"This Won't End Well" - Mortgage Rates Spike To 4-Year Highs

Growth? Inflation? Be careful what you wish for, as the surge in Treasury yields has sent mortgage interest rates to their highest in four years, flashing a big red warning light for affordability and home sales in 2018...

The U.S. weekly average 30-year fixed mortgage rate rocketed up 10 basis points to 4.32 percent this week. Following a turbulent Monday, financial markets settled down with the 10-year Treasury yield resuming its upward march. Mortgage rates have followed. The 30-year fixed mortgage rate is up 33 basis points since the start of the year.

Will higher rates break housing market momentum?

As the following chart shows, that surge in rates will have a direct impact on home sales (or prices will be forced to adjust lower) as affordability collapses...

Comments

CheapBastard Stuck on Zero Thu, 02/08/2018 - 15:00 Permalink

4.2% ?

ha ha ha.

They should be at 7% or higher for a sound economy. Right now, millions of investors simply speculating on the NAR premise, "house prices never drop."

I saw some raw land back in 2000 selling for $200/acre out in the middle of nowhere. It rose and rose and rose due to investors buying and speculating the city will [eventually] grow in that direction. Now it's at $12,500/acre. And it's still pretty much in the middle of nowhere.

This craziness will end at some point.

In reply to by Stuck on Zero

the artist TBT or not TBT Thu, 02/08/2018 - 13:16 Permalink

This is a fascinating topic. A true "Chicken or the Egg" scenario.

Consider back in the day (1900)when men lived to 35-45. A reason they began labor and everything else so early in age. Land was cheap, essentially free...you just had to go a little further out of town. A home cost what people could afford. 2-5 years saved wages. Banks, generally did not offer mortgages to common working people until the Bank of Italy (later BofA) broke ranks in SF after the quake. An abundance of gold and expanding industry/infrastructure played a big hand at the time. 

An understanding of disease and treatment was just coming in to focus. Germ theory etc. Sewage treatment. Antibiotics, antiseptics, anesthesia. Nutrition, modern dentistry... This all pushed life expectancy higher and increased the years we can labor. What we could "afford" pushed housing higher. Banks pushed the envelope exponentially by creating mortgages, first the 5 year, then 10 year, then 20, 30...You see where this is going. We increase "quality of life" and end up toiling behind a growth curve that few understood in any meaningful way. People by and large did not understand what was going to happen when the FED got ahold of the machinery. Interest, $ created out of thin air, drives inflation. The skim is controlled so that we do not notice until the hockey stick part of the curve slams into our purchasing power. That part is now. Understand that one concept and you are fully half way to understanding modern economics.   

If banks were out of the picture people would still buy and sell but at that lower price that people can "afford". Of course, literally everything would be different in our lives. That is another fascinating topic. 

In reply to by TBT or not TBT

Old Goat the artist Thu, 02/08/2018 - 15:52 Permalink

Pretty spot on, I'd say.  However, falling real estate prices are not necessarily guaranteed in a rising mortgage rate environment.  It seems like they should as the real cost of home ownership rises with rising interest rates, but ironically, potential sellers will often decide against selling for fear of losing out on the low rate they have locked in, and the (quite legit) fear of not being able to afford a new home at a higher rate.  Hence, inventories fall, and prices continue to rise due to the limited supply of housing.  

Definitely fascinating topic.  

In reply to by the artist

the artist Old Goat Thu, 02/08/2018 - 17:49 Permalink

Now I am giving away the candy store here but...

No other country offers a tax shelter like the US housing capital gains exclusion for your primary residence. Live in your home 2 out of 5 years, sell it and you as a married couple collect the first $500k tax free!. $250k as a single person. How long does it take you to save that?

That means that you can gravitate toward a market that provides ever larger returns in order to optimize this concept at the sweet spot. 

The goal in life should be to cycle through this as many times as possible in your working career (20 times?!) and doing so will dwarf your wage savings. 

Identify your retirement home early on and rent that one long term to lock in Prop 13 tax rates. On retirement you roll it all into some shelter or funnel it to kids etc. 

Of course to do it right you need to be buying smartly and remodeling the homes to max out the gains. 

Combine this with the concept above and you have one hell of a system. 

I helped do this for a friend of mine. Turned a $300k investment in Palo Alto into $7M in 4 years. 2 more years and Ill have that number to $9M (these are asset values not equity positions. equity is about half).

 

In reply to by Old Goat

Mtnrunnr monoloco Thu, 02/08/2018 - 13:55 Permalink

Yeah. While that's true it's pretty damn hard to not feel like a slave now. Been working hard my entire adult life and I have saved like a motherfucker only to have 3/4ths of a car saved up (if I work a job, I'll need to buy one soon as mine has 150k miles). Seems like a bit of a bullshit trade to me, really. 

In reply to by monoloco

Endgame Napoleon Mtnrunnr Thu, 02/08/2018 - 15:44 Permalink

Find a less trendy, but safe, area, in the same county as an affluent, trendy city, buying a modest and less fashionable house there. When I was married, I did that, and believe me, you are not likely any more interested or well versed than I am in design trends. I just could not afford to indulge that interest when buying a home. That is for the crony-absentee moms, taking tons of lengthy babyvacations and other time off in family-friendly workplaces, the ones married to high earners, specifically, not for the likes of me, whereas the frequently absentee single moms have access to free apartments or reduced-cost units in nicer, safer areas than I can afford as a now-single non mother. When I divorced, the house in the non fashionable — but safe — area sold in a week for a profit. We only had it for 2 years. People like that area because of the safety and the relatively less-awful schools, etc., and I knew that, not that I liked the look of the town or the house very much. Now, the adjacent town that I could never afford to buy in is lovely. The house note was lower than the rent for a crappy apartment. You could even make money that way for a bigger down payment, living there in the non-trendy area for a few years before moving, or if your income did not go up, you might have to stay non-trendy. Except in places like CA, where housing markets are just surreal, when people say they cannot afford a house, they often mean they cannot afford their dream house or a house equivalent to the one they grew up in. 

 

In reply to by Mtnrunnr

HRClinton 1stepcloser Thu, 02/08/2018 - 12:27 Permalink

Yes. Our Teaser Rate drops the Principal payment portion of PITI to Zero, when you lose* your job.

   * To a robot, alien or H1B visa guy/gal from Bang-a-hore.

The teaser is in you hoping that you will pay off the Mort_gage in your lifetime. But that's a bit like a Wish Sandwich, . You know what what a Wish Sandwich is, don't you, Debt Brothers?

In reply to by 1stepcloser

No Time for Fishing lester1 Thu, 02/08/2018 - 12:25 Permalink

Houses are bought based off how much a month someone can afford. For a given neighborhood the per month price remains relative constant. As interest rates came down the sale price went up , as interest rates go up the sale price will go down. Unless their typical buyer in that neighborhood is seeing wages increase there will be no ability for the per month cost of housing to go up. House price inflation has been more the result of interest rates lower than houses actually being worth more and buyers actually being able and willing to pay more. 

In reply to by lester1

Mtnrunnr No Time for Fishing Thu, 02/08/2018 - 12:33 Permalink

You're half right. Except rhe wealth effect caused by boomers sitting on their properties and their household wealth has been the underpinning of many loans. If this falls (lower home values) many will either A) be underwater or B) try to unload. This can't end well C) keep their asking price high or a combination thereof. This isn't so easy. 

In reply to by No Time for Fishing

Mtnrunnr No Time for Fishing Thu, 02/08/2018 - 12:34 Permalink

You're half right. Except rhe wealth effect caused by boomers sitting on their properties and their household wealth has been the underpinning of many loans. If this falls (lower home values) many will either A) be underwater or B) try to unload. This can't end well C) keep their asking price high or a combination thereof. This isn't so easy. 

In reply to by No Time for Fishing

Bemused Observer Bill of Rights Thu, 02/08/2018 - 12:32 Permalink

Oh, they'll resist to the bitter end, no doubt. But when the housing market collapse gets under way, they won't have any choices. Tanking home values WILL result in tanking property tax revenues, and tax rates WILL be forced downwards after these cases start showing up in courts across the country.

You can only foreclose on a token number. If that doesn't 'scare' the rest into compliance, you are screwed because now your fatal weakness is exposed...You are shit out of ammo, friendo, and now everyone knows it. They will have little choice but to fess up to their wealthy supporters..."We can't put everyone out of their homes, and the people KNOW this now. So you guys are SOL and will have to swallow your losses."

 

Which would be the greatest thing to happen to the real estate market, ever. A 'Golden Age'of home ownership where REAL home buyers can finally enter this market at a realistic price. Do THAT, and you may just get that economic 'boom' you all have been waiting so long for...a REAL one this time!

In reply to by Bill of Rights

CHoward Thu, 02/08/2018 - 12:04 Permalink

My first mortgage was - 30 yr fixed: 10.45%!!

 

Refinanced several years later and thanked God - 15 yr fixed: 7.85%!!

 

4.32% - FUCK YOU!