Sun, June 30, 2024 at 00:03

• 

  Kang-hoon

  • Hello, Annie.

  • Today, I want to discuss a potential crisis in the U.S. housing market that could have long-lasting effects.

  • 
• Annie

  • Oh, that sounds serious.

  • What's happening exactly?🤔

  
• 

  Kang-hoon

  • During the pandemic, the Federal Reserve reduced interest rates to zero, leading many homeowners to lock in very low mortgage rates.

  • Now, more than half of mortgages have real interest rates of 4% or less.

• Annie

  • Wow, that's quite low!

  • But how does that lead to a crisis?

  
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• 

  Kang-hoon

  • The issue arises because current mortgage rates for new buyers are around 7%.

  • This disparity discourages existing homeowners from moving, causing stagnation in the housing market.

• Annie

  • I see.

  • So, people are just staying put in their homes.

  • But why can't they just build more houses?

  
• 

  Kang-hoon

  • Building new houses in the U.S. is costly.

  • Unlike in some countries, U.S. housing consists mostly of single-family homes that require extensive infrastructure like water, sewer, and electricity, making it expensive.

• Annie

  • That makes sense.

  • But what about the financial institutions?

  • How are they affected?

  
• 

  Kang-hoon

  • Financial institutions are in a bind.

  • They hold a lot of these low-interest mortgages.

  • With current interest rates at 7%, these institutions are essentially losing money on their investments.

• Annie

  • Oh no!

  • So, what happens if they can't sell these mortgage bonds?

  
• 

  Kang-hoon

  • If they can't sell them, they face significant financial losses.

  • This situation is similar to what happened with Silicon Valley Bank (SVB), which went out of business due to similar issues.

• Annie

  • That's alarming.

  • Could this lead to a broader financial crisis?

  
• 

  Kang-hoon

  • Indeed, it could.

  • According to Bank of America, the stagnation in the mortgage bond market and housing market could last up to a decade, even if the Fed cuts rates.

• Annie

  • A decade?

  • That's a long time.

  • What does this mean for the average person?

  
• 

  Kang-hoon

  • For homeowners, it means they are likely to stay put and not sell.

  • For potential buyers, it means higher mortgage rates and difficulty in purchasing homes.

  • For financial institutions, it means potential instability.

• Annie

  • So, is there any way out of this situation?

  
• 

  Kang-hoon

  • The only potential solution would be a significant drop in interest rates, but even that might not be enough to turn the market around quickly.

• Annie

  • This sounds like a ticking time bomb.

  • What should investors do?

  
• 

  Kang-hoon

  • Investors should be cautious.

  • The current environment is risky, and the potential for financial instability is high.

  • 

  • It's best to avoid heavy investments in mortgage bonds and related financial instruments.

• Annie

  • Thank you for the detailed explanation, Kang-hoon.

  • So, in your opinion, is this news a positive or a negative for the market?

  
• 

  Kang-hoon

  • Unfortunately, Annie, this is definitely a negative.

  • The potential for a prolonged period of stagnation and financial instability is too significant to ignore.

  • Upon comprehensive consideration, this news is perceived as a 😱Bearish.