The Federal Reserve has observed that the economy is doing better than anticipated, and now there are discussions about allowing the Quantitative Easing (QE) program to phase out. Reactions to this have resulted in more sell offs in the bond market, which have further resulted in the rising yield curve. If you are like me, and don’t necessarily believe that the Fed is driving the car, just look at the money flows over the past 12 months:
Since mid-year people have been ditching bond-investments, directly and indirectly putting all the more pressure on yields. So buying a home has become marginally more expensive. However, before we become too reactive to this evidence, let’s appreciate the counter-factual: the values of homes, too, have been rising! This is the inverse, the opposite, of what we saw coming out of the S&L crisis of the early 90’s—instead of more expensive prices with lower affordability, back then it was lower prices with stronger affordability trends!
Here is a neat way to frame it, my way of framing it, using a matrix: