Five percent was the number at the top of the market’s mind as the 10-year Treasury yield closed in on that psychologically important mark. Round numbers attract attention, but there are more important measures to note.
It is surprising that the housing market hasn’t cracked from the massive rise in mortgage rates, up from unprecedented lows in the 3% range during the Covid pandemic. Housing starts rose 7% in September to a 1.358 million annual rate, although that was down 7% from a year earlier. But single-family starts were up 8.6%, driven by the much-reported lack of existing houses for sale by homeowners loath to part with their ultralow-rate mortgages.
To be sure, the decision to buy a home is driven by family circumstances as well as the numbers. But the pure economics of residential housing have been upset by the rise in interest rates. According to a post on X, formerly known as Twitter, by the Kobessi Letter of a chart from Reventure Consulting, the return on residential housing is below the 10-year Treasury yield. That’s based on the “cap rate,” or the return to an investor who buys a house to rent out.
NDR points out a subtler effect of rising interest rates on equities. Some analysts adjust stocks’ valuations for the cash holdings on company balance sheets, making the P/E ratios of cash-rich companies appear lower. But if the numerator is adjusted for cash, the earnings that cash generates also should be deducted from the denominator, the firm pointed out in another note it published this past week.
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