Rising Interest Rates Start Popping Bubbles - The End Of This Expansion Is Now In Sight

Towards the end of economic expansions, interest rates usually start to rise as strong loan demand bumps up against central bank tightening.

At first the effect on the broader economy is minimal, so consumers, companies and governments don’t let a slight uptick in financing costs interfere with their borrowing and spending. But eventually rising rates begin to bite and borrowers get skittish, throwing the leverage machine into reverse and producing an equities bear market and Main Street recession.

We are there. After a year of gradual increases, interest rates are finally high enough to start popping bubbles. Consider housing and autos:

Mortgage Rates Up, Affordability Down, Housing Party Over

The past few years’ housing boom has been relatively quiet, but a boom nonetheless. Mortgage rates in the 3% – 4% range made houses widely affordable, so demand exceeded supply and prices rose, eventually surpassing 2006 bubble levels in hot markets like Denver and Seattle.

But this week mortgages hit 5% ...

... and people have begun to notice. Here’s an example of the resulting media coverage:

Mortgage rates top 5 percent, signaling more home price cuts

Some of us out there still remember when the average rate on the 30-year fixed mortgage hit 9 percent, but we are not the bulk of today’s buyers. Millennials, now in their prime homebuying years, may be in for the rude awakening that credit isn’t always cheap.

The average rate on the 30-year fixed loan sat just below 4 percent a year ago, after dropping below 3.5 percent in 2016. It just crossed the 5 percent mark, according to Mortgage News Daily. That is the first time in 8 years, and it is poised to move higher. Five percent may still be historically cheap, but higher rates, combined with other challenges facing today’s housing market could cause potential buyers to pull back.

“Five percent is definitely an emotional level inasmuch as it scares prospective buyers about how high rates may continue to go,” said Matthew Graham, chief operating officer of MND.

Home sales have been sliding for much of this year, and total annual sales are expected to come in lower than last year. Affordability is the clear culprit. With rates now more than a full percentage point higher than a year ago, that adds at least $200 more to a monthly mortgage payment for a $300,000 loan. It also knocks some borrowers out of qualification because lenders are strict on how much debt a borrower can carry in relation to his or her income.

Some recent headlines illustrate the sudden shift in housing sentiment:

Manhattan home sales tumble in market clogged with listings

Vancouver home sales mark steady decline

For-Sale home supply surges in hot West Coast markets

Bond-market bloodbath likely to hit mortgage rates soon

Auto Sales Run Out Of Gas

For autos, it’s the same general story, as low interest rates – in the form of 0% financing and too-good-to-be-true lease terms – produced the highest sales ever in 2016.

But lately a couple of things have happened: Everyone who could possibly qualify for a 7-year car mortgage has done so, depleting the pool of potential buyers. And interest rates have risen enough to make it uneconomic for car companies to keep offering yesterday’s crazy-low rates. From today’s Wall Street Journal:

Zero-Percent Financing Deals Fade From the New-Car Lot as Interest Rates Rise

Car buyers on the hunt for a 0% financing deal are going to have to look harder.

Auto lenders are pulling back on the no-interest financing offers that had become widespread in new-car ads and dealer showrooms for much of this decade. Cheap financing reinvigorated the U.S. auto industry’s sales following the recession, helping to keep monthly payments affordable and draw buyers from the used-car market, where lending rates are usually higher.

But as interest rates rose, the cost of such deals has increased, pinching profits for car makers that finance vehicles through their lending arms and must pay the difference to keep the rate at zero for the customer. With U.S. auto industry sales slowing, car companies are turning to other types of sale incentives, such as cash rebates and discount lease rates, to lure buyers to showrooms, dealers and industry analysts say.

“For a long time, everything was 0%,” said Adam Lee, chairman of Lee Auto Malls, a dealership chain in Maine. At first, buyers could find 0% finance deals on 48-month car loans, and then auto lenders started extending those deals to 60-month loans and eventually 72-month loans, he said. “There are fewer and fewer of those deals now,” Mr. Lee added.

In September, the percentage of new cars financed with an interest rate of 1% or less fell to 5.3% for the month, down from 8.2% in September 2017 and 11.7% in September 2016, the year U.S. auto sales peaked, according to market research firm J.D. Power.

No-interest loans have become even scarcer, accounting for 3.4% of all new-car financing in September, down from 9.1% two years ago, J.D. Power said.

The average financing rate for a new-car purchase was 5.75% in the second quarter, up from 4.82% two years ago when auto sales were at their strongest, according to Experian Automotive.

“You’re definitely seeing the entire industry pulling back,” said Jack Hollis, general manager of Toyota North America, of the scaling back of interest-free auto loans. “Obviously, interest rates rising is a reality in the marketplace, and we’re going to react.”

As this post was being written, Ford announced an 11% drop in monthly sales.

To sum this up, millions of Americans who were happily signing on the dotted line because of irresistibly cheap financing are done with that kind of thing. The companies selling cars and houses to these people are now desperately trying to cut their expenses to fit their much lower year-ahead sales projections. Those companies’ suppliers are scaling back in response, and so on down the line as two major industries go from boom to bust.

Housing and autos aren’t the only ones hitting a brick wall of higher interest rates. Lots of other businesses depend on their customers’ ability and willingness to borrow. They’ll be the subject of future posts in this series.

10/10/2018

Authored by John Rubino via DollarCollapse.com


Harvard Trained Economist: The Next Global Financial Crisis Is Starting

Harry Dent has spotted a divergence, warning us that something is wrong, and the next crash is clearly in motion. Here is what Harry sees…

by Harry Dent of Economy & Markets

The 2008 financial crisis was well overdue, what with predictably slowing demographics, especially in the U.S. at first, and an unprecedented debt bubble in the developed countries.

The trigger was the subprime crisis – a small, but high-risk sector of really bad loans that started to blow up when everyday households started to default on mortgages they could never afford in the first place. But that was only the trigger.

Since early 2009, we’ve seen unprecedented money printing to save the banking system and economy from a depression, and most of the new debt has accumulated in the third world. A McKinsey study shows that emerging markets have taken on $57 trillion in additional debt through 2014, with more to follow.

Like 2008, this too will blow. The trigger this time looks to be corporate loan failures in emerging countries, starting with Turkey and the worst, Venezuela.

Turkey, like China, greatly over-expanded after 2008 with cheap dollar-based loans. Such foreign loans aren’t in their control and makes them more vulnerable to defaults.

And now, with the dollar and U.S. interest rates rising, Turkey is getting into trouble quickly.

Venezuela’s over-spending on social programs, from oil revenues when they were high and dependence on foreign debt, was more extreme and that’s the classic scenario where you get hyperinflation. You must print large amounts of money to pay off increasingly expensive foreign debt – but unlike the developed countries, that money doesn’t go back into the economy to help prop it and the banks up.

Rather, the currency keeps crashing from such outflows creating internal inflation from imports, and it makes those foreign loans massively more expensive… so they print much more money until they approach one million percent inflation. Welcome to Venezuela today.

This chart tells the story.

The developed countries debt spree, especially corporate, peaked in 2008. It’s been flat ever since, with a brief drop as a percentage of GDP in 2014. It was 94% in early 2008 and is 92% today. They didn’t de-leverage, nor leverage back up further.

As the McKinsey study showed, all the action shifted to the emerging countries when cheap dollars (and euro and yen) made foreign borrowing easier and cheaper.

Emerging countries went from 55% of GDP in late 2008 to 108% – doubling – today, with the strongest surge after 2011 when Europe joined the U.S. and Japan with all guns blazing in money printing together.

But China, with its unprecedented 64 times debt since 2000, was the race horse. It’s gone from 97% corporate debt in late 2008 to a 166% peak in early 2016 and is currently at 164%!

Emerging countries normally don’t have corporate, or any sector, debt ratios nearly as high as developed countries because they’re not as wealthy or credit-worthy. But now China and emerging countries corporations are the most in debt… and they tend to default first.

China’s stock market has been down as much as 25% recently and the emerging market indices have been down 22%, with Turkey down 30% and Venezuela down 40%.

This is a major divergence, warning something is wrong, and the next crash is coming.

But even in developed countries, the risks are rising. The percentage of BBB (near junk) ratings on U.S. corporate bonds has risen from 32% to 48%, currently at 47%.

And there’s a wall of high-yield (actual junk) debt to be re-financed between 2019 and 2024 as I cover in the November Boom & Bust newsletter.

Europe has seen a more ominous trend going from 18% BBB to 48% since late 2008 and their economy has and will be weaker than ours. European stocks have not made new highs in recent months, creating another divergence with U.S. stocks.

Corporate debt, especially in emerging countries, is likely the biggest trigger for the next crash and financial crisis… and its already clearly in motion.

China will be last to get hit because it’s much more massive debt is internally-driven, and not foreign. Regardless, it will fall the hardest when the shit does hit the fan!

Harry

Follow me on Twitter @harrydentjr

Fonte: qui