The Hidden Risks of High Mortgage Rates

Why Everyone Should Care About the Real Estate Market

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The Challenge of Affordable Housing in Times of Uncertainty

One of the most persistent concerns that plague family and friends is when housing will become affordable again. We live immersed in the eternal promise that housing prices will decrease, that it is not sustainable to maintain them at these levels, and that young people will never be able to afford their own homes.

To make matters even more complicated, the prices of 30-year fixed-rate mortgages have reached multiples never seen before since the early 2000s. Surely, many of you reading this did not experience that era, but it is a period from which we must learn meticulously to understand how the interest rate market behaved and how we can take advantage of it.

As you may recall, in June 2021, we recommended investing in home purchases. "I thought this newsletter only talked about stocks and ETFs," you might ask. The answer is no. The purpose of this newsletter is to help everyone achieve financial freedom, to share what the media and your boss would prefer you not to know (perhaps he doesn't even know it himself).

Our intention is to show you how, by making intelligent financial decisions, you can build a solid wealth that will allow you to retire before the age of 65, perhaps even before 70 or 75, by the time many of you reach that stage in life.

Why Mortgages Put Us in Danger

To put things in perspective, if we apply an interest rate of 7.1% to the current median home price, we would get a staggering monthly payment of $2,800. This proves to be a financial burden that most people in the United States real estate market cannot bear.

The problem is that the real estate market affects everyone. From dear Aunt Sally who is trying to buy a house to your cousin who is trying to sell his garage in San Francisco to move to Austin, including the major financial institutions that own a significant amount of real estate.

It is important to remember that the average American has about 24% of their net worth tied to real estate, most often represented by their primary residence.

If the real estate market collapses and there is a significant reevaluation of these assets, everyone will start to feel much poorer very quickly. And it doesn't take much more to push the U.S. economy into a recession.

The question that arises is: How high will these interest rates go? How long can they remain at these levels without causing significant harm to the economy?

This is what we must monitor as one of the factors that could trigger a recession. The stability of the real estate market is a concern that extends beyond homebuyers and affects the entire nation.

Affordable housing accessibility is a critically important issue today. Speculation about when housing prices will return to reasonable levels has been a recurring topic at family dinners and gatherings with friends for years. Will we ever see a housing market that is accessible to the younger generation again? That is the question that resonates in the minds of many.

However, it is not just the price of housing that is at stake. Interest rates on mortgages also play a crucial role in the equation. In the first part of this newsletter, we mentioned that interest rates on 30-year fixed-rate mortgages have reached unprecedented levels since the early 2000s. This has a significant impact on people's ability to buy homes.

When to Buy a Home

Now, the question everyone wants to know is when they will be able to buy a home at a good price. The honest answer is that we do not know. In fact, no one knows, and anyone who claims to know is lying.

What we do know is that now is not the time. Generally, we advocate not buying assets that are at their highest levels in the last 10-15 years, and now with mortgages at their highest levels in 20 years, it's a risk.

There are multiple assets that can provide you with a much higher return than a home, and that's why you should consider them.

Often, investing in these types of assets allows us to afford others when their prices drop, and that's precisely what we're going to do.

As you know, we continue to accumulate very out-of-the-money options in preparation for the next recession, and that will be the ideal time to buy a home. We will let you know at the precise moment.

When the market is at its peak, as it is now, we must tread carefully, especially in an environment where it seems that euphoria is gradually returning to the markets.

This week, we have added to our portfolio a position that is as antifragile as possible. It's likely a bargain and could potentially triple in value without any unusual market events. A true gift.