A mortgage rate surge is not a phenomenon that consumers and the broader stock market can overlook indefinitely. Homebuilder stocks are starting to turn, suggesting that the time for the broader market to care about housing might be right here, and right now.
For the last three weeks, 30-year Treasury prices have fallen aggressively, with yields spiking across the board in the bond market. It’s more than just the debt downgrade by Fitch. It’s also the market questioning just how much more risk the economy can take with inflation and extraordinarily high leverage.
If we look at the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT), this month has seen a crash in bonds. And since mortgage rates are baselined against 30-year Treasuries, this should make you very nervous.
If we look at homebuilder stocks, it sure looks like a double top. If 30-year Treasury yields keep spiking, I find it hard to believe homebuilders can break out. Instead, there is risk that an important part of the economy could collapse.
It’s worth noting that while mortgage rates are surging, delinquency rates have returned to a record low. According to the latest mortgage delinquency report from CoreLogic, only 2.6% of U.S. mortgages were in a state of delinquency in May. I suspect this will increase soon given now nearly a trillion dollars in credit card debt and the resumption of student loan payments.
High Mortgage Rates Threaten a Stock Market Crash
The current mortgage rate spike will inevitably impact consumers and the broader stock market. As rates rise, obtaining a mortgage becomes more expensive, which can deter potential homebuyers and slow down the housing market.
Moreover, higher mortgage payments mean consumers have less disposable income for other purchases, which can impact various sectors of the economy.
Furthermore, higher mortgage rates can also lead to decreased profit margins for companies in the real estate industry, including homebuilders and mortgage lenders. These effects can ripple through the stock market, affecting investor sentiment and stock prices.
The Bottom Line
Bottom line? I don’t think it will take much more for stocks to break significantly. While consumers and the broader stock market might be able to overlook the mortgage rate surge in the short term, it’s not a sustainable scenario in the long run. This just adds further evidence to the idea that a credit event is coming.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
