Highest Mortgage Rates In 8 Years Unleash Bidding Wars, Home Buying Frenzy

Yesterday when looking at the latest MBA Mortgage Application data, we found that, as mortgage rates jumped to the highest level since 2011, mortgage refi applications, not unexpectedly tumbled to the lowest level since the financial crisis, choking off a key revenue item for banks, and resulting in even more pain for the likes of Wells Fargo.

Today, according to the latest Freddie Mac mortgage rates report, after plateauing in recent weeks, mortgage rates reversed course and reached a new high last seen eight years ago as the 30-year fixed mortgage rate edged up to 4.61% matching the highest level since May 19, 2011.

But while the highest mortgage rates in 8 years are predictably crushing mortgage refinance activity, they appears to be having the opposite effect on home purchases, where there is a sheer scramble to buy, and sell, houses. As Bloomberg notes, citing brokerage Redfin, the average home across the US that sold last month went into contract after a median of 36 only days on the market - a record speed in data going back to 2010.

To Sam Khater, chief economist of Freddie Mac, this was a sign of an economy firing on all cylinders: "This is what happens when the economy is strong,” Khater told Bloomberg in a phone interview. “All the higher-rate environment does is it either causes them to try and rush or look at different properties that are more affordable."

Of course, one can simply counter that what rising rates do is make housing - for those who need a mortgage - increasingly more unaffordable, as a result of the higher monthly mortgage payments. Case in point: with this week’s jump, the monthly payment on a $300,000, 30-year loan has climbed to $1,540, up over $100 from $1,424 in the beginning of the year, when the average rate was 3.95%. In other words, all else equal, home prices will fall.

As such, surging rates merely pull home demand from the future, as potential homebuyers hope to lock in "lower" rates today instead of risking tomorrow's rates. It also means that after today's surge in activity, a vacuum in transactions will follow, especially if rates stabilize or happen to drop. Think "cash for clunkers", only in this case it's houses.

Meanwhile, the short supply of home listings for sale and increased competition is only making their purchases harder to afford: according to Redfin, this spike in demand and subdued supply means that home prices soared 7.6% in April from a year earlier to a median of $302,200, and sellers got a record 98.8% of what they asked on average.

Call it the sellers market.

Furthermore, bidding wars are increasingly breaking out: Minneapolis realtor Mary Sommerfeld said a family she works with offered $33,000 more than the $430,000 list price for a home in St. Paul. The listing agent gave her the bad news: There were nine offers and the family’s was second from the bottom.

For Sommerfeld’s clients, the lack of inventory is a bigger problem than rising mortgage rates. If anything, they want to close quickly before they get priced out of the market -- and have to pay more interest.

“I don’t think it’s hurting the buyer demand at all,” she said. “My buyers say they better get busy and buy before the interest rates go up any further.”

Then again, in the grand scheme of things, 4.61% is still low. Kristin Wilson, a loan officer with Envoy Mortgage in Edina, Minnesota, tells customers to keep things in perspective. When she bought a house in the early 1980s, the interest on her adjustable-rate mortgage was 12 percent, she said.

“One woman actually used the phrase: ‘Rates shot up,’” Wilson said. “We’ve been spoiled after a number of years with rates hovering around 4 percent or lower.”

Of course, if the average mortgage rate in the America is ever 12% again, look for a real life recreation of Mad Max in a not so friendly neighborhood near you.


Scanderbeg JRobby Thu, 05/17/2018 - 15:01 Permalink

Indeed, this is how Neo-Lib Scamenomics goes.

The market will crash relatively soon and the only people who will do well are those who were rich enough to buy Real Estate in highly inflated markets in the first place and hold for a relatively long time.

A typical Cap rate these days is less than 2% in places like Los Angeles. So essentially they are just buying to park capital and banking on making a profit from the re-sale in 5-10 years. And because inflation is so out of control in tight rental markets they are correct.

But for those people buying at high interest rates in B/C areas or markets prepare to get fucked. They will wind up underwater just like in 2007 and the situation for renters will be even worse.

Isn't Neo-Liberalism grand?

In reply to by JRobby

same2u Thu, 05/17/2018 - 12:01 Permalink

Been hearing this shit for ten years. I didn't buy when I could have and now here we are again. Can't find anything I like I can afford... I feel like an idiot

alangreedspank same2u Thu, 05/17/2018 - 12:08 Permalink

The fact that you can properly evaluate what you can afford makes you part of a special clique of people who still have a head screwed on their shoulders.

But I hear ya, I'm nearing my 40s and there's nothing more I'd like than a place to light a fire and chill with a glass of scotch after a hard week of work.

In reply to by same2u

alangreedspank GreatUncle Thu, 05/17/2018 - 12:21 Permalink

"Tells me they will do literally everything to maintain that market."

Used to assume that for years...Until I saw the Fed puking back their bloated balance sheet back onto the market to the tune of 50 billions monthly it will be by the end of the year. Then, it'll be MBS's turn to try and find a buyer (lol).

I think the Fed is trying to buy back some credibility, no matter the cost. I wouldn't fight them.


In reply to by GreatUncle

rgraf alangreedspank Thu, 05/17/2018 - 15:02 Permalink

No, they're just squeezing the last pennies out of the hands of the people that still have anything. States are going broke, so state funding will evaporate. When that happens, local government will have to foot the bill. To do that, real estate taxes will have to increase. Either they raise assessments, or they raise tax rates. Raising tax rates puts the focus on the politicians. Not happening. Raising assessments fools the owners, who count on equity as an investment. Increased valuations will mean nothing, as buyers head for the hills.

In reply to by alangreedspank

bluskyes same2u Thu, 05/17/2018 - 12:39 Permalink

Hind-sight is 20/20.

Houses are selling for 10x manufacturing cost in Toronto Ontario

Farm Credit considers 100 year paybacks on farms, to be be acceptable.

I could've bought 1000's of acres for $500/acre, and sold it for 10k/acre.

Could have been a bit-coin millionaire.

Probably would have gone broke.

In reply to by same2u

snblitz same2u Thu, 05/17/2018 - 14:01 Permalink

I live in the Silicon Valley.  People have asked me over the years if now or then is a good time to buy a house.  I tell them the trick is not to time the market but to be in the market.  If you can afford a house for 10 years get in now.

I am not telling them housing is a good or bad investment, they have already decided they want in.  I am just telling getting in now is better than trying to time the market.

Now is housing a good investment?

https://www.finitespaces.com/2018/05/05/why-stocks-housing-and-gold-are-not-really-investments but are the best places to put your money.

In reply to by same2u

1033eruth Oldguy05 Thu, 05/17/2018 - 13:45 Permalink

Its a propaganda article sponsored by the real estate industry.  "Hurry, buy, buy, buy before interest rates go up."  Hurry, they don't make anymore real estate."  Hurry, real estate only goes up in value."

There might be a a few, high demand areas where there are still bidding wars, HOWEVER, the exception does not make the rule.  

The point of propaganda is to highlight the exception in this case.  

In reply to by Oldguy05

Seasmoke Thu, 05/17/2018 - 12:05 Permalink

Yeah the cunt may have paid 12% in the past. But she left out that prices were 1/2 what they are now and don't forget those property taxes were also much less than they are today.

Mr. Universe Bill of Rights Thu, 05/17/2018 - 12:27 Permalink

Go back to 1970 when American workers averaged around $6,200 a year. Mortgage rates were 8.5% and the average payment was $127 bucks a month. A new car was around $3,500 and you get a gallon of gas for $.36.

How the general populace has not seen the devastating effects of inflation and demanded an end to the Fed is due to the continuous public relations misinformation campaign put out by our friendly Banksters. All with the help of our sold out elected officials and a complicit press.

In reply to by Bill of Rights

snblitz Seasmoke Thu, 05/17/2018 - 14:10 Permalink

California has proposition 13 which attempts to limit property tax increases.

Basically as long as you do not sell the tax goes up at most 1% or so per year.

You can "transfer" your prop 13 "basis" to another house.

I pay $6000 in property taxes for my two houses.  And I bought them long ago.

I cannot imagine someone buying my Mom's house for $1,500,000 (1850sf 4BR2 on 1/4 acre) and paying $18,750 per year in property taxes.  (average rate is 1.25% in california).

There are lines of people trying to buy my Mom's house and hers is not even for sale.

In reply to by Seasmoke

Yen Cross Thu, 05/17/2018 - 12:06 Permalink

 Smart people are selling right now.

 Even if you don't have another property to live in rent a place, just park your cash[equity] for a couple of years, and buy the crater, as rates get dropped. Or refi as rates drop.