Adjustable Rate/Ballon Payment Crisis Ahead?

[George Gammon]

Below is a chart of the interest rate on the 10 year going back to 1880. As we all know the 10 year is a reasonable benchmark for mortgage rates. In other words, or what matters to investors, the 10 year determines how much your monthly payment will be to the bank (consistent on a fixed rate, fluctuating on an adjustable rate). I'll list my key take aways below the chart and I'd love to hear the BP communities thoughts on the chart as it pertains to current day REI strategy and future RE prices.

My take aways and questions I ask myself...

1.  Bull and bear markets in the 10 year normally last around 30 years.

2.  Interest rates have been going down since 1981.  Since lower interest rates decreases monthly payments (which increases purchasing power, which increases the price of home affordable, which increases home prices), has the rise in home prices since 1981 been exclusively a result of lower interest rates?  What happens to home prices if we go into a 30 year bear market (interest rates go up) in the 10 year? 

3.  Massive increase in volatility since going off the gold standard in 1971.  How could that volatility affect the debt in a real estate portfolio? 

4.  The US national debt is 19 trillion.  The average interest rate on that 19 trillion is approximately 2% making annual debt payments around 400 billion (interest only).  If rates just went to 4% (still very low historically) the annual interest payments would rise to 800 billion.  If the government has 400 billion less to spend into the economy how does that affect overall consumer spending and how does that trickle down to home affordability and prices?  Taking it a step further what happens to the debt payments if the 10 year enters a 30 year bear market (interest rates going up).  At 15%, where we were in 1981, 100% of tax revenue would go to pay the interest on the debt...how would that affect real estate prices?   

5.  How much of consumer spending/economic activity is based on credit?  If interest rates go up, consumers have higher monthly payments on their credit cards, this will decrease spending.  If the US economy is 70% consumer spending how does a long term reduction in that spending affect real estate prices?  

6.  Taking it a step further...interest is the cost of money and money is one half of every single transaction.  If the interest or the cost of money increases steadily over the next 5 years, 10 years, 30 years how will that affect everything sold in the economy and/or real estate? 

7.  If interest rates rise corporate profits decrease because debt payments consume a higher percentage of profits.  If overall profits decrease that will put massive downward pressure on stocks?  What does that do to 401k's?  If people have far less money to retire, due to corporate profits decreasing, does that affect spending?  If so, how does that affect RE?

8.  Finally, fixed rate debt seems incredibly prudent.  Any deal with a ballon payment must include an extremely conservative amount of equity.  There's a much higher than average risk that inflation adjusted real estate prices will be lower in the future.  

9.  Negative real interest rates are the only solution for the government and the economy.  If the federal reserve can pull that off, what does that look like, and how should my RE portfolio be structured to prepare and hopefully take advantage of it?  

I could go on but I'd like to hear what other people think about the chart above.  

George