What The Recent Surge In Rates Means For Your Home Purchasing Power

Tyler Durden's picture

Contrary to what one may have read in the financial tabloids, a houseing market does not recover thanks to Fed-subsidzed REO-to-Rent loans used by the biggest private equity firms to buy up distressed property on the margin, by foreign oligrachs buying Manhattan triplexes sight unseen just to park 'tax-evaded' cash courtesy of the NAR's anti money-laundering exemption, and by foreclosure stuffing from the big banks desperate to subsidze the market higher before the sell into it. The recovery comes from the average consumer, who has disposable income and savings (in a hypothetical scenario of course) and who can buy houses based on a given monthly budget - a budget which must provide a better deal to own than to rent.

The problem with such a budget is that first and foremost its purchasing power is dependent on interest rates, and in an economy in which leverage is everything, rising rates mean a collapse in purchasing power. Here is a glimpse of what has happened to the mortgage rates in the past month alone: from Bloomberg's Jody Shenn:

Wells Fargo & Co., the largest U.S. mortgage lender, is offering 30-year fixed-rate loans at 4.5 percent, according to its website, up from 4.13 percent on June 18 and 3.88 percent on May 22, when comments by Bernanke to lawmakers and the release of the minutes of the last Fed meeting caused bonds to plummet. Freddie Mac’s survey, which is lagging behind the bond slump because it reflects originator responses through yesterday, showed average rates falling to 3.93 percent this week.

So in one month, the average 30 year fixed rate mortgage has jumped by over 60 basis points. What does this mean for net purchasing power? Well, as the chart below shows, assuming a $2000/month budget to be spent on amortizing a mortgage (or otherwise spent for rent), it means that suddenly instead of being able to afford a $425K house, the average consumer can buy a $395K house.

This means that, all else equal, housing just sustained a 7% drop in the average equlibrium price based on what buyers can afford.

But assuming the current selloff in rates continues, things are going to get much worse: we may be seeing 5%, 5.5% even 6% and higher mortgages in the immediate future.

It also means that a buyer who could previously afford a $506K house with a $2,000 monthly budget at an interest rate of 2.5% will be able to afford only $316K if and when the average 30 Year fixed hits 6.5%: a 40% drop in affordability based on just a 4% increase in interest rates!

And this is bullish for the economy?

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Dareconomics's picture

Then, can we finally put the mainstream media's housing recovery narrative to bed?


Praetorian Guard's picture

Good! Can't wait until the fire sale really begins... foreclosures through the roof, ARM's going up in smoke... these greedy bastards from main street to wall street should have learned their lesson years ago, but they kept using their "get out of jail for free" card... those days are over... you watch - tons of mcshit shacks on the market, and the banks will DUMP and mark to market their inventory...

MillionDollarBogus_'s picture

Tyler, you suggest that the average consumer could afford a $425K house.

This is a joke, right..??

Praetorian Guard's picture

I agree. I remember in the early 1990's how a 120-130K house was for the rich side of town. Shit, 120K now is for a literal shit shack. However, a good wage back then was 15 bucks and hour, and food was cheap, gas, etc.

Fucking thing I hate the most is the boomers, ie my parents, telling me to get a new house (my house is paid off, but the neighborhood went down the shit tubes, though I have no problems). What they fail to understand is that their house caost all of 40K back in the 70's, is paid off, and they hold jobs with double the original value of their house note. In essence I asked them if that meant in the next 20 years if the 400K house I buy will translate to me earning 800K a year? Because if so, things are beyond fucked up...

BraveSirRobin's picture

Why yes, things are FUBAR. Please enjoy the rest of your day.

NotApplicable's picture

Not at all, once you realize how the average has evolved.

"consumer" = "someone that still has disposable income" = "upper class"

Non-consumers need not apply.

MacGruber's picture

And to make matters worse, since most housholds in the U.S. are levered with revolving variable rate credit they will be even more tapped out as their rates go back through the roof. Bon voyage American Dream!

max2205's picture

What moron would get an ARM with rates zo low....oh wait...

DosZap's picture

I was jsut informed my home and property may be termed not mine,(Eminent Domain) as there are plans for state use.I will be forced to take their offer, or else.FINE by me, it will free me up from this money pit, which all homes are, and relocation is finally a reality.PLEASE make me an offer.

DosZap's picture

Then the so CALLED recovery in the housing sector, will drop dead,No one is going to take a 6% loan,unless they are very wealthy.

kito's picture

cant wait to see the refi numbers!!!!!!!

fonzannoon's picture

I think I want tomato.

kito's picture

relaz fonz, the dow is barely breaking a sweat. the pullback is maybe considered a correction..............maybe...............silly fonz...as if reality has anything to do with stocks.......its all about worshipping ben.............

fonzannoon's picture

Ben will be tarred and feathered for worrying about inflation too much and not fighting the deflationary monster.

smlbizman's picture

thts is the question i would have asked? why is inflation good for me and why is deflation bad?...your honor your honor...

Al Huxley's picture

He'll be tarred and feathered for breaking the bond market.  How ironic, for almost his entire term he does nothing but monetize the shit out of everything that moves, and then in his final months, one little hint that 'maybe we'll start to 'taper'' and his reputation as the 21st century's tight-money miser who destroyed America is assured.


Tough gig, hey Ben?  Nothing like academia.

NotApplicable's picture

Yep, that's the script all right. I wonder how long ago he figured out he was going to be the fall guy?

Praetorian Guard's picture

Pullback is considered a correction? WTF? Watch yields launch into orbit, explain to me how that will help the debt, credit, or loan amounts - the stuff businesses, mainstreet, and govt use to survive on a daily basis? This bitch is going to implode and drag a ton of collateral damage down with it in its wake...

kito's picture

you...sir....are getting ahead of yourself.....the sentiment isnt there for that.........yet.............

Praetorian Guard's picture

I got you... yea, but sentiment could vacillate within a few days at this rate...

BraveSirRobin's picture

You may see a burst as people rush in before rates go higher. If so, do not take this as a positive sign for the housing market.

Beam Me Up Scotty's picture

Won't the US budget blow up before mortgages ever get back to 6.5%?  How much of the annual budget will go to servicing the debt at that point?

Praetorian Guard's picture

Yes, I believe last I looked it was like a 1% rise would tank the system...

U4 eee aaa's picture

So that's why Obama and family are in Europe. He's going to be begging for asylum soon!

BraveSirRobin's picture

If the average rate of interet paid by the USG climbs to 6.5%, yearly interest payments will rise from around $225 billion per year to around $1,100 billion ($1.1 trillion) per year.

But it's nothing to worry about, because we can easily print that, too.

nbsharma's picture

the way to tackle this is to stop giving out subsidized money to PEs / hedgies / banks, and let the entire market be cleared with foreclosed homes in the market. low affordability with higher interest rates can still lead to higher home sales as long as the prices come down. no?

toady's picture

I need a new roof, so I toyed with the idea of a home equity loan, put in a few online apps.

Chase called me yesterday. 10.25% for 10k, the minimum, and 6.75% for 25k. They get the money free from the bernank, and want 10% from me? I'll just pay cash.

Bad timing on my part I suppose...

NotApplicable's picture

Wow, that's insane. I guess they don't want anyone fixing up a home to put it on the market?

CrashisOptimistic's picture

Houses (there are no homes, only houses) are not bought with mortgages now.

They are bought by private equity firms for cash to be rented out.

So this examination of mortgage rates is not important.

fonzannoon's picture

Down almost 300 and the 10yr still selling off. 

It's gonna take a doozy to get that toothpaste back in the tube.

BeansBulletsBandaids's picture

395k??? Dang, I guess that means my family and I are well, well below average. We'd be lucky to get a 105k house right now...

Midasking's picture

tapering is not happening or the entire world will be a smoking hole in the ground. QE will be expanded you can count on that. http://tinyurl.com/mem7o7x

trebuchet's picture

and This post is why QE4eva billes as inducing wealth effects is NOT  a stock effect and only had a temporary flow effect by promoting liquidity. 


Banks know these numbers but wrote 3.5% mortgages knowing they could flip them to the fed. Now that the buyer is leaving town, time for property recovery to go into reverse as banks will not write low interest mortgages any more



Bay of Pigs's picture

Moar dog n ponies!

bill1102inf's picture

Its bullish if your a buyer who is renting. Buying a house that was built and sold in 06 for $350,000 to someone with a 5/1 option arm with a teaser introductory rate for $70,000 at 8% for a 30 year is so much more doable and payoffable. 

devo's picture

They're just going to tax the gains or kill them via interest rate hikes. It's one reason buying a home (to live in) is stupid. The other being they're overpriced to begin with and have poor fundamentals.

ParkAveFlasher's picture

Yeah, let's all be nomads.  I have a stainless steel hockey mask for just that kind of lifestyle. 

ebworthen's picture

And all those home-builder stocks, lumber, and the Lowe's/Home Depot ramps of 50%-60% will reverse.

All that shadow inventory on the bank's balance sheets will rot further.

Is it any wonder the FED is buying MBS's?

Taper?  Yeah right.

Jesse is on point today, knocking it out of the park:

"The games being played in the markets are apparent, heavy-handed, and beneath contempt, operating under the rationale of a 'necessary perception management.' Necessary for whom? It is officially sanctioned theft, pure and simple, however one wishes to rationalize it. The 'new normal' is really the new awful, with a decidedly oligarchic taint."

From "Pictures From a Monetization" here:  http://jessescrossroadscafe.blogspot.com/

(link opens in new window)

Freedom In Your Lifetime's picture

Throughout history human beings have never had a problem creating housing for themselves. It is just a sign of how fucked up things are that it takes 5+ years of labor for a person to have a house to live in. Once again, the only reason this is the current reality is because of industry imposed government regulations and 'laws'. Go long Cobb, earthships, adobe, earth bags, even straw bales and make a house with resources from you own land instead of asia. http://russellbybee.hubpages.com/hub/For-Those-Frustrated-with-the-Curre...


MisterMousePotato's picture

I haven't seen the movie, but I did see pictures of the sets Peter Jackson made for The Hobbit.

What's wrong with that?

Biggest impediment in life is .GOV. Building codes running to thousands of pages and real property taxes. Doing something about them is the first thing needed for liberty.

So what if someone wants to live in a tent? It's not always a matter of economic necessity (Muammar Gaddafi, for instance).

Dr. Engali's picture

But an anyliston CNBC this morning said that the U.S. Consumer was 'getting richer' because home prices were going up. Surely he can't be wrong.

IllusionOfChoice's picture

Dr. Housing Bubble made the argument sometime back that rates going up will bring home prices down - which is great for anyone who doesn't own and wants to get in, especially if they have cash waiting. His argument was that the market has to respond to interest rates going up by dropping prices because people simply cannot afford to pay more, and the inverse was that rates going down allowed home values to appreciate.

This seems to be just one more way that the Fed losing control of interest rates endangers our glorious recovery.

Cheeseus Sonofdog's picture

What does it mean to flippers who blew their wad of cash? Will they make the profits on that flip they had figured into their overbidding? Will they regret buying a declining asset when deleveraging hasn't finished yet? The sucker they planned on buying with a mortgage might not be there. Somebody gonna get stuck.

Peter Pan's picture

I believe that people fail to apprecate that the printing machine will once again be cranked up. If it isn't the effect will be so devestating that failures in everything across the board that carries debt will be witnessed. That includes banks. Gold will therefore more than hold its relative value and probably its nominal value. Perhaps it might even rise.

If the presses across the world start whirring then everything will levitate for a while only as everyone attempts to cash in befre the final crunch.

Monedas's picture

This roaring RE bubble must be reigned in !

devo's picture

It seems like PM investors will take their loses in a few days, and housing/stock investors will take them over decades via property and gain taxes + inflation, interest rate manipulation, etc. The latters' loses will be "hidden" behind nominal price increases or flatlining prices, so they'll feel they did okay. It has to be this way to keep faith in those assets, since those assets are our economy.

Peter Pan's picture

Housing losses will be quiteimmediate and savage if rtes increase because cash flow will be devestated.

In the days ahead gold may suffer more as leveraged gold traders feel the pinch and sell otherwise those that have bought will stick it out at least for a while.

Cheeseus Sonofdog's picture

Another shock buyers may have is property taxes. If prices are up 20% their property taxes may be too. Doubt they were budgeting in that little surprise. Especially flippers who can't get homestead exemptions...