The Drag From Higher Mortgage Rates

Tyler Durden's picture

Mortgage rates have increased more than 1 percentage point since early May, jumping half a percentage point since last week’s FOMC meeting, raising concerns that this rapid rise may derail the housing recovery and dim the outlook for the broader economy, especially in the context of generally tighter financial conditions. As Goldman notes, the rise in mortgage rates may impact the economy through two broad channels: (1) the direct impact on construction activity and home sales, which feed into the residential investment component of GDP, and (2) the indirect effects of lower home prices and less refinancing activity on consumption. Goldman estimates Housing Starts could plunge 11% in the coming quarters, total home sales could drop 7%, residential investment may fall 6 percentage points, could weigh on home prices, and pull up to 0.4 percentage points from real GDP growth - presenting a significant downside risk to their somewhat rosy current outlook.

Via Goldman Sachs,

Mortgage rates have increased more than 1 percentage point since early May, jumping half a percentage point since last week’s hawkish FOMC surprise. The latest weekly data, released this Thursday, show the Freddie Mac 30-year fixed rate benchmark standing at 4.46% (Exhibit 1). Many have raised concerns that the rapid rise in mortgage rates may derail the housing recovery?which has been a welcome bright spot in the economy in recent quarters?by reducing housing affordability, and could potentially dim the outlook for the US macroeconomy more broadly. For a mortgage on a median-priced single family home (around $200,000) with a 20% down payment, the recent rise in rates represents roughly an increase of $100 in the monthly mortgage payment, or about 2½% of pre-tax median household income.

Based on their general VAR-based approach, the chart below shows the estimated impact of a 1 percentage point increase in mortgage rates on housing starts. Starts fall by about 11% over 4 quarters, which is consistent with our prior work estimating a 150k impact on housing starts per percentage point increase in rates...

Residential investment in the GDP accounts includes three main subcategories: structures (which are closely related to housing starts with a lag), improvements (such as refinishing kitchens, installing wood floors, etc.), and the relatively small category of brokers’ commissions (related to new and existing home sales). Our past work has suggested that a 1 percentage point increase in mortgage rates might reduce total home sales by 7%, and our VAR results generally agree with this magnitude.


Looking at the impulse response for residential investment as a whole in Exhibit 2, we see that the maximum level impact occurs several quarters after the maximum impact on housing starts. Over the next year, the VAR predicts that residential investment might decline by six percentage points relative to a baseline.

Putting the pieces together, we would expect a growth drag from the direct and indirect effects of higher mortgage rates of around 2 tenths of a percentage point over the next year, although of course there is significant uncertainty around this estimate.

Importantly, the recent increase in mortgage rates has been only one part of a broader tightening in financial conditions including a stronger dollar and lower stock prices - that might be expected to subtract around 0.4 percentage point from real GDP growth over the next year (Exhibit 5).

The bottom-line - This represents an appreciable but not insurmountable growth drag... and a continued deterioration in financial conditions would present a significant downside risk to that outlook.

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Colonel Klink's picture

Goldman, enough said.  Zzzzzz

Midasking's picture

It will be nice one day to have affordable homes rather than affordable mortgages.

ricky663's picture

We moved to an amazingly gorgeous part of the world and are now mortgage free. The fact that real estate values are going up here is an added bonus. I will never have another mortgage if I can possibly avoid it.
Being "mortgage free" certainly adds to peace of mind AND quality of life.

CheapBastard's picture

Agree. Incredibly better to pay less for the house and have a higher mortgage. To push overpriced houses onto sheeple buyers by advertising "buy now b/c of record low interest rates" is sad.

doggis's picture

what da F*UCK!!!






wisehiney's picture

Gonna be fun watching goldman try to profit from those oBUMMER tenants.

Croesus's picture

It won't be fun when drug-dealing derelicts move into your neighborhood, in order to "redistribute the crime", so as to make everything equitable.

No bullshit, that is a plan that is actually encouraged. You see, everyone needs an "equal amount of bullshit".

Forget the "Inconvenient Truth", that MOST BULLSHIT, comes from the talking assholes we 'elect'.


wisehiney's picture

There are no neighborhoods out here, but you are correct. Section 8 tries to move 'em in everywhere. The only thing is that they did not understand that they would have to pay for it all somehow. Tumbles down soon.

CheapBastard's picture
The Suburban Slum Era Has Arrived


True, the article is from 2001 but it's even worse today. My old Hood --formerly a pleasant golf course community-- was gobbled up by "investors" and over 16% rentals. Now Section 8'ers hang out at night around the course and on their front porch.


It's really an incredible and unexpected transformation for many areas. Any sheeple who buys needs to be Extra cautious about this.

Skateboarder's picture

I chuckle when I hear someone say "the market is hot!" these days. Instinct tells me, though, if there was a good time to sell your property, it's probably now. House prices and mortgage rates cannot go up forever...

CPL's picture

This isn't close to over, this is the pre-game show.

Think about how that train backs up onto itself and unwinds everything tied to it.  We'll have Insurance companies going tits up again WITH all those quadrillion dollars in derivatives imploding on policies popping like bubbles everywhere...and all the underwritten agreements.


The whole thing is glued together with spit.  People are going to be badly hurt by it which sucks a bag of ass..  But yes, it eventually goes up and just goes away.

Skateboarder's picture

Surely this is the pre-game show. Seems like there is enough artificial oomph for the "markets" to eat shit one more time before the whole thing bottoms out forever. CBs will do all they can to protect derivatives as long as they can, which means they will protect insurance companies as long as they can.

Question is, can Benny (or Benny2, whoever that will end up being) blow anothe real estate bubble after this one goes pop in a year (or less)?

CPL's picture

Maybe.  It worked once, twice, three times...seventh...I think there has been a bail out every year for thirty years.  Banks.  Airlines.  Auto Sector.  Agricultural.  

However the market can barely afford bread now.  Because the problem isn't 'money', it's value and trust.  Which there isn't any.  The fiat isn't backed with anything but unpayable debt.  Not some of the fiat on the market.  All of it.

lasvegaspersona's picture


you will want to be holding real assets like a house when hyperinflation (or whatever variant we get) hits...

Skateboarder's picture

We're on the same page LVP. I'm saying that whatever instinct that is telling me that now is the right time to sell to get the most bang for your buck... it might hold some credence.

Selling now, renting for a while, and buying after the dip will put you years ahead on payments and effectively reduce your monthly. Requires a move is all. But it also depends on where your property is and what the relative demand is. Some pockets in the Silicon Valley have seen an immense increase in home prices and are seeing great demand, others not so much.

Dingleberry's picture

Exactly. My local RE guy says the market is going up mainly because of "all cash" (read: hedgies) entering the market and gobbling up everything to flip, using Uncle Ben's checkbbook.

The other story is the gov now owns over half of mortages according to what I heard on Keiser's show.

And it goes without saying that the gov is backstopping 95% of new mortgage loans thru FHA, etc.


All this shit, plus Ben doing his QE thing, makes Vegas look conservative than RE. 

What the fuck?

Sechel's picture

Mortgage rates have been subsidized by the Fed purchasing mortgages in not unsubstantial quantities. Now that the market feels the Fed may be tapering, its repricing, and anyone who trades mortgages understands that they have convexity risk(higher rate, slower prepay) to deal with, so seeing mortgages react this way is no shock.  The Fed was attempting to price fix mortgages at a rate lower than the market would have otherwise determined, much like Richard Nixon enacting price controls four decades earlier, except that unlike in 1970 the result is more building and refinancing occuring than would have occured otherwise. Well we learned in Nixon's time that while price controls work for a short period, they fail miserably over the long run.  Rather than fret over the end of QE , we shoul welcome it. The market is saying yields need to compensate lenders for duration and convexity risk. Let's let the capital markets do their job.

max2205's picture

Next cash for crack, move on

RunningMan's picture

Compared to long run averages, mortgage rates are still low. But consumers are simple creatures, and assuming they've been looking for awhile (and understand how a mortgage works, which is a stretch for the vast majority) they'll hold the view that homes are "pricier" on a monthly payment basis. All true. This will push people downmarket in house (probably not a bad thing, since most lived beyond their means anyway).

Seasmoke's picture

and historically, they are still VERY LOW.....imagine that !

Seasmoke's picture

--- Better to live in 150,000 mortgage @ 9%

--- Better to live in 300,00 mortgage @ 5%

Skateboarder's picture

That's a trick question! The answer is "depends on your salary and the neighborhood you want to live in."

Dingleberry's picture

No trick (this example is for the same house-imagine CA prior to the boom).

You can pay off the principal quicker or write off more in interest.

Eventually, one day, rates will be back at 9-10% like they always were.

Then you will see what your house is really worth.

CPL's picture

You guys honestly believe you get to keep the USD and fractional reserve banking when this shits the bed?  ....uhhhh no.

ekm's picture

I've said it and I will say it again:


Only in "modern economics", higher prices are ............better........than lower lower prices.


Why? Because the Financial Sector creates bets on them going higher.

kito's picture

Ohh housing drops will pull .4 percent from worries they can just add more pension contribution promises to make up for the GDP.....

ekm's picture

Re: Your and Fonz's comments about high life in NY.


It's quite normal for any gov, even in communism that where the gov/financial hq is situated, life always is better than anywhere else.

It was the same in communism, it's same in China and the same in USA, UK etc.


Nobody wants revolts around gov and financial headquarters.

10mm's picture

Mortage buisness,just another scam.

kito's picture

No doubt ekm.....

LetThemEatRand's picture

Crap, initially thought this article was about NSA catching the Bernanke wearing drag.  

Meremortal's picture

At this time in Denver metro, the market is responding in its usual fashion to a hike in rates. It is heating up even more as people rush get a house while they can still afford what they want.

I have a friend who just wrote an offer for some clients yesterday. There were five offers received on day one of the listing, and her people didnt' get the house.

The question now is: At what level of rates will the market hit price resistance?

We aren't there, people are bidding above the price on homes in the Denver area. So things will have to cool quite a bit to send things the other way.

I've watched this market for over 30 years and I can't tell where we are at due to the distortions caused by govt interference. But things will become evident, its just a matter of continued attention.



noob's picture

OT butt speaking of drag...
Gays / lesbians what the same marital tax status hetero couples “enjoy”.  Dumb fucks all.

Meremortal's picture

I have the sneaking suspicion that divorce lawyers are pushing big for gay marriage. Homosexual relationships don't tend to last as long as heterosexual ones.  

homiegot's picture

Concerned about zombies attacking us in the coming economic meltdown, we decided to get the hell out of Dodge and move a little ways out of the city. Sold our house for a ridiculous amount and locked in our mortgage at 3.625 for the new place in the country. Cheaper mortgage, cheaper taxes, and the peace of mind knowing that I don't have to fight off the bottom feeders. I couldn't have timed it better.

Judge Crater's picture

That $100 a month increase in monthly mortgage payments is a fixed expense that you can budget for.  What about all those unexpected price increases, from the cost of energy to the big jump in fines for traffic tickets (most jurisdictions are not removing their red light cameras or cutting back on ticket quotas for cops) to home repair costs.  Federally subsidized flood insurance has no way to go but up, auto insurance rates marginally increase each year and health insurance should spike once Obamacare gets going in 2014.  Then there is the cost of food, which is going up 5% to 8% a year.  Price any fruits and vegetables lately?  The only area of price stability for most Americans is their salary.  Wages have not kept pace with inflation since around 1973, right after the United States went off the gold standard.  There have been some winners as the middle class in the USA is hollowed out: college professors, hospital administrators and health professionals and techs who work for NSA contractors (there are tens of thousands of those guys earning 6 figure salaries for spying on us). 

Opinion: For the most part, the USA has become a country with no pensions for non-government employees, almost no vacation pay for workers and having the worst "news" reporters in the world who, like the reporters for Pravda and Izvestia when Stalin ruled the USSR, are reporters who function as paid liars to tell us, among other lies, to buy homes before the price goes up and to tar and feather anyone who claims that 9/11 was a staged government operation or that high government officals have worked hand in hand with narco druglords to smuggle in heroin, meth and other dangerous drugs into America. 

Bad as things are now, they will get worse.  Larry Ellison of Oracle is ready.  Some rich people put a "panic room" in their homes for protection.  Ellison went those people one better, he bought a "panic island," most of the island of Lana'i in the state of Hawaii.  Unlike you and me, Ellison can afford to prepare for potential major disasters. 

Ranger4564's picture

There are no coincidences. The mortgage rate is rising because it's a part of the confluence of negative economic data. Time has come for the stranglehold maneuver. Take a deep breath.

starman's picture

can you explain housing recovery? Im from Mars.