Flat Yield Curves

If the yield curve continues to flatten, or eventually inverts, mortgage rates do not have to go to 8% to burst the housing bubble because banks will just stop writing new mortgages.


[Also a threat

Unlike most analysts who cite rising long-term interest rates as the only threat to the real estate bubble, Mr. Trahan recognizes that the flattening yield curve also poses a great threat.

Banks love to lend when they can charge more to their borrowers than they are paying to borrow those funds – hence the appeal of a steep yield curve, where long-term rates are appreciably higher than short-term rates.

"With interest rates at 40-year lows, and the yield curve flattening, lending conditions will likely become more difficult, removing one of real estate's most significant headwinds," Mr. Trahan said.

One flashing red light is that the number of new homes for sale for which construction has not begun has never, ever been this high. Speculation, in other words, has never been more frenzied.

And then there is the supply/demand dynamic.

"Supply, as depicted by the amount of new homes for sale, seems to be increasing at the same time the home non-ownership rate seems to be near all-time lows and still declining," Mr. Trahan observed. "We are approaching a situation where there will be more homes built than there are prospective homeowners."

Bottom line: The risk in real estate has never been this high vs. its potential reward.]

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