If Federal Reserve Chairman Jerome Powell wanted to see signs of a downshift in the U.S. economy, this is definitely one of them. After numerous successive federal funds rate hikes with a pause in between, the rate on a 30-year fixed mortgage is now 7.48%.

When the Federal Reserve hikes the fed funds rate, U.S. interest rates increase across the board: credit cards, auto loans, mortgage loans, you name it. Americans typically hold much of their wealth in their homes, but they won’t be able to keep those homes if they can’t make the interest payments.

Just to provide some perspective, the average 30-year fixed mortgage interest rate was roughly 5.5% at this time last year. So, a jump to nearly 7.5% in a year’s time represents a sizable increase.

30-year fixed mortgages are very common in the U.S. Now, homeowners are paying the highest interest rates since November 2000 on those loans. For young Americans looking to buy a home and start a family, the American Dream is truly inaccessible in the 2020s.

10-year U.S. Treasury yield. Courtesy: MarketWatch

This isn’t to suggest that high interest rates are bad for everyone. For example, this chart shows this rise in the 10-year U.S. Treasury yield, so government bond owners might enjoy decent yields for a little while – until the Federal Reserve cuts interest rates, that is.

On the other hand, high rates carry unforeseen consequences. In particular, it’s difficult to find a home to buy nowadays, since current homeowners don’t want to sell their homes. Many current homeowners locked in a fixed annual mortgage rate of around 3%, and if they moved and bought a new home, they’d now have to pay nearly 7.5% annual interest on it.

Hence, not only are new homes unaffordable, but they’re also hard to find since current homeowners aren’t budging. Meanwhile, renters are still paying unreasonably high prices, so there’s nowhere to hide if you want to avoid overpaying for shelter.

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    There are also more esoteric but nonetheless impactful consequences. Oddly enough, a 10-year Treasury bond will pay you 4.34% per year but a 5-year Treasury bond (which requires half of the time commitment of the 10-year bond) pays 4.99% per year.

    That’s the classic inverted yield curve, which has historically preceded economic recessions in the U.S. However, we’re living in times of unprecedented events and broken streaks, so I’m definitely not recommending pulling out of all investments now.

    iShares U.S. Real Estate ETF (IYR). Courtesy: Yahoo Finance

    Another upshot of the current tight-credit conditions is that lenders are reluctant to lend and the real estate sector has been a poor performer in 2023 so far. While shares of NVIDIA, AMD and other tech high-flyers grind higher, typically reliable dividend-paying real estate stocks are disappointing income-seeking investors.

    And then there’s gold, which isn’t crashing by any means but is also having trouble with that pesky $2,000 resistance level. Again, it needs to be emphasized that the Federal Reserve will back off and cut interest rates at some point. This should open the door to higher gold prices.

    Gold is testing investors’ patience, and it’s easy to pass that test (you just have to stay invested and do nothing) but it’s also difficult because people always feel like they need to be active. However, I actually recommend being passive and letting the interest-rate soap opera play out. In time, sanity will be restored to the markets despite the central bankers’ best efforts.

    Governments Have Amassed ungodly Debt Piles and Have Promised Retirees Unreasonable Amounts of Entitlements, Not In Line with Income Tax Collections. The House of Cards Is Set To Be Worse than 2008! Rising Interest Rates Can Topple The Fiat Monetary Structure, Leaving Investors with Less Than Half of Their Equity Intact!

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