Goldman Sachs economists increased their March interest rate prediction by 25 basis points. They predict 75 basis points this week—50 in December and 25 in February and March. The new prediction is 5% interest rates by March 2023. The Goldman economists stated three reasons they increased their prior prediction of 4.75%. The reasons stated are "uncomfortably high" inflation, the need to cool the economy as fiscal tightening ends and price-adjusted incomes climb, and avoiding premature easing of financial conditions. The chart shows how the overall market predicts interest rates after the March FOMC meeting. Overall, the market says there is approximately a 32.7% chance that rates will be between 5-5.25% after the March FOMC and 80.5% chance it will be at least 4.75%.
Market sentiment on rates is not good news for the cracking housing market. Mortgage Rates topped 7% this week. The average 30-year mortgage rate is 7.08%, up from 6.94% last week. A year ago, rates were 3.14%. Redfin reports that home sales and new listings have hit record lows since the pandemic’s start.
Inflation and high-interest rates are pushing buyers out of the housing market. Housing rates are the highest in more than 20 years, and new mortgage applications are down 25%. Refinance applications are down 86%. Contract signings fell 10.2%. The expectation was 5%. 20% of sellers lowered their prices in September. On average, monthly payments are $558 or 40.4% higher than at the beginning of 2022, and it is about to get worse. If rates rise by 75 basis points, a $350,000 loan will increase by a minimum of $161.48 per month up to $2882.05 per month. People in high tax districts, high HOAs, high insurance, and less-than-perfect credit will see more substantial monthly payment increases.
The average American household income is $87,864 or $7,322 per month. Banks have guidelines for mortgage debt-to-income approvals. The general guideline is 43%, but less than 36% is preferred . 43% of $7,322 is $3,148.46. The current average price of a house is $428,700 (assuming a 20% down payment, $3,500 for taxes, $1,500 for home insurance, and $60 for HOA), equating to a monthly payment of $2776.84 per month before the rate hikes this week. Most people don’t have $85,740 for a down payment. If Goldman is correct, the housing market will be a train wreck by March. Most people don't want to move in the winter, so sales naturally slump. The math says a substantial housing pull-back is coming, or there will be a massive increase in adjustable-rate mortgages. Either way, there is no sugarcoating it. Housing is going down.
When interest rates rise, previously purchased bond prices go down. In 2022, interest rates have risen 3%, and many bonds have fallen more than 30% with an average loss of -19.2%. Most analysts think the Fed will raise interest rates another 1.25-1.50% to 4.4 -4.5% before 2023. If Goldman’s prediction is correct, there will still be another 1.75-2.0% increase before March 2023. If the pattern continues, it is reasonable to expect at least -11.2% more to be wiped out of the bond market by March. The Fed has been explicit about its intentions to raise rates. There is a mountain of data to show what happens to the bond market when interest rates rise. Sadly, most investors will ignore all the warnings and pretend their life savings is not evaporating. Many people will do nothing to salvage their retirements.
Most people look to precious metals for long-term purchasing power protection, insurance if the Dollar goes completely kaput, and a tax-advantaged way to pass wealth down to the next generation. For people with these objectives, the day-to-day price movements of precious metals are background noise. They tend to buy at regular intervals to Dollar cost average buying more when the market is favorable. The short term for precious metals prices is uncertain. There are reasons to believe they climb and reasons to think they could fall farther. Either way, I am a buyer. The long-term outlook on metals is spectacular.
Interest rates are going to continue climbing. The paper and housing markets will continue to contract for months, possibly years. Former Treasury Secretary Mnuchin said he thinks we are in a recession that will last until 2024. I know this article may sound like a broken record as interest rates have been the focus for a while. Consider this article a last-minute warning before the rate announcement on Wednesday. More market pain is coming, but you can avoid it.
Why not rebalance your portfolio into precious metals to ride the storm out? The experts at the U.S. Gold Bureau can help you make a liquid purchase or rollover your retirement account. How would you feel if you didn't make a dime and only protected your purchasing power? Would you come and throw rocks at our building, or would you want to take us out for lunch? The alternative is to stay in paper and stress daily about how high-interest rates will rise and how low your accounts will fall.
If you want your portfolio to be something different from the world, you need to do something different. The interest rate train is still coming. It has destroyed everything in its way. Even though more destruction is coming, most people still won't move off the tracks. Do you have something to lose by getting your wealth off the tracks? Do you gain anything by keeping it there? There is still time, but action is required.
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