10% Mortgage Rate Scenario: Are You Ready for a Market Crash?

Michael Zuber (0:00)

All righty, folks, we're recording this on September 16th, aka Fed Day. We already have mortgage rates over 7%, likely headed to 7.5%, if not 8%. But I wanna do something different today. I wanna look out in the future and say, what if mortgage rates get to 10%? The 10-year note, maybe to 7.25, 7.5.

What happens to the AI investment boom? Does that blow up? Do we see a stock market correction of 25% or 30%?

Again, this is not a prediction. This is simply a what if exercise. What will we do if anything different? What do we think blows up? And where are the opportunities? Dion, we always go in the order that people showed up. Dion, you were first today. What are your first thoughts? 10% mortgage rates and a 25% stock market crash.

Dion (0:50)

Two immediate thoughts come to mind. The first one is, great, less competition.

Michael Zuber (0:56)

Yep.

Dion (0:57)

The second one is, man, or the crash bro is gonna have a hay day. And they're gonna be wrong.

Michael Zuber (1:03)

Yeah, and I think there's a third one. Thank God for 30 year fixed rate debt, because it doesn't bother me one iota if rates are 10%.

Dion (1:11)

They're going to say the crash has to happen because rates are so high and nobody can buy a house, not thinking about all of the people who own the house currently that just aren't going to sell. So your called crash in transactions gets amplified, but the crash in prices doesn't happen because we don't have forced sellers. If interest rates went to 10 billion, we don't have forced sellers with fixed rate debt.

Commercial gets interesting, residential doesn't get touched.

Michael Zuber (1:36)

I'm glad you brought up commercial because I have a lot of thoughts there, but let's bring Matt into this. Matt, you've been around, you've been through a.com blow up. You and I got scorched in that. It was very painful. I still have a nasty scar that looks ugly.

But what are you thinking? You know, 25 I mean, what's worse from where you are? 25% stock market crash or 10% mortgage rates?

Matt (1:59)

Oof. I mean.

How rich aren't people that waited? Congratulations, you lost, you lost, you lost the excuses, sure, since the teens, but really since COVID.

Michael Zuber (2:15)

Yeah.

Matt (2:16)

So how much money have those people lost, right? They could have bought with 2.5% or 3% or 3.5% or 4% or 4.5%.

And all the while, they were complaining about the rates being too high. And now we're looking at the real possibility that rates will be 7.5%, 8%.

Michael Zuber (2:35)

Oh, for sure.

Matt (2:36)

So they get crazy. Yeah. Could they get crazy and get to 10? Sure. Well, all I had to say is, told you so.

Michael Zuber (2:44)

That's it.

Matt (2:44)

Just told you so. All of our debt at 3.5% and 4%, when we were running into the fire, and all these other people were running out, and all the other people that were sitting at cocktail parties when we walk away, and they go.

Michael Zuber (2:56)

He's going to go broke.

Matt (2:58)

Yeah. He's going to blow up. Hey, all I got to say is, retired. How's work this morning?

But when you catch this at 9.3 at night, when your kids are finally asleep, and then you get a chance to watch some YouTube, or you're time stealing from your boss, either that.

Michael Zuber (3:13)

Yeah, I want to hit on a couple of things there, because again, people hear 10% mortgage rates, and I got to tell you, there'll probably be people in the comments that just bust out on the title, that think all three of us are going to go bankrupt.

I'm going to tell you one more time, 30-year fixed rate debt sub 4% in a 10% interest rate environment, none of us are going broke. We are all fine.

Our portfolios might be worth less, but I don't live on my portfolio. So yeah, it's pretty crazy. Here's a question I just thought of. What do you guys think? And Matt, we'll go to you first. What do you think happens to rent? Think about an environment where mortgage rates are 10%. What do you think happens to rent?

Matt (3:53)

Well, I think what people don't realize, and it's usually from people that are in states, and Dion is now a part of this horrible brethren, but states that don't raise taxes on an annualized basis. And so, what happens is, they say, we didn't raise taxes. They didn't, but they raised assessments which brought taxes higher.