What Higher Mortgage Rates Mean In The Real World

Tyler Durden's picture




 

As we pointed out here, the impact on both 'real' housing affordability of surging mortgage rates is extremely significant for the so-called 'housing recovery' but as Charles Hugh-Smith notes, there is a more insidious (inflation-like) effect (aside from the consumer-confidence sapping one we described here). Rising mortgage rates reduce household purchasing power just like higher taxes and inflation. That means there is less household income to spend on other things, and that's not good for "growth."

Via Charles Hugh-Smith of OfTwoMinds blog,

Rising mortgage rates reduce household purchasing power just like higher taxes and inflation.

Mortgage rates have jumped significantly in the past few weeks, from 3.50% at the beginning of May to the current rate of 4.875% for conventional Fannie Mae mortgages.

These are the two rates quoted by a mortgage broker in Mish's recent post on rising mortgage rates.

Here is the repayment summary for both rates courtesy of mortgagecalculator.org:

I plugged in these parameters, basing them on the average cost of a new home and a mid-range property tax rate:

$360,000 home value, $300,000 mortgage, annual property tax rate of 1%, interest rate of 3.50%:

Monthly Payment: $1,647.13

Total of 360 Payments: $592,968.26

Total Interest Paid: $181,968.26

Total Tax Paid: $108,000.00

Interest rate of 4.875%: This is an increase of 1.375%, which represents a 39% increase over the initial rate of 3.50%.

Monthly Payment: $1,887.62

Total of 360 Payments: $679,544.88

Total Interest Paid: $271,544.88

Total Tax Paid: $108,000.00

The monthly payment rose by $240.49, or 14.6%. While unwelcome, that in itself doesn't seem like much.

But look at the lifetime cost increase: $86,576, all extra interest of course.

This relatively modest increase in mortgage rates to a still low by historical metrics 4.875% will reduce the purchasing power of the household by $240. Over time, $86,000 in additional interest payments will be transferred from the household to the lender/ owner of the mortgage.

We are constantly told inflation is near-zero, but a decline in purchasing power is equivalent to inflation. If one's labor buys fewer goods and services, then saying inflation doesn't exist is merely a semantic victory.

In other words, the $240 reduction in the household purchasing power due to rising rates has the exact same effect as inflation that reduced the household's monthly income by $240/month.

For context, here is a chart of mortgage debt. The total debt has declined for a number of reasons, including writedowns due to defaults and foreclosures and the decline in housing prices, which reduced the size of new mortgages:

Over time, rates on the roughly 48 million outstanding mortgages in the U.S. will rise. There are still millions of adjustable rate mortgages out there, often second mortgages or home-equity lines of credit (HELOCs). Those will start ticking higher in the months ahead.

$240 a month ($2,880 a year) may not seem like much, but multiply that by a million, and then by many millions, and the number starts becoming consequential: that money is no longer available for consumption or investment. Rising mortgage rates reduce household purchasing power just like higher taxes and inflation. That means there is less household income to spend on other things, and that's not good for "growth."

 

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Wed, 06/26/2013 - 14:43 | 3696177 buzzsaw99
buzzsaw99's picture

The howmuchamonth club can't afford one more dime, much less $240.

 

OT - What we want to do, is, just when Fannie Mae starts making money, sell it to friends of the squid for a song instead of getting our $200B paid back with interest.

Wed, 06/26/2013 - 14:52 | 3696222 dow2000
dow2000's picture

Tyler's:   PLEASE REPOST

Taken from Jesse's Cafe Amercain

"Listen to this incredible audio recording of a speech made by JFK before the American Newspaper Publishers Association where he warns the press about the secret societies that are the real power in global affairs."

https://www.youtube.com/watch?feature=player_embedded&v=xhZk8ronces

btw... Each time I post to Facebook, the post is then removed...fucking scary

Wed, 06/26/2013 - 14:54 | 3696245 The Juggernaut
The Juggernaut's picture

“A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank.”  - Ron Paul

Wed, 06/26/2013 - 17:02 | 3696759 nugjuice
nugjuice's picture

In response to the article:

But, but, the banks will then turn around and take that extra $240 and will do their part by using it to buy risk free assets, will then leverage and re-hypothecate it, and will loan that out to willing consumers at 10x that value! Obviously bullish for the economy.

Nevermind the fact that banks and credit card companies are refusing to fucking loan.

Perfect example: I just got turned down by Amex for a credit card. I'm 27 years old, have made > $100k the past 2 years, have $0 in debt (including student loans), $100k in liquid assets, 1 existing credit card with only a $4000 credit limit, all of which is backed by a $4000 CD that I. Fucking. Bought. 

If they won't lend to me....who the fuck are they willing to lend to?

What a joke. The bank will take that $240 and sit on it.

...and people wonder why the economy isn't growing. Because only the largest corporations that are essential to our economy and thus implicitly (or explicitly) backed by the gov't are able to obtain access to credit. nevermind the 80% of the economy driven by consumers and small businesses. FUCK THEM! they can fend for themselves.

Wed, 06/26/2013 - 17:09 | 3696804 boogerbently
boogerbently's picture

In order to make any money banks need the interest rates to rise.

In order to sell their foreclosures banks need interest rates to fall........oh, shoot!

Wed, 06/26/2013 - 22:28 | 3697744 aka_ces
aka_ces's picture

Sorry that you had this experience.  With very similar financials 13 years ago, plus a mortage w/ principal of $130K, I got an AMEX card.  Did they give specific reasons why you were declined ?

Wed, 06/26/2013 - 15:02 | 3696270 buzzsaw99
buzzsaw99's picture

I've read that speech a number of times. That wasn't why he was killed imo. That was just some cold war blather about the balance of the public's right to know with the need for secrecy during the cold war. Kind of eerie for today's world when he spoke this though:

And there is very grave danger that an announced need for increased security will be seized upon by those anxious to expand its meaning to the very limits of official censorship and concealment...

Wed, 06/26/2013 - 14:58 | 3696265 Midasking
Midasking's picture

I don't think people like the real world.. let's keep interest rates low. http://tinyurl.com/mem7o7x

Wed, 06/26/2013 - 16:31 | 3696659 max2205
max2205's picture

Chareles is such a dork

Wed, 06/26/2013 - 18:26 | 3697065 CheapBastard
CheapBastard's picture

'howmuchamonthclub"......I like it.

Wed, 06/26/2013 - 19:55 | 3697288 Midas
Midas's picture

Yeah, I hope he doesn't mind me stealing it.  I can alternate it with "the howdeedodats" I stole from Tony Wonder.  I was surprised the author dismissed an extra 240.00 a month as chump change.  The Suzy homemakers I know seem to think when a bank approves you for a 300,000 mortgage, it means you are suppossed to get a 300,000 mortgage.  Most people I know are stretched to the limit on a good day and then the SUV needs new tires.

Wed, 06/26/2013 - 14:43 | 3696181 mess nonster
mess nonster's picture

Fuck it. It never was really mine anyway.

Wed, 06/26/2013 - 14:44 | 3696184 Hondo
Hondo's picture

The rate in and of itself I consider unimportant unless juxposed against what's happening to wages.  We've had rates much higher in the 60's then things were humming economically.  It more the fact wages haven't don't anything for over a decaded now...all other prices have risen...leaving very little discreationary "free" cash flow to make additional payments to anything let alone a house....

Wed, 06/26/2013 - 14:47 | 3696205 buzzsaw99
buzzsaw99's picture

Cash out refis have masked the rising unemployment and falling wages. When that and realtwhore flipping goes bye bye the eCONoME crashes big time.

Wed, 06/26/2013 - 14:55 | 3696254 McMolotov
McMolotov's picture

"Sure, sure... but you'd better buy now or you risk getting priced out forever!"

—every realtor that's ever existed

Wed, 06/26/2013 - 15:21 | 3696381 OneTinSoldier66
OneTinSoldier66's picture

I hear ya. It's not like we could EVER have the price of homes come down. Unless it's a CRISIS!

 

In a way I keep wondering why it always takes a crises. But then I don't really have to wonder, I know what fascism is. That's what happens when you let the Government take over things like Fannie Mae and Freddie Mac that they never had any business being in, let alone taking over money itself! Education, the Insurance and Health Care Industry... the list goes on and on.

Wed, 06/26/2013 - 14:53 | 3696241 FieldingMellish
FieldingMellish's picture

Mortgage interest is also tax deductible so the govt is losing revenue as the dollars move from taxed to untaxed expenditure.

Wed, 06/26/2013 - 15:04 | 3696279 thismarketisrigged
thismarketisrigged's picture

u say in the real world.

 

sadly we have not been living in a real world for years due to fuckhead central bankers and the fed, fuck them all.

Wed, 06/26/2013 - 15:10 | 3696310 otto skorzeny
otto skorzeny's picture

Property tax rate of 1% of assessed value- dream-fucking-on -these FAT civil servant AFSCME salaries and  pensions need way more that that pound of our flesh to continue

Wed, 06/26/2013 - 15:10 | 3696313 TrustWho
TrustWho's picture

Who gets the increased interest payments? Savers spend too!

Wed, 06/26/2013 - 15:14 | 3696336 Dr. Engali
Dr. Engali's picture

If $240 is going to bust your budget you shouldn't be in the house in the first place. Here is an idea..do it the old fashioned way.Put some money down on a  smaller house, and upgrade later if you feel you need a McMansion.

Wed, 06/26/2013 - 15:45 | 3696485 FreedomGuy
FreedomGuy's picture

It is not a matter of busting anyone's budget. If you have a mortgage now, it will not change unless you were a moron and got an ARM. What is does mean is that some people begin getting priced out of homes. I remember back in the late 80's I was nearly priced out of my first home as rates rose from about 8 to 10%.

If you think $240 per month is a small amount you indirectly support the statist argument for higher taxes, too.

Wed, 06/26/2013 - 21:11 | 3697496 Blankenstein
Blankenstein's picture
"Will begin getting priced out of home"  - that's realtard speak.  It means the home prices will have to drop to keep the payment the same.  Most people live on payments and there just aren't multitudes of high-earning, flush-with-cash people to buy all the homes that would stay at current prices with higher interest rates.
Wed, 06/26/2013 - 18:28 | 3697074 CheapBastard
CheapBastard's picture

Sellers, Realtors and house builder sales offices HATE telling you what the actual full price is nowadays. They resemble car salesmen now, "How much can you afford?" is their Spiel and they will work out some formula to make you debt slave forever.

 

However, when you see the research that shows fewer then 20% of Americans can multiply 15x75 (even when given a pencil and paper), this stratgegy make sense to sell the boxes.

Wed, 06/26/2013 - 15:14 | 3696337 RunningMan
RunningMan's picture

Good article. Best line is this:

"If one's labor buys fewer goods and services, then saying inflation doesn't exist is merely a semantic victory."

We've had inflation since the crisis began, and my grocery bill is signifcantly higher for the same basket of goods. Homes will be less valuable yet more expensive.  We have wealth deflation, AND price inflation, AND fewer people working, AND lower wages for those who are working. There is still money being made, just by folks at the top. But that group too is smaller now, so a bunch of those "out of the club" can't be too happy either.

Wed, 06/26/2013 - 15:14 | 3696340 Seasmoke
Seasmoke's picture

1% property taxes....... clearly this house isnt in NJ, where thethe corruption makes it closer to 4% !!!!

Wed, 06/26/2013 - 15:18 | 3696368 robertocarlos
robertocarlos's picture

Canadian MSM reported yesterday that YoY US real estate is up 12%. I think that is to keep the Canadian bubble blowing.

Wed, 06/26/2013 - 15:25 | 3696403 ghostfaceinvestah
ghostfaceinvestah's picture

Just wait until the mortgage industry complex starts dishing out the layoff notices now that the refi boom is over.

Wed, 06/26/2013 - 15:29 | 3696418 NotAMathWhiz
NotAMathWhiz's picture

We have 2 solid decades (or more) coming up of people so encumbered with college debt that discussions about a real estate come back are completely irrelevant.  One trillion dollars in college loans (and growing) comes directly out of the future real estate market.  Why do you think Wall Street is buying up property?  They know none of these kids will be able to afford a house, and are counting on sucking them dry one month at a time.

The days of real estate being an investment for the average person, with the possible exception of farmland, are over until after I'm dead and buried and my kids have grandkids.  America's last great bastion of manufacturing (construction) is headed to the tar pits.

Wed, 06/26/2013 - 15:37 | 3696445 slightlyskeptical
slightlyskeptical's picture

This article also fails to address adjustable rate mortgages. Those with ARMS's also tended to be those the most underwater as ARM issuances peaked at the top of the market. The low rates have allowed many homeowners to hold onto their homes with much lower than scheduled payments though refinancing has been close to impossible. Rising rates will once again wreak havoc to this class of homeowners who despite market improvements is still largely underwater, especially those who has a pick a pay option. 

Wed, 06/26/2013 - 16:19 | 3696616 NEOSERF
NEOSERF's picture

Lucky all home purchases are being done by REITs, hedge funds and investment groups with cash...mortgages are irrelevant and the loss in disposable income on several 10s of thousands of people won't be a drop in the bucket...go to the FHA and get your 3.5% down payment casino payment...with that amount of skin in the game, they can afford to walk away, again and again...

Wed, 06/26/2013 - 19:24 | 3697218 Cheeseus Sonofdog
Cheeseus Sonofdog's picture

Those " REITs, hedge funds and investment groups with cash" are depending on their renters ability to keep paying the rent. It is likely that renter is living off of credit. So his credit is costing more. The more it costs, the less he has to spend. What impact does that have on his rent payments? 

Wed, 06/26/2013 - 16:19 | 3696617 jpc578
jpc578's picture

For a household earning $50,000 (current median income) this 14 percent increase in their monthly payment represents almost six percent of their income. For a household living paycheck to paycheck that certainly hurts the family budget. And about three-quarters of Americans are living paycheck to paycheck.

Wed, 06/26/2013 - 19:21 | 3697208 Totentänzerlied
Totentänzerlied's picture

Who still makes mortgage payments?

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