Mortgage rates are the highest since 2008
What is it?
As stocks struggle to move higher, the real estate market is also getting worse.
“Mortgage rates surged past 6%, the highest level since November 2008, worsening already rampant affordability concerns.”*
Many people may be stuck renting or even moving as the affordability of homes remains an issue.
“Demand for mortgages has remained at a 22-year low since the end of August. High home prices and tight inventory levels have pushed affordability to its worst level in 37 years.”*
Why does it matter?
“‘The record low interest rates that we’ve seen over the last two and a half years have really allowed home price growth to outpace income growth,’ Andy Walden, recently told Yahoo Money. ‘In this affordability landscape it would take a combination of a 40% rise in incomes, roughly a three percentage point decline in 30-year rates, or a 30% pullback in home prices.’”*
Real estate is a big factor in the economy as it accounts for much of the wealth and is linked to interest rates. We see this news as an indication that stock market prices may continue lower ahead of unfavorable real estate data. If conditions such as the Fed continue on the path they are on it could be detrimental to stock values. Stocks and real estate prices may come back to more of a fair value range as opposed to reaching all-time highs.
Ray Dalio expects stocks to fall 20% if Fed Fund rates rise to 4.5%
What is it?
Like many others in the industry, we respect the insight Ray Dalio has on the markets.
“Billionaire Ray Dalio, founder of one of the world’s biggest hedge funds, has predicted a sharp plunge in stock markets as the U.S. Federal Reserve raises interest rates aggressively to tame inflation. ’I estimate that a rise in rates from where they are to about 4.5 percent will produce about a 20 percent negative impact on equity prices,’ Dalio wrote in a LinkedIn post on Tuesday.”**
While we do not have a specific target such as down 20%, we believe that prices could find some support if they fall to the range of highs made in early 2020. Unless conditions change for the better, it seems like stocks are positioned to fall closer to that range.
“His comments came the day data showed U.S. consumer prices unexpectedly rose in August. The inflation data raised fears of another outsized interest rate hike next week and sent stock markets into a downward spiral.”**
Why does it matter?
As some people were ready to buy the dip in the market earlier this year, they may be reconsidering that position. Since asset prices were elevated like never before from things like stimulus checks and low-interest rates, they could take longer to recover than some may have anticipated.
“‘A significant economic contraction will be required, but it will take a while to happen because cash levels and wealth levels are now relatively high,’ Dalio wrote. ‘For example, while we are seeing a significant weakening in the interest rate and debt dependent sectors like housing, we are still seeing relatively strong consumption spending and employment.’”**
As rates rise, things start to fall apart at a certain point with the market contracting. While cash levels and employment are holding up, they could become much worse depending on the increasing interest rates used to combat the continued inflation.
We plan on remaining in more secure investments to protect the capital. Once riskier assets begin to gain more traction we will invest there as we see fit. Most broad-based ETFs are down with the market. Because of that, we are looking into opportunities outside of what people can get in a broad ETF. That is one possible advantage to our tactical investment approach as opposed to a buy-and-hold strategy.
Other articles we found interesting this week:
Current 401(k) portfolio
Our last portfolio reallocation: 5/19/2022.
Want more information?
The weekly market insight provides a window into the process we use in our investment management process. At Breakaway, we believe markets are always changing and require a nimble yet data-oriented approach.
Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.
*Gabriella Cruz-Martinez. “Housing: Mortgage rates breach 6% for first time since 2008. 9/15/2022. Yahoo Finance. https://finance.yahoo.com/news/housing-mortgage-rates-breach-6-percent-140013849.html
**Reuters. “Bridgewater’s Ray Dalio expects stocks to fall 20% if rates rise to 4.5%”. 9/15/2022. Reuters. https://www.reuters.com/markets/us/bridgewaters-ray-dalio-expects-stocks-fall-20-if-rates-rise-45-2022-09-15/
Educational use Only. The market update published by Breakaway Financial Group LLC (“Breakaway”) is intended to be educational in nature and is not intended to be a recommendation for any specific investment product, strategy, plan feature or other purposes. Accordingly, it should not be construed by any consumer and/or prospective client as solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation.
Advertising and Marketing. Communications such as this are not impartial and are provided in connection with advertising and marketing. This material is not suggesting a specific course of action or any action at all. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, insurance, legal or tax professional that takes into account all of the particular facts and circumstances of an investor’s own situation. No person associated with Breakaway is a licensed attorney or tax professional and the information contained herein should not be considered tax or legal advice.
Links to Third Party Content. This Market Update contains links to articles or other information maintained by unrelated third parties. You acknowledge and agree to the following: All such information is provided solely for convenience purposes only because we believe that it may provide useful content. and all users thereof should be guided accordingly. We disclaim any responsibility for the link’s performance or interaction with your computer, its security and privacy policies and practices, and any consequences that may result from visiting it. We do not control the content published by the third-party; we do not guarantee any claims made on it, nor do we endorse its sponsor or any of the content, policies, activities, products or services offered by any advertiser on the site. Breakaway assumes no liability for any inaccuracies, errors or omissions in or from any data or other information provided by the third party and inclusion or reference by Breakaway to any third party link should not be construed by any consumer and/or prospective client as a solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet.
Important Information regarding Registration Breakaway Financial Group, LLC and/or Patrick Traverse offer investment advisory and financial planning services through Belpointe Asset Management, LLC, (“Belpointe”) 500 Damonte Ranch, Parkway Building 700, Unit 700, Reno, NV 89521, an investment adviser registered with the Securities and Exchange Commission (“SEC”). Registration with the SEC should not be construed to imply that the SEC has approved or endorsed qualifications or the services Belpointe offers, or that its personnel possess a particular level of skill, expertise or training. It is important to read disclosures pertaining to Belpointe Asset Management at this link https://belpointeasset.com/disclosure/. Additional information about Belpointe and Patrick Traverse is available on the SEC’s website at www.adviserinfo.sec.gov.