Are 9% Interest Rates Coming? The Financial Crisis Nobody Is Talking About

SPEAKER_1 (0:00)

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Michael Zuber (0:31)

You are not going to believe what is going on over at BlackRock. It is being widely reported that financial institutions like BlackRock and others are now running scenarios with a 10-year note at 9%.

Nine, today, rough and tough, we are sitting with a 10-year note at about 5%.

And not only are they talking about a 9% 10-year, but to quote it, for an extended period of time.

If you think back just to a couple of years ago, we saw the 10-year note hit 5% for a minute, and then retreat. Now we are asking ourselves, what would happen with a 9% 10-year note for an extended period of time? This would be game-changing. When I think about a 9% 10-year, you probably have a 12 or 13, 12 or 13% mortgage rate.

So I took down a few thoughts about what would happen with a 9% 10-year note. First and foremost, multifamily would be a catastrophe. Folks, the multifamily market is built on a debt product that resets every 3, 5, 7, and maybe 10 years.

If we are running into a cycle where the cost of capital is now double digits, let's just call it 10%, and you purchase the deal with, let's be conservative, a 5% mortgage, and then you are forced to go back and reset that mortgage at 10%.

There are, frankly, great operators that would lose their buildings. Multifamily, the big stuff, would likely see a collapse of at least 60% of value. Frankly, you would see deals get done, but they would be done for cash.

And again, they would be done for cash at a very, very depressed price. So the first thing I think about with a 9% 10-year is the fact that multifamily, really all commercial, multifamily, hotels, industrial, warehouse, storage, all of them, all of them, anybody who's built on variable rate debt, even if you are a good operator, you are not planning for mortgage rates to double. It's just not in your 5-10-year plan. So multifamily is a catastrophe. Next up, home builders. We are already seeing home builders struggle. We are seeing home builders eat margin, perform mortgage rate buy-downs to $4.99, $3.99, and in some crazy cases, $3.49. This is already taking gross margins from the low 30s to the teens.

A 9% 10-year and a 12% mortgage would likely send a lot of the public builders to bankruptcy. A lot of the small builders would just be gone. We would be doing a lot more real estate for cash. It is frightening. Let's talk about the AI bubble. A 9% 10-year probably takes junk bonds to 14% or 15%.

The AI bubble would explode. The cost of capital would make it impractical. The stock market would crater. The stock market today is built on a 5% quote, unquote, risk-free rate of return. If that doubles to 9%, stock market will crater.

The other thing, on the good side, if you have a savings or a money market account, you would get a real rate of return. If the 10-year is at 9%, maybe a money market account is earning you 6 or 6 1⁄2. So you would be paid to hold cash, and believe me, people would.

And then the last thing, residential real estate. Existing home sales would turn into a crawl. Today, we're doing rough and tough 4 million. If we jump to a 9% 10-year note, that has the possibility to fall to 2.5 million, or even 3 million, somewhere between 2.5 and 3 million. Again, the only transactions that would happen with a 9% 10-year would be cash purchases, probably FHA, VA loans, and creative financing. We would have to go back and study the early 80s, the 1981, 82, 83, really understand and talk about seller seconds, and silent seconds, and equity pushes, and just all kinds of crazy things. Because again, if you had a mortgage at 4, 5, 6%, you would actually have an investible asset at that point. So it's a little bit frightening, frankly, when I read that BlackRock and other financial institutions are running scenarios with the tenure at 9%. The economy is not worth it. That doesn't even talk about the $40 trillion in debt.