High interest rates are not the problem with the real-estate market. Anyone who bought a house in the ’70s or ’80s can attest to that. The actual problems? Weak appraisals, 20–30% cash at closing, high labor costs, and high input costs for basic materials top my list. So the Federal Reserve’s long-bond-buying binge is a real head scratcher.
As you can see in the following charts, traders jumped on the news, buying up long bonds last week to front-run the Fed buying that will begin in October and last through June 2012. Traders have done quite well.
Annuities and pension funds cannot be thrilled. They invest new money in longer-term bonds to match up liabilities. Thanks to the Fed, they are now left with much lower yields. As a group, they can ill afford such a headwind, and a fabricated one at that. The Fed claims it is trying to help Main Street, yet that is exactly who is hurt most by such low rates.