Wednesday, December 29, 2010

Spiking Bond Yields Will Accelerate Housing Double-Dip

These things all feed each other.  When our foreign creditors show insufficient appetite for our bonds, yields climb:

Treasury market yields rose Tuesday after the government’s sale of $35 billion in new five-year notes drew weak demand. The annualized yield on the notes was 2.15%, the highest market yield on five-year securities since June and up from the rate of 2.04% on Monday on previously issued five-year notes.

When yields rise, home mortgages get more expensive.  Floating-rate ARMs get more costly to service.  Homeowners lose equity faster.  Foreclosures, forced sales, and abandonment follow.  The market-clearing price for homes will sink:

Housing markets have taken a turn for the worse, with the widely followed S&P/Case-Shiller index declining more than analysts had forecast in October, lending credence to the housing bears who have predicted a double dip.

Those of you who bought houses as rental properties in 2010 made mistakes only if you went into debt.  That debt will be hard to service as deflation puts a ceiling on prevailing rents. 

Oh, before I forget, let's note that China is reducing its export quotas for rare earth metals.  This has nothing to do with the above, but everything to do with the gradual shift in prosperity from the Anglo-West to the East.  Tesla Motors will have a very hard time getting lithium for its batteries unless it digs its own mine in Afghanistan.