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Who didn't see this coming after a full year of the most aggressive central bank rate hikes in history? Zero Hedge published an article yesterday evening titled, 'Surge in mortgage rates above 7% sends homebuyer applications to 28 year lows' shows that rates passed the 7% mark last October to highs not seen in 20 years. In January, the rate dropped closer to 6%, fueling a temporary 'mini-surge' in mortgage applications.
Now, those rates are averaging 7.06 to 7.1% and once again, mortgage apps are collapsing. After some 10 years of near zero rates that fueled the housing market like no other time before, I myself having a mortgage with a 1.9% fixed rate 5 year plan, the rain has started coming down hard on the parade. Many people are in a similar position and are wondering what will happen when it comes time to renew. If the rate suddenly goes to 7%, that's an increase of 5 percentage points. This could spill over and morph into a giant wave of mortgage delinquencies.
Historically, going back 60 years or so, the average mortgage rate is actually 7% so one might be compelled to think there's no issue since this is the average. Well, if you bought a house 50 years ago at 7% and the house / property cost $35,000, then a 7% mortgage is reasonable. According to LendingTree.com, the average mortgage in the USA today is $142,927. A 2% mortgage on this amount would incur a cost of about $3,000. If the rate suddenly jumps to 7%, interest owed jumps to about $10,000.
What about those who bought new or newer homes in the last 5 years or so and have mortgages in the several hundreds of thousands. If one has a mortgage of say, $300,000 which is a little more than double the average and the rate jumps to 7% from 2%, you're going from $6,000 a year in interest payments to $21,000.
To most of us, suddenly paying an extra $15,000 in interest payments alone on a mortgage will not be feasible / affordable but what about those with half a million or higher mortgage? I think you understand what I'm pointing at.
Is it possible we'll see a wave of mortgage defaults, especially on higher end homes. It certainly seems we're headed in that direction. The main reason is because the FED has not stopped raising interest rates. They raised another 50 basis points in January and the consensus is in to expect another 50 basis point hike in just a few weeks time later this month. That translates to even higher mortgage rates.
Are we to expect headlines later this spring and summer like, 'Mortgage rates hit 40 year low'? I stated in previous posts that central bank planners are hell bent on raising interest rates to quell inflation to the terminal point where rates are higher than the inflation rate. We're being told the inflation rate is about 7% but is this what you see every time you fill up with gas or buy your groceries. I'm sure you can see for yourself that the inflation rate is much higher right now. I would say it's really closer to 16%.
Are rates to go beyond 16%? It happened in the early '80s when FED Chair Paul Volcker increased rates to 19%, which meant banks were lending above the 20% mark. I remember borrowing $1,000 to buy a used car around 1984 and the rate was an astounding 29%. Needless to say, it took me a while to pay off that loan. It would have been better to just take the bus.
We are already seeing commercial real estate collapsing. New York never fully recovered from the lockdowns as most office workers found jobs working from home. It's not just New York. All the major cities are feeling the pinch. In fact, the media started picking up on this last year. Check out this article from sfstandard.com titled, ' San Francisco braces for epic commercial real estate crash' from last September!
So then, big trouble is brewing across the real estate board. It does present golden opportunities for experienced buyers to snatch up homes for pennies on the dollar, literally. We might even see people paying for homes with stacks of silver and or gold coins.
In 1973, an ounce of gold was about $35 on the open market and by January, gold skyrocketed to over $800 per ounce. If I could only go back in time, I'd buy 100 gold coins for $350 (Gold ownership became legal again on December 31, 1974) and hold on to them until 1980 where I could then convert these coins to cash to the tune of $80,000, more than enough to buy a house, a new car and all-new furniture at that time
Today, gold is hovering around $1,840 per ounce, way too costly for the average person. Silver on the other hand is still only about $21 spot per ounce. Bix Weir of Roadtoroota.com has stated numerous times he expects silver to eventually rise to $600. I agree with him because I believe there is far less silver than there is gold as it has been gobbled up by industry over the last century, making it rarer and thus more valuable.
So let's imagine a home previously valued at $300,00 has been repossessed and the housing market is so depressed that the new asking price is 50% off the original price to $150,000. Actually, it might go even lower than that but let's stick with $150,000 as an example. If silver does actually go to $600 (or higher), then you'd need exactly 250 one ounce coins to buy this home.
With silver prices today presently subdued, you could buy one ounce of silver for about $35 USD. To buy 250 silver coins, it would only cost you about $8,750. Doesn't it sound nice to be able to scoop up a home valued at $150,000 for just $8,750. That would equate to a discount of about 95%. Applying it to the original cost of $300,000, you're looking at a 98% discount.
Sound so unbelievable...
I am getting ready for such a scenario to play out. I have my silver lined up to make this play when the time is right. I can't guarantee anything. I am not an expert and I can't see into the future but one thing I'm fairly certain I'm good at, is connecting the dots and I can tell you we are headed for a nasty recession that could spill over into a great depression.
The biggest marker is the U.S. debt ceiling. At this point, the FED is officially bust! The only way to keep the system going is for Congress to raise the debt limit. If that's the case, then expect the inflation rate to go hyperbolic. Either way, the FED is cornered.
investing in silver / precious metals. A great wealth transfer is coming and I plan to be on the right side of this transfer. Maybe it' already begun. Precious metals never lose against currencies, without fail! History proves this beyond any doubt. A glaring example is the German Weimar Republic of the early 1920s. They suffered through a hyper-inflationary event that started with a whimper in 1920 and by November, 1923 when it finally ended, it left the German populace destitute and in ruins.
Had a German citizen bought just one ounce of gold in 1920 for 50 marks, this person would have seen that one ounce of gold rise to an unbelievable 57 trillion marks. This person would have been able to buy entire neighborhoods. Same can be said for silver which eventually went to almost half a trillion marks by the time their system collapsed.
Here's Zimbabwe and their 50 trillion dollar bill... Not even good for a loaf of bread but great to pay off any previous debts held in Zimbabwean currency!
And finally...
Keep an eye on those interest rates. The higher they go, the higher the probability of a real estate crash and the sooner it may arrive.
Peace and love to everyone!
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