The Housing Bubble is Deflating

With the recent surge in the mortgage yields, let’s see how the housing market is doing. The two key metrics to look at are mortgage rates and household income. Let’s analyze the mortgage rates first.

Historically, there is a high correlation between 30 year U.S. treasuries and 30 year mortgage rates (Chart 1). The chart shows that the 30 year treasury yield has spiked upwards starting in 2013, so I expect that the 30 year mortgage rates will spike upwards too. 30 year mortgage rates have already gone up from 3% to 4.9%, which had negative consequences for the real estate market, which is not priced in yet in the housing index.

Chart 1: Correlation between 30 year treasury yield and 30 year mortgage yield

As Zero Hedge reports, the affordability of housing is declining rapidly with rising mortgage yields. Every percentage increase in yields on 30 year mortgages will result in a 10% decline in affordability as the chart shows. If yields continue to go up to 6%, affordability would have declined about 40% since 2013.

Chart 2: House Purchasing Power

The question is, will mortgage rates go up further? And what about the savings rate of the average citizen?

The answer is that real estate should be sold out of. Kyle Bass for example sold out of three of his real estate holdings: Newcastle Investment Corp (NCT), Hyatt Hotels Corporation (H) and Realogy Holdings Corp. (RLG ) – Real Estate Services.

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Fiscal Cliff: Savings Rate to go into Negative Territory

The fiscal cliff which is right in front of us will arrive on January 1st, 2013. The most important change will be the expiration of the Bush tax cuts. Each citizen of the U.S. will have a tax hike starting next year. The result will be a decline in savings rate. Tax rate can be said to affect the savings inversely both in the personal and corporate levels. It means that in the cases when the tax rate increases, the rate of savings may fall while with decrease in the tax rate, the savings may increase.

Overall, the personal income tax rate will go up 3% with the exception of the lowest and highest income earners who will have a whopping 5% tax increase. This tax increase will therefore reduce the disposable income of each and every person and business in the U.S.

So what does this mean in simple numbers? If I earn 3000 dollars and I am taxed 33%, I will have 2000 dollars of disposable income. If I save only 3% of my disposable income (see chart 1). I am saving 60 dollars. If now the taxes on my personal income go up 3%, I will need to hand over 90 dollars to the government. My disposable income will be 1910 dollars. This means I’m going underwater: 60-90 = -30.

Chart 1: Personal Savings Rate

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