Bond Market Crashes; Your Home Is Next | Ron Butler

Ron Butler (0:00)

There's financial pressure, which has been grinding for a couple of years. This looks like it's gonna go on another year or two. Go crazy, like just go 20% less on everything. When the borrower gets in trouble, they just throw up their hands and say, well, I guess I'm just gonna stop paying because I cannot sell this house even close enough to the amount of the mortgage to allow me to get out with any money. And I'll just live for free.

David Lin (0:27)

This is possibly the worst housing crisis since 2008 across both Canada and the US. US mortgage rates are at a nearly three year high. Freddie Mac's 30 year average has hit 7.4% versus 6.27 just a year ago. Housing costs keep climbing too. The shelter component of the CPI rose 3.2% year over year. But downside pressures are already building. Redfin counts 62.6% more sellers than buyers. The biggest gap in its records and housing completions are down. And the XHB Home Builders ETF is down 22% from its June highs. In Canada, the cracks are in full view. Court order foreclosures in Vancouver are at the highest level in years, decades even, even higher than 2008

And as central banks around the world continue to raise rates, homeowners face even higher interest rates down the line, which eventually may be passed down to renters. So, how high do rates go?

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Ron Butler joins us now. He's a principal mortgage broker at Butler Mortgage and the host of the Angry Mortgage Podcast. Welcome back to the show, Ron. Good to see you as always.

Ron Butler (2:24)

Pleasure to be here, David. Thank you.

David Lin (2:26)

Let's start with the US side. 30-year fixed at 7.4% in the fourth quarter this year. More buyers are choosing adjustable loans, CNBC said.

Have you been talking to people in the states about their outlook and their sentiment and what they're choosing in terms of products? Are they avoiding buying a new home altogether until rates come down?

Ron Butler (2:48)

I think the best answer there is yes. I mean, let's face it, sometimes there's just pressure to move, there's family pressures, there's situations that come up, people feel they have to buy something.

That's a case where they're going to, but they wish they hadn't and anyone who could stay on the sidelines will stay on the sidelines because if it's not an urgent requirement, they're not going to go ahead and pull the trigger on a purchase, not when they're going to have a rate that high. Adjustable does, it's an alternative, but it makes people, many people feel nervous.

David Lin (3:25)

Yeah, the arm share of mortgage demand increased 10.5 percent, the highest in the year. If you're getting an adjustable, you're assuming rates are going to come down. Is that a fair assumption though, right now?

Ron Butler (3:33)

You better be because it can come around to bite you as well. It has to be an assumption that rates are as high as they're going to get, or they're going to come down and which may be an entirely wrong assumption.

David Lin (3:46)

Yeah, let's talk about that. Why is that? That was my question to you. Where do you think it's headed? Because if you're getting an adjustable, you better be right, like you said.

Why is that probably not the right assumption?

Ron Butler (3:57)

Well, I'm fortunate that I get an opportunity to talk to fixed income executives in Canada and across the border in the US.

And the sentiment is becoming very, very bearish in terms of the movement of bond yields right across the globe, particularly long-term bond yields, which moves the 25 and 30 year fixed rate market in the US. And bond yields in Canada as well. I mean, the things I hear are simply this, that all these yields of all types of bonds will be higher next year, and central banks will continue to raise.