Mark Hanson Explains Why "A 1% Mortgage Rate Surge Changes Everything"

Tyler Durden's picture

Zillow is rapidly catching up with where the rest of the mortgage providers offer 30 Year Fixed Rates Mortgages, and as it reported moments ago, the 30 Year Fixed in the Zillow Mortgage Rate Monitor rose from 3.94% to 4.1% in the week ended today.

As we reported previously, the latest Wells 30Year Fixed refi rate is now 4.625%, with the overall complex about 100 bps higher from where it was just a few months ago. The move prompted none other than Frddie Mac to issue a warning about the future of the housing market.

Is that a big move? The answer, conveniently, comes from a just released note by housing expert Mark Hanson who explains why a "1% rate surge changes everything"

* * *

The Rate Surge Changes Housing Affordability Statistics

Redfin.com did a purchase market survey of 2400 ready-buyer users between Nov 7 and 11 - right when rates first started surging and were much lower than today - on how a 1% jump in interest rates would impact their purchase decision, if at all.

Note, today rates are 50 bps higher than when the survey was done and up greater than the 1% referred to in the questioning.

Bottom line: A 1% rate surge changes everything. Especially, considering the macro housing market - demand and prices - is controlled by the incremental buy or sell pressure.

  • 68% weigh rates heavily into their purchase decision; only 11% don't care.
  • 72% of buyers would have to change strategy on a 1% rate-surge; 29% wouldn't.
  • 46% OF BUYERS WOULD HAVE TO BUY A LESS EXPENSIVE HOUSE.

The metric I highlighted red is what I find the most important. It is exactly why I always assume most people buy as much as they can afford using contemporary mortgage rates and guidelines.

It's important to remember, however, that a RATE-SURGE OVER A SHORT TIME-PERIOD actually creates a month or two of higher numbers followed by a sharper give-back period, which portends a much weaker than a year-ago Spring and Summer (when yy comps haven't been so steep since 2006).

PART 2) AFFORDABILITY LOST ON THE RATE SURGE (from my recent note on post rate-surge affordability).

Bottom line: The rate surge took away 11% of purchasing power, which will drag on house prices. It comes as houses cost the most ever to the end-user, shelter-buyer (see FOUR charts below).

 

ITEM A) MOST EXPENSIVE HOUSING EVER

BUILDER HOUSES

1) The average $361k builder house requires nearly $65k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $65k is needed.

For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper.

Bottom line: Reversion to the mean can occur through house price declines, credit easing, a mortgage rate plunge to the high 2%'s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.

 

The following chart compares Bubble 1.0 (2004 and 2006) to Bubble 2.0 on an apples-to-apples basis using the popular loan programs of each era.

Bottom line: Builder prices are up 19% from 2006 but the monthly payment is 43% greater and annual income needed to qualify for a mortgage 83% more.

 

RESALE HOUSES

2) The average $274k RESALE house requires nearly $53k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $53k is needed.

For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper.

Bottom line: Reversion to the mean can occur through house price declines, credit easing, a mortgage rate plunge to the high 2%'s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.

The following chart compares Bubble 1.0 (2004 and 2006) to Bubble 2.0 on an apples-to-apples basis using the popular loan programs of each era.

Bottom line: Resale prices are down 1% from 2006 but the monthly payment is 32% greater and annual income needed to qualify for a mortgage 68% more.

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duo's picture

I'm paying off my mortgage Thursday. Glad I don't have to worry about this crap.

1stepcloser's picture

Just keep that prop tax payment on time... 

-The club...

Hal n back's picture

damn annual property tax is more than the annual P&I

First and second homes were not like that.

USisCorrupt's picture

Rudy Giulani blows Pizzagate WIDE OPEN, Today Dec 20th !

http://archive.is/IDBh5

THIS IS HUGE!

Squid Viscous's picture

that lisping faggot must be involved himself, maybe hoping to "cop" a plea

Doña K's picture

The problem is if mortgage rate is high, selling your house is tough.

roddy6667's picture

In 1986-1988 mortgage rates were 12% and slowly sliding down to under 9%. Houses were selling like crazy, often over asking price. Interest rates are only a part of the picture, and sometimes a minor part.Supply and demand, demographics, and the condition of the overall economy are more important.

 

migra's picture

High rates suck for sellers, but good for smart buyers.

eatthebanksters's picture

This isn't rocket science.  People buy houses based on what they can afford for a mortgage payment each month.  If rates go dwon people can borrow more and prices rise.  If borrowing rates go up people borrow less and we have deflation.  

Fewer people buy in a climate of prospective price depreciation which in turn slows the market even more which in turn drives prices further down.  It's a self fulfilling cycle.  

The only way to get out of this cycle at this point is more QE and lower rates which trigger infation, OR, create income growth that offests the increased borrowing costs and keeps demand constant or growing.

Its a tough deal, but we finally have a guy in the White House who WILL deal with it instead of putting his fucking head under the covers.

11b40's picture

Did I read this wrong? Is the writer of this article comping a conventional fixed rate mortgage now with a variable rate in 2006?

froze25's picture

Dude it is fake stop spamming it.

Takeaction2's picture
Takeaction2 (not verified) USisCorrupt Dec 20, 2016 5:47 PM

So FAKE Bro...leave it alone.

JRobby's picture

And it's going higher!!!!

Stay tuned! 2nd wave of repos. Will private equity, hedgies and "dark pool" $$$$ step up again????

Flipper & Pals are already out securing larger lines of credit.

I am more equal than others's picture

Flippers are dead and they don't know it.

The greater fool buyer pool shrinks when rates increase.

Watch flippers turn their Escalade leased vehicle in over the next 6 months.

froze25's picture

When the mom and pops enter the market (they have big time over the last 2 years) you know the end is near.

Paul E. Math's picture

Seems like I've seen this movie before.

BillyBass's picture

I would say the flippers have a pretty damn narrow window to pull it off.  What makes sense now, in my area anyway, is to buy and flip it to a rental.  

JRobby's picture

My lack of description.  Organized, well funded flippers that operate in many markets. Not the failed actors on HGTV etc.

bilbert's picture

Buying/Selling/Demolishing/Building activity in my neighborhood is WAY too similar to 2007 activity, for my comfort.

I want to buy another rental property, but I'm gonna wait - I feel a 15 - 25% RE drop coming in the next 6 - 9 months.

DosZap's picture

You got that right, not to mention upkeep and insurance costs,a paid for home is great, but the costs to live there are unreal. It's sort of like Medicare, it's free?, my arse,costs an additional 6-8k a year for an F plan and a D plan, not counting Co-Pays on D,and deducts from SS for  part B.

Jethro's picture

Congrats! That is a big milestone

JRobby's picture

duo, please refer to "rules of fight club".

duo's picture

I watched it last night.

gatorengineer's picture

Paying off a home is the worst thing you can possibly do.  You have a ton of cash tied up in an asset that is going to depreciate 30 percent or more in the next 12 months against rising taxes.......  The giverment is going to have to bail out housing again big time....... No free shit for you.

Jethro's picture

I understand your point. I bought a repo waaaay out in the country, paid about 30% down or so. It's a tiny house on some land. Utility bills are small, and I'm on my own well/septic. I bought it for about half of what it sold for previously. I'm good in my case, but my circumstance is very unusual.

gatorengineer's picture

Thats a different animal, in my area, Eastern PA, a 5% down buyer will after a 30 percent downturn be paying AS MUCH in Property Tax and Insurance as Principal and Interest.  Think 13K property and insurance on a 300K house..... with no upkeep....  So you have to have a grand a month to pay on the home "own"......  a 60k house in flyover country with say a grand in insurance and taxes is a completely different

Jethro's picture

That tax rate is criminal.  I could never live in a liberal-controlled area.  They always turn their areas into complete shit.

theright555J's picture

But there's no price tag on the freedom of knowing that there is no lien on your primary domicile.  It takes quite a bit of savvy and discipline to use loose cash freed up by leverage to intentionally improve cash flow, unless you're doing it as part of your career.  Usually just gets spent on more consumer goods.

gatorengineer's picture

taxes in my view are a permanent lien......

roddy6667's picture

The Federal government owns your house and land. Don't believe me? Try not paying your "mortgage payment" to them, AKA known as property taxes.

Also, if you get in an accident or get sued for any reason, including divorce (over 60% of marriages), you stand to lose your home. Any debts you have can be settled by the creditor suing you and taking your house for payment. Ask the millions of people who lost their homes in foreclosure because of medical bills.

Home ownership makes you a huge, fat, sitting duck.

Stalefarts's picture

I'd like to see mortgage rates hit 12% or even 18%. The sad fact is that most people should not own a home. New builder homes like Toll Bros. are garbage anyway, stapled together chipboard and vinyl boxes that are slapped together by illegal alien work crews and start rotting away before the "sold" sign is even on the lawn.

Crawdaddy's picture

In general I agree but if the rates jumped up to that level I would think it was a head fake to screw people yet again. Higher rates may be correct if they were tied to the actual cost of money (which it isn't) instead of the monkey man fiscal/monetary/political manipulation that we have had for the past many years. I remember notes with 19% interest and higher (21%) back in the late 70's early 80's. Little pink houses and farm aid.

roddy6667's picture

I agree with you on the home ownership tate. People buy houses when they are in precarious financial situations. If the break a shoelace they lose the house.

I worked with a guy who served 10 years in prison for murder. When he was released he bought an SUV at at a buy here/pay here lot. He paid $19K for a $13K vehicle.  He had been sleeping on his friend's couch because he couldn't afford car payments and rent at the same time. After 9 payments he got approved for a mortgage and bought a house. Of course he got laid off and lost the house within 6 months.

The American home ownership rate is not healthy.

Rainman's picture

A house is just like a bond .... rates up , prices down . Should be found somewhere in the Fed dot plot. 

DosZap's picture

Rates UP^ kills sales.

rccalhoun's picture

sales killed =  lower price = default and less disposable income = stock market crash = zirp, QE and nirp

 

might as well cut to negative rates at next meeting

WakeUpPeeeeeople's picture

rates up=prices down means it time to buy those rentals.

rates down=prices up means refinace for a positive cash flow and money in the pocket.

lester1's picture

Interest rates will continue to rise into next year given the fact that Trump wants to do tax cuts and increased spending on infrastructure. Who's going to buy the US Treasury bonds to pay for that? The national debt is about to cross 20 trillion dollars that alone is going to scare a lot of bond investors

JRobby's picture

Might not use T Debt to do the infrastructure.  Might be something not seen in a long time. But debt is debt and will force rates up. So.......

AGuy's picture

"Interest rates will continue to rise into next year given the fact that Trump wants to do tax cuts and increased spending on infrastructure. Who's going to buy the US Treasury bonds to pay for that? "

My Two Cents:

Rates will crash once the next recession begins. I don't think Trump will be able get much in tax cuts. Ryan & McConnell have already said they will not support any tax decreases. Trump's Treasy Secy. also stated that taxes are not going to decrease much. Plan is to lower taxes for the Middle Class, but remove tax deductions so the net affect is no real reduction.

Bush Jr Tax cuts didn't help much. It took Greenspan to lower rates to 1% to get the economy to pick up, which resulted in the Housing Bubble.

My guess is there will be a flight to safety as the economy falls back into recession. Cash in Stocks will jump back into Bonds. People overseas in Europe & Asia will be dumping cash into US treasuries as Banking Failures & Bailouts become an issue. The Even if US Treasure rates crash, They will still be higher than NIRP in Europe and parts of Asia.

Trump might kick of a trade war with Tariffs causing US Consumer prices to increase, and a decline in exports. It will take 3 or more years for production to return (ie takes time to set up factories, train workers, etc). Tariffs and trade wars will like cut overall consumer spending.

In order to get the economy in the right direction its going to cause some serious economic pain. Thus it will be a risk-off economy and a flight to US treasuries at some point

Crawdaddy's picture

The "market" has gone so long with being artificial maybe it is no longer possible it will ever again be a real reflection of the economy. As long as we have the govt running damn near everything, especially the courts, it will never end. Up is down and down is sideways. IMHO, when the bond holders got screwed over back in 2009 it was game over and we crossed the rubicon.

That said, rates will be exactly were they need to be to produce the end result desired by the puppeteers. If they want to bust out the new money house flippers and take their shit then that is what they will do. That is a reset. If they want to purpetuate the current illusion a bit longer because this serves a larger purpose, say as a reminder that risk managment is so easy a high school kid can do it so bet it all you dumb hillbilly everyone is rich but you!, then they may continue that route. That would not be a reset.

I've been pro reset for 5 years but it ain't happend yet. So beware, I may be the one that tips this fucker oer the cliff. This year I may buy something. On credit!

AGuy's picture

"I've been pro reset for 5 years but it ain't happend yet. So beware, I may be the one that tips this fucker oer the cliff. This year I may buy something. On credit!"

My thought is that if Rates continue to rise it going to cause problems for those dependent on low cost debt: Auto loans, Mortgages, small businesses, Student loans. etc.

Bernanke ended up popping the housing bubble and didn't have a clue it was about to burst in a dramatic way. I don't know how high rates will need to go to cause another 2008 crash, but it going to happen and well before rates get anywhere near 5%. There appears to be collapsing window on how high rates can go before it triggers a crash. In 1987 it was 7.25%, in 2000 it was 6.25%, in 2008 it was 5.25%. Presuming the trend remains, it would be 4.25%. However considering that debt in the US had doubled since 2008, and quadrupled worldwide. I suspect that a crash would happen if the US 10 Yr is near or slightly above 3%.

Currently US 10 yr is at about 2.6%, so I think it would only take another 50 to 75bps to trigger a crash.

Grandad Grumps's picture

This is a big "yeah, so what!" It is not as if this is any different than any other time that rates have gone up in the past. This fallacy that one can expect non-market determined low rates forever is welfare for the rich and bankers and nothing more.

Great, so rates go up and valuations go down. This does not mean that the price controllers have to lower price, but they will because they are not yet willing to admit that the market is entirely rigged, parasitic and corrupt.

If there was an actual expectation of normal free market volatility then people would adapt. Today there is no expectation of free market volatility and so the contrived volatility is in second and third derivative markets where money is stolen by the cronies.

gatorengineer's picture

The banks were supposed to fix their balance sheet, free money in loan and 15% on credit cards, and clean up your books.  Problem is that they paid it all out in Bonuses, and lined the pockets of the execs.....

JRobby's picture

People will still buy. They bought in '82 when rates were 12% 14%.

Banks fear higher rates because they still have not cleared out all the "shadow inventory" yet AND strategic default is more widely accepted than it was 6 to 8 years ago after all of the information, movies, documentary's etc. that have come out.

in4mayshun's picture

You mean when houses were $55,000?