US ten-year yield above 3%

The US government ten-year yield (IEF) has continued to rise, breaching 3% for the first time since the taper tantrum of 2013 aided by rising inflation (TIP) expectations. The 3% ten-year bond yield isn’t a significant level for any reason—it’s a psychological level that has created some market frenzy.

The continued increase in bond yields, however, has been worrying stakeholders in the housing (XHB) industry. Recent reports from the housing sector haven’t raised any red flags for the sector at this point, but continued increases in the 30-year mortgage rate along with rising home prices could push prospective buyers away once rates reach higher levels.

Are Rising Bond Yields Affecting Housing Markets?

Higher rates could affect housing markets

The 30-year mortgage rate has risen to 4.8% in May, its highest level since 2011 and a steep increase of 100 basis points compared to 3.6% in 2016. Given the strong possibility of another three rate hikes from the Fed, we can expect a continued increase in mortgage rates over the next two to three years.

The housing market hasn’t witnessed any fall in demand despite these increasing rates, and the reason for this could be rising wages and disposable incomes thanks to tax cuts and falling unemployment. It’s difficult to assess how homebuyers could react to another 100-basis-point increase in interest rates (BND) in the next six to 12 months, as the pace of rate hikes could eventually outrun the benefits of tax cuts.

Series overview

Throughout this series, we’ll focus on the economic data from the housing market released in May, which were mixed, and we’ll analyze the trends in homebuilder (ITB) confidence, home prices, building permits, and new and existing home sales.

In the next article, we’ll discuss the National Association of Home Builders’ (or NAHB) May report on builder confidence.

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