Stock Market - Rising Interest Rate will affect home prices?
After FOMC meeting minutes on June 19, 2013, stating the Fed may have to slow down its 85 Billion USD bond buying programme as soon as end of this year based on the labor market. As soon as this announcement is made, Interest rate started tickeing higher because the liquidation of bond funds, hence greenback is enjoying a pwerful rally since while. Besides it does lead to collapse of commodities prices such as gold and silver.
Since interest rate started moving up, the first time home buyer can not qualify for higher amount of loan since their EMI goes up with increasing the interest rate. Of course, psychologically we have been used this low rate for the last couple of years, it is hard for us to go with higher rate. However it should be short lived since still historically the interest rate have been very low compared the last twenty years. Any thing less than 6% is considered as good now 30 year mortgage rate is ticking at 4.5%.
Note that even though US$ enjoying the powerful rally, it may not continue in the long run especially againt euro zone currencies. Since most of euro zone countries 10 years interest rate has less than 2%. Germany is keeping its rate as 1.29% and UK is at 1.62%. Where as US is currently trading just above 2.5% for 10 years treasury note.
Since US has first begin easing the monetary policy, it has lost its value in the beginning and in the sameway it is enjoying the perful rally now. When Euro zone countries start increasing the rate, greenback is going to collapse supporting higher inflation and gold prices will also tend to move higher.
Overall the rising interest rate is only a psychological factor and it is unlilely to affect the home prices much in the long run. Once the interest rate goes above 6% and comes down 5%, people would be happy to buy home, eventhough they are reluctant to buy home at 4.5% interest rate.
Rising inflation in the coming years will move much higher compared to increasing the home prices and eventually both lines has to touch again in the near future.
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