Itchy itchy snitchy witchy bit...

So I had the itch the other day.  The itch to employ my "employees", i.e. excess funds beyond weekly, monthly, 6 month buffer, needs, into income producing assets.  So I started looking around.  Stocks.  Interesting to own a part of a real business that generates you passive income.  REITs seem cool and similar to what I like, i.e. real estate.  What about lending club?  What about something going up to the bakken oil fields?  What about something something something?  

Mainly my focus/interest though leans to real estate.  I've looked at mobile homes too.  No go on the real estate/stock thing for me though after thinking about one main thing.  

Interest rates. 

When they go up, prices, when all else is equal (which isn’t ever the case and in fact I think “all else” is going to get a lot worse as far as effecting house prices going up, but for simplicity sake this time we’ll let it be), must come down.  How much must they come down?

For a property/home that is 100k with a 3.5% interest rate, which we just finished visiting on the historical interest train just about a month ago, on a 30 year mortgage has a payment of $449.04. 

I happen to know through a tiny bit of research that the AVERAGE 30 year interest rate on a mortgage is 6.97%, or basically double the first rate. 

How much is the payment on that 100k house now at 6.97%?  $663.29.  That is a 47% increase in mortgage payment amounts made each month!!!! 

Now this is very important so pay attention…BROCK! Lol.  Remember I’m itchy… 

Now lets continue to assume that indeed “all else” stayed the exaaaact same as it was when the house sold for 100k at 3.5%, but now we’re facing 6.97% interest rates.  Would anyone in his or her right mind buy that house? 

Now to “all else”.  To me “all else” would be that employment didn’t improve or worsen, incomes didn’t go up or down, the population stayed the exact same, supply of houses stayed the exact same.

Hopefully the answer is abundantly clear.  The answer is that nobody in his or her right mind would buy that property or even goes look at it as clearly it was overpriced by 47%, which is the realization I finally came to. 

To flush out my thoughts. 

We’re as a people up to our nostrils in debt. 

www.usdebtclock.org/ if you haven’t already been there.  CRAZY site.  We’ve never been in worse debt and it is growing exponentially.  If “we” came to me or you and asked to borrow more money then AND you HAD to give it to them, but you could change the amount of interest they must pay would I/you set it lower or higher knowing the trend of debt accumulation?  Now that is another easy lob for you to knock out of the park.  Higher.  Way higher is where you’d set the rate.  Much higher than the current record low amount that is currently being charged to “we”.

So now that that is established and we know that things tend to revert to the mean/average over time that means that we’re going to, as it relates to house mortgage interest rates, greatly surpass 6.97%.  That means all those REITs and stocks (those stocks are indeed businesses that get charged interest rates too for the loans they have and are apart of the “we”) and mobile homes and trucks (car loans) to go to the bakken oil fields will be much more affordable and likely by a discounted amount of 50% plus.  This is just interest rates.

Demographics are changing and in a way here in the US that fewer and fewer people will be buying homes in the future.

So while I could buy a healthy amount of passive income currently, by protecting my assets in inflation-protected assets like food, fuel, protection, and other hard assets.  I’ll be able to buy even MORE of those assets once rates have normalized and lowered prices to even more favorable levels.

Ahhh…itch is more bearable now…..