State of Economy: Housing Affordability Goes From Challenging to Near Impossible

The long-anticipated Federal Reserve rate hike has finally happened – but the anxiety in the bond market isn’t over, which is driving mortgage rates even higher and making housing even more unaffordable in an economy that continues to put strain on consumer budgets.

The story isn’t just that the Fed hiked rates – it’s about the reaction to it and what’s to come. The war in the Middle East, resulting in higher oil and gas prices, forced the central bank to act and slow down the economy as inflation has remained at 3.4 percent for two straight months, according to government data.

The idea is to discourage borrowing by raising interest rates and hope that inflation gets closer to the Fed’s long-preffered 2 percent target.

Treasuries Impact on Economy

Since late August, we have already seen significant movements in prices and rates. Often, 10-year and 30-year Treasury yields are good indicators for the rest of the lending market.

Since August 25, the 10-year has gone from a low of 4.64 percent to not only enter the daunting 5 percent territory – but cross 5.3 percent. If you thought lending has been expensive post-Covid, the benchmark is reportedly now at its highest level in over two decades.

The 30-year was seen last month crossing 5.6 percent and has reached its highest level since 2002, according to CNBC.

This marks quite the turnaround from the Great Recession and post-environment of signficantly lower interest rates. Consumers and businesses will need to now adapt to an even more elevated rate climate quickly, with the rapid swings taking place in the bond market in the last several weeks.

Pressure in Economy Spreads To Mortgage Rates

For many economists and experts, the 10-year Treasury yield hitting 5 percent has been seen as a breaking point for the economy. Notably, this has ramifications in the housing market, with CNBC laying out that the sector could be one of the first to feel pressure if 5 percent or higher yields are sustained on the 10-year.

The result is the 30-year fixed mortgage rate passing 7% and hitting 7.28 percent, as of October 1, according to data from Freddie Mac. Before the last several weeks, it was already a struggle for home buyers to afford homes.

Now, the risk is a freeze in transactional activity in the housing market. And if you thought 7 percent was bad enough, it may get even worse with the warning signs the bond markets have been sending.

Jack Ablin, chief investment officer at Cresset Capital, said, according to CNBC, that not only does the 5 percent level leave more strain on consumers the longer the 10-year stays at or above the threshold – but we can be headed for potentially 8 percent mortgage rates if the bond market jitters continue.

At least One More Rate Hike On The Way

And there’s good reason why the trend may persist. Over the past month, WTI Crude prices have jumped by 6 percent, of September 30, meaning inflation could come in even hotter for September.

We could very well be heading for a second consecutive month of a Fed rate hike. In fact, CME Group’s FedWatch tool gives this a 37.1 percent chance of happening, as of Wednesday, which is down from the 71 percent chance traders were pricing in a week ago.

If the central bank decides to take action again, that would put the Federal Funds rate in the range of 400-425 basis points. At its last meeting, the Fed was projecting one more rate hike this year. And perhaps more will be on the way either this year or next.

Additionally, traders are giving it a roughly 58 percent chance the benchmark will be between 425 and 450 basis points after the central bank’s December meeting. It’s unclear if the bond markets have fully priced this in just yet.

New Potential Catastrophe Emerges With AI

If higher borrowing and fuel costs weren’t enough in this economy– now something that seems almost unimaginable has emerged with artificial intelligence.

Evan Hubinger, a lead Anthropic researcher, made headlines when he noted in an X post that AI could end humanity, giving it a greater than 10 percent chance.

“I believe Anthropic is trying its best, but we do not yet have a plan to solve alignment for superintelligence and are not clearly on track to,” he said.

Jacob Coxon, A former researcher at Anthropic and OpenAI, shares a similar view, thinking that AI could kill all humans by the end of the decade.

Outside of Anthropic, Nate Soares, president of the Machine Intelligence Research Institute, warned that the advancement in the technology could also result in a fatal ending for the human race.

How could this happen? CNN reported that a powerful enough AI system could use bioweapons or convince a human to develop a deadly enough virus to eliminate humans.

Add that to the fact that OpenAI admitted last week in a statement that its autonomous agents interacted with government websites in ways that they weren’t supposed to.

Right now, the problem is simple. AI developers themselves have lost control of the technology. There just aren’t enough guardrails to ensure safety.

After the Midterms

When you start hearing alarm bells from tech giants themselves that have attracted massive investments in AI – you know the situation is dire. Many including Anthropic are calling for regulation even if it impacts their bottom lines. After all, they have to live on this planet too.

While this screams for immediate federal action from lawmakers, nothing is likely, nor is any other meaningful legislation to pass until after the Midterm election results. Unfortunately, this is how partisan our politics has gotten.

Republicans, who currently control all chambers of government, have, by and large, opposed imposing major restrictions on AI. Also, President Donald Trump has, to this point, balked AI and data center crackdowns, with one of his Truth Social posts insisting that the U.S. will continue to lead China in AI.

So whether it’s AI, tariff refund checks or ending the war in the Middle East, I guess we’ll just have to wait until the Midterms take place. That’s assuming humanity survives past that point.

AI not only poses a safety – but a threat to our economy as well.  As I warned about in a July post, tech firms are betting big on AI; and if it doesn’t work, we risk a bubble bursting and a massive stock market crash, which would all but certainly lead to a recession at the very least.

And if AI doesn’t eliminate humans, it could take away our jobs.

The more advanced the technology becomes without guardrails – the more dangerous it becomes. What happens if AI hacks our bank and investment accounts and steals our savings? Forget not being able to buy a home; all of a sudden, you’re looking at a 1929-style Great Depression.

The economic situation is dire and likely too many headwinds exist to overcome. Whether our current bond crisis leads to mass layoffs, fuel prices skyrocket to unprecendented levels because of the war, budgets tighen more, the AI bubble bursts or worse yet actually winds up killing us all, it’s hard to imagine a scenario where a receission is avoided in the coming months.

Now we wait to see what triggers it.