Rising Interest Rates Will Supress Real Estate Prices

My brokerage seems to agree with my notion that bond yields are poised to rise. Their bond fund manager says they're holding more cash than usual anticipating a drop in prices.

USAA: Have you taken some risk out of the portfolios you manage?

Espe: Yes. We think interest rates are going higher across the yield curve, and we've begun to prepare for it. Rates will probably go higher if the government stops buying Treasuries and mortgage-backed securities in March as planned. If they extend quantitative easing, it could be later, when the Fed raises rates as the economy recovers. But given the low current rates, the big budget deficit that has to be financed and the potential for the market to get spooked by any signs of inflation, we think higher rates are a question of when, not if.

The way we're managing risk is, first, by taking profits as bonds we own get back to normal valuations. Next, we have lowered exposure to rising rates by cutting back our duration, buying shorter-term securities and floating-rate securities. We're holding more cash than usual so that we are ready to deploy assets when rates rise. We have a big yield advantage over the peer group average, which will help in the event of defaults. We're also minimizing our holdings of U.S. Treasuries at these low interest rate levels, although we may increase our position if there's a spike in rates.

If interest rates rise, it's hard for me to see real estate prices increasing. I am baffled by people who have houses they want to sell but are holding on to them expecting real estate prices to increase.