Mortgage rates have now reached 'breaking point'; Investors need to watch this major market risk - Ted Oakley
Mortgage rates are at the highest level since 2020, with the 30-year mortgage at 4%. This is in comparison to last year when the 30 year was down to 2.8%. "The consumer is going to be under pressure, and we already saw mortgage applications go way down in the last few months. That is what is happening in the marketplace," emphasized Ted Oakley, Founder of Oxbow Advisors. "I suspect that the 4% rate on the 30-year mortgage is a breaking point."
Oakley discussed mortgages and interest rates, and markets with David Lin, Anchor at Kitco News.
Oakley gave an example of a consumer taking out a $400,000 mortgage today. "It will be up 20% from where it was a year ago on the payment. If the payment goes up 20%, and the home rises 20%, all of sudden we get into that territory that you are locked into," he explained. "Then you have a situation where the Fed will probably raise rates into a slowing economy which they always do, because they are always late."
The consumer will be impacted significantly, because they will have higher mortgage payments, plus we don't have Fed stimulus like we had last year," Oakley noted. "All the business people that sell houses or cars or anything else, they say payments are what matters to consumers, and those payments are going up," he said.
Oakley continued speaking about possible interest rate hikes and inflation. "You can't really believe the Fed, because they are always late to everything they do. When they finally raise rates in a slowing economy, and then all of a sudden oil spikes, that is a tax on the 50-60% of people who live from paycheck to paycheck," Oakley pointed out.
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"We will see the economic slowdown not necessarily going away, and inflation dropping as well, and both will impact the markets," he continued. "The current rate of inflation is 7.5%, but it could go back down all the way to 1 or 2%. But it will certainly go back to 3% before it's all over, because the economy just couldn't tolerate it."
Discussing equity investments, Oakley suggested investors should make sure they have enough liquidity for new opportunities "If you don't have any liquidity, and you get into a situation where things are really attractive, you have some real opportunity, but you can't take advantage of it," he explained.
Oakley expects the economic slowdown to cause stock market fears. "I think what happens is that selling begets selling. Every time the market sells off 10%, and all of a sudden it comes back a bit, investors like the idea of buying on the dip," he said. "But there's a spot in here, and we think that it is this year that buying on the dip will no longer work, at least not in the short run, but perhaps in the long run. We think to get to a normalization of where you want to put more cash to work, you need to have more than a 10% sell-off."
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