote, “With home prices going up — and mortgage rates at a stunning 22-year-high — the situation is looking increasingly bleak for Americans looking to buy a house…Prognosticators had believed that rising mortgage rates would force home prices lower — and they did fall by 13% from their 2022 peak. But prices are still 26% higher than they were in the first quarter of 2020”
Americans who were eager to buy homes in the 1980s may have felt similarly bleak. While home prices were significantly lower 40 years ago – the median price was about $69,000 in 1981 versus $420,000 in the first half of 2023 – mortgage rates were considerably higher.
The highest-ever 30-year fixed mortgage rate was 18.53 percent in October 1981. Last week, the average 30-year fixed mortgage rate was 7.09 percent, which is below the 52-year average of 7.74 percent. Regardless, in tandem with higher home prices, it’s high enough to put owning a home out of reach for many Americans, right now.
In times like these, it’s important to remember that the economy is cyclical. We are in a period of expansion. Eventually, the economy will adjust itself.
Focus – Think About It
“Life is what happens when you are busy making other plans.”