Watch for commodity, stock and real estate prices to fade

Interest rates will inevitably rise.  Other countries, including China and some in Europe, and even the ECB (European Central Bank) have already started raising rates, weakening the dollar and putting further pressure on the Fed to raise rates here at home.  Inflation in commodities is rampant, and sooner or later (probably very soon) the Fed will be forced to raise rates.  A sharply rising interest rate environment is death for commodities, and with the current very high price structure for commodities across the board, we should see a significant sell-off for commodities in the near future.

Stocks don’t do all that well in a rising rate environment either, and real estate usually performs even worse.  High interest rates is the other shoe to drop for real estate.  We have been lucky thus far not to have high rates, even though real estate prices have fallen more than 40% from the October 2007 peak here locally in Santa Barbara (and in most markets across the country by substantial percentages from their peaks).  If (when) rates begin to rise, real estate prices and sales activity will no doubt be negatively impacted.  It is already next to impossible for people to get loans, even if they have stellar credit, 20% or more to put down, and plenty of free cash flow to service the loan.  As rates rise, the monthly cash outflow, for a given loan amount, will increase dramatically.  Banks are already reticent to loan, so with rates rising, they will be that much more reluctant to provide financing.  Add all this up and it makes for a very tough real estate market for the foreseeable future.

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