What Will Rising Mortgage Rates Do To Housing Bubble 2?

Authored by Wolf Richter via WolfStreet.com,

Oops, they’re already rising.

The US government bond market has further soured this week, with Treasuries selling off across the spectrum. When bond prices fall, yields rise. For example, the two-year Treasury yield rose to 2.06% on Friday, the highest since September 2008.

In the chart, note the determined spike of 79 basis points since September 8, 2017. That was the month when the Fed announced the highly telegraphed details of its QE Unwind.

September as the month of the QE-Unwind announcement keeps cropping up. All kinds of things began to happen, at first quietly, without drawing much attention. But then the trajectory just kept going.

The three-year yield, which had gone nowhere for the first eight months of 2017, rose to 2.20% on Friday, the highest since October 1, 2008. It has spiked 82 basis points since September 8:

The ten-year yield – the benchmark for financial markets that most influences US mortgage rates – jumped to 2.66% late Friday.

This is particularly interesting because the 10-year yield had declined from March 2017 into August despite the Fed’s three rate hikes last year, and rising short-term yields.

At 2.66%, the 10-year yield has reached its highest level since April 2014, when the “Taper Tantrum” was winding down. That Taper Tantrum was the bond market’s way of saying “we’re shocked and appalled,” when Chairman Bernanke dropped hints the Fed might eventually begin tapering what the market had called “QE Infinity.”

The 10-year yield has now doubled since the historic intraday low on July 7, 2016 of 1.32% (it closed that day at 1.37%, a historic closing low):

Friday capped four weeks of pain in the Treasury market. But it has not impacted yet the corporate bond market, and the spread in yields between Treasuries and corporate bonds, and particularly junk bonds, has further narrowed. And it has not yet impacted the stock market, and there has been no adjustment in the market’s risk pricing yet.

But it has impacted the mortgage market. On Friday, the average 30-year fixed-rate mortgage with conforming loan balances ($417,000 or less) for top-tier borrowers, according to Mortgage News Daily, ended at 4.23%, the highest in nine months.

But historically, 4.25% is still very low. And likely just the beginning of a long, uneven climb higher.

And the impact on mortgage payments can be sizable. When rates rise for example from 3.5% to 4.5%, the payment for a $250,000 mortgage jumps by $144 to $1,267 a month. This can move the payment out of reach for households that have trouble making ends meet.

A one-percentage-point increase takes on larger proportions in a place like San Francisco, where it might take a mortgage of $1.25 million to buy a median home. At 3.5%, the monthly payment is $5,613. At 4.5%, it jumps to $6,334, an increase of $721 a month and an increase of $8,652 a year.

A mortgage rate of 4.5% is still very low! And it is likely headed higher.

Since the Financial Crisis, the ultra-low mortgage rates were among the factors that have caused home prices to soar. But as rates are heading higher, the housing market is in for a big rethink. These higher rates are going to be applied to the now prevailing sky-high home prices.

This will come in addition to the rethink triggered by what the new tax law will do to the housing market.



There’s another aspect to this equation: Homebuyers who are willing and able to stretch to cough up those higher mortgage payments can’t spend this money on other things. Falling mortgage rates gave a huge boost to home prices and to the entire economy in numerous ways. But that process will go into reverse.

So where will it go from here? The 10-year yield is still historically low and has a lot of catching up to do with regards to the trajectory of shorter-term yields. In addition, the Fed will continue to push its buttons – gradually hiking its target range for the federal funds rate and proceeding with its “balance sheet normalization.” And as the 10-year yield rises, mortgage rates will respond, and Housing Bubble 2 will get a lot more costly to deal with.

Even the bond market’s inflation expectations now exceed the Fed’s target. Read… Bond Market Smells Inflation, Begins to React


rc59 Justin Case Sat, 01/20/2018 - 20:59 Permalink

"twice as long to buy the average house" 


Depends on how it is computed. Since women have entered the workforce in large numbers (c. 1970s+) the more stable denominator would be 'house hold' income -- ie. two working incomes.  Great for the liberation of a gender to join the poorly paid slave market, however, it unfortunately tends to cut by half the value of the working effort. Wages stagnate and everything else moves towards 'inflation' until a new balance is achieved. No blame on females -- just the laws of capitalist economies. 

In reply to by Justin Case

Endgame Napoleon Four Star Sun, 01/21/2018 - 10:05 Permalink

It is not any better if you are a renter, with a rent payment that builds no equity nor security eating over half of your monthly earned-only income, particularly in the many states where per-capita income falls between $18k and $20k. A $20k yearly income is about $10 per hour in a full-time job. Your monthly take-home pay is less than $1,600, so a $1,267 mortgage payment is out of the question, but then, so is a $859 rent bill for a crappy, one-room apartment.  

In reply to by Four Star

Number 9 Drater Sat, 01/20/2018 - 15:18 Permalink

and at the same time are trying to convince you the market is without any decent housing to sell.. all the good properties are gone.. better get anything available as it is what it is..

never has there been more liars in one group of people out side the lawyers realm as there are in the NAR..


In reply to by Drater

Endgame Napoleon Joebloinvestor Sun, 01/21/2018 - 10:11 Permalink

Some programmer will probably invent a Bitcoin-financed mortgage. Since only a limited number of Bitcoins exist, it might have to be like proprietary software, working with all the different types of cryptos. That might be the only way to get the Millennial generation—a larger generation than the Baby Boom despite all the fretting over birth rates—to buy into another Fake housing “boom.”

In reply to by Joebloinvestor

warpigs Sat, 01/20/2018 - 15:30 Permalink

Mortgage rates are based on Mortgage Backed Securities, not the 10yr Treasurues. Who the fuck wrote this shit article? The entire premise is shit.

ReturnOfDaMac max2205 Sat, 01/20/2018 - 16:02 Permalink

Indeed, print until there are no more trees!  We need financial assets to go up, we need real-estate to go up, we need more paper contracts to suppress precious, and we need more outsourcing for lower wages.  But most of all, we need moar WAR!  FINALLY, we got the exceptional government we deserve.

In reply to by max2205

DuneCreature Sat, 01/20/2018 - 16:00 Permalink

A Real Estate Agent friend of mine is buying a lot plastic sheets.

I don’t know if he plans on killing someone, has started wetting the bed or is taking up the new hobby of getting drunk, passing out and unchucking on hisself in a stuper.

Live Hard, All I Know For Sure Is He Keeps A Set Of Plastic Sheets In The Trunk Of His Car Too, …. Maybe He’s Planning On Getting Drunk, Killing His Loan Officer And Pissing On The Body In Some Remote Air B&B And Trying Not To Get Charged Extra For Staining The Carpet, Die Free

~ DC v8.4

Mazzy Sat, 01/20/2018 - 16:24 Permalink

Fixed rate mortgage, my payment ain't going up.  Interest rate increases will have no effect on current owners making payments.

Of course higher rates makes it harder for people to borrow, and if that knocks too many would-be buyers out of the pool, that could make sales harder which will have downward pressure on prices.  But again, I don't care.

blown income Sat, 01/20/2018 - 17:21 Permalink

Now my first home in 1995 was 9.4


My second home purchase in 2003 was 5.3 and I was very great full.


Now 3rd home i bought in 2013 was 2.75  and was approved for way more than I could actually afford!


Now I know when i go to sell this home i will take a bath but i was smart enough to only take out for 150k so i won't make money but should get everything i put in back at least.

JailBanksters Sat, 01/20/2018 - 20:02 Permalink

Increasing mortgage rates will Inflate the housing bubble, but then lowering the mortgage interest rate will Inflate the housing bubble. Because this is Federal Reserve controlled bubble, and they won't allow it to pop. If it pops it's because of circumstances beyond their reach.


ZeroLounger Sun, 01/21/2018 - 00:26 Permalink

Go to Zillow.com.  Do a search for Colorado Springs, Colorado. Filter out 'for sale' on 'listing type', and only leave pre-foreclosures......

You'll see a sea of blue dots.  Each one is in pre-foreclosure. Hundreds.

The banks are hiding this.

I Write Code Sun, 01/21/2018 - 00:46 Permalink

My guess is that as high as rates can go now without popping the big one - the national debt - it won't affect real estate much. 

The top has lifted off and is in orbit now, the rich buy fancy houses, no matter what happens to the other 99%.  So the good news is it will all just put very modest pressure on 99% of real estate. 

buzzsaw99 Sun, 01/21/2018 - 07:26 Permalink

And the impact on mortgage payments can be sizable. When rates rise for example from 3.5% to 4.5%, the payment for a $250,000 mortgage jumps by $144 to $1,267 a month. This can move the payment out of reach for households that have trouble making ends meet.


It's clear the author did some research and doesn't reach totally wrong conclusions (unlike some on here) and also has at least some knowledge of the issue but a some of it is poorly written. the above for instance is vague or intentionally misleading. a person who wanted to do a responsible piece, a true resource, would have expounded on the difference between buyers and current owners. s/he would also have related a bit to readers on the prevalence of fixed rate mortgages not only in the usa, but possibly canada, australia, the uk, etc. as a comparison.

Being a usa centric piece I understand not wanting to go into great length but that kind of information can be contained in a few short sentences. My feeling is that the author is trying to convince us that the mort sticker shock for buyers plus loss of wealth effect for current owners will be more profound &/or more immediate than it will just from this one factor than is actually the case. Now throw in a stock market crash of say -30% on top of slightly higher rates and then we're talking some serious doom.

btw - imo assuming that rates will keep rising is not a given.

Let it Go Sun, 01/21/2018 - 08:04 Permalink

The housing picture is not brightening and most likely will not because the benefits of historically low interest rates are mainly behind us. Those controlling the narrative, big builders and realtor associations wishing to drive sales, often fail to tell us the true story.

Our current policies create a questionable base for higher home prices when we consider the low end of the market is driven by Fannie, Freddie, and the FHA all insuring 3.5% down payments from borrowers that often have a weak credit history. The article below explores some of the issues currently facing housing.

 http://The Housing Sector Shows Little Promise.html

Not if_ But When Sun, 01/21/2018 - 11:34 Permalink

Rising mortgage rates, drastically rising property taxes, tapped out credit cards, rising this and rising that - with stagnant wages and energy costs recently going up =  we're f*cked.  But the Bankers have been aptly rewarded for their contributions to this mess.       CPL 593H

everything1 Sun, 01/21/2018 - 17:03 Permalink

Whales are lying in wait for the next big opportunity, as the rental society is a better money maker than stocks.  Sure people are buying homes and interest rates are lower than ever, I did a 15 at 2.625 just over a year ago.  But, people are buying again, as interest rates go up, and we have more and more condo projects, realistically, it is time to buy, higher interest rates are more $ in the pocket of the bankers, they need to make whatever they can on the front end while they can, later doesn't matter, even Warren Buffet buying realty companies now.  Home ownership will probably continue to suffer, see .. TPTB need initial owners to buy over priced, then the whales scoop them up during recession.