With US consumers suddenly dreading to see the bottom line on their next 401(k) statement, they now have the housing market to worry about. Here’s why…
from Zero Hedge
With US consumers suddenly dreading to see the bottom line on their next 401(k) statement, they now have the housing market to worry about.
As interest rates spiked in the past month, one direct consequence is that U.S. mortgage rates, already at a seven-year high, surged by the most since the Trump elections.
According to the latest weekly Freddie Mac statement, the average rate for a 30-year fixed mortgage jumped to 4.9%, up from 4.71% last week and the highest since mid-April 2011. It was the biggest weekly increase since Nov. 17, 2016, when the 30-year average surged 37 basis points.
With this week’s jump, the monthly payment on a $300,000, 30-year loan has climbed to $1,592, up from $1,424 in the beginning of the year, when the average rate was 3.95%.
Even before this week’s spike, the rise in mortgage rates had cut into affordability for buyers, especially in markets where home prices have been climbing faster than incomes, which as we discussed earlier this week, is virtually all. That’s led to a sharp slowdown in sales of both new and existing homes: last month the NAR reported that contracts to buy previously owned properties declined in August by the most in seven months, as purchasing a new home becomes increasingly unaffordable.
“With the escalation of prices, it could be that borrowers are running out of breath,” said Sam Khater, chief economist at Freddie Mac.
“Rising rates paired with high and escalating home prices is putting downward pressure on purchase demand,” Khater told Bloomberg, adding that while rates are still historically low, “the primary hurdle for many borrowers today is the down payment, and that is the reason home sales have decreased in many high-priced markets.”
Meanwhile, lenders and real-estate agents say that, even now, all but the most qualified buyers making large down payments face borrowing rates of 5%. And while rates have been edging higher in recent months, “the last week we’ve seen an explosion higher in mortgage rates,” said Rodney Anderson, a mortgage lender in the Dallas area quoted by the WSJ.
Meanwhile, the WSJ reports that once-hot markets are showing signs of cooling down. Bill Nelson, president of Your Home Free, a Dallas-based real-estate brokerage, said that in the neighborhoods where he works, the number of homes experiencing price cuts is more than double the number that are going into contract.
The rise in rates could have far-reaching effects for the mortgage industry. Some lenders—particularly nonbanks that don’t have other lines of business —could take on riskier customers to keep up their level of loan volume, or be forced to sell themselves. Many U.S. mortgage lenders, including some of the biggest players, didn’t exist a decade ago and only know a low-rate environment, and many younger buyers can’t remember a time when rates were higher.
Meanwhile, in more bad news for the banks, higher rates will kill off any lingering possibility of a refinancing boom, which bailed out the mortgage industry in the years right after the 2008 financial crisis. If rates hit 5%, the pool of homeowners who would qualify for and benefit from a refinance will shrink to 1.55 million, according to mortgage-data and technology firm Black Knight Inc. That would be down about 64% since the start of the year, and the smallest pool since 2008.
Naturally, hardest hit by the rising rates will be young and first-time buyers who tend to make smaller down payments than older buyers who have built up equity in their previous homes, and middle-income buyers, who can least afford the extra cost. Khater said that about 45% of the loans that Freddie Mac is backing are to first-time buyers, up from about 30% normally, which also means that rising rates could have an even bigger impact on the market than usual.
Younger buyers are also more likely to be shocked by higher rates because they don’t remember when rates were more than 18% in the early 1980s, or more recently, the first decade of the 2000s, when rates hovered around 5% to 7%.
“There’s almost a generation that has been used to seeing 3% or 4% rates that’s now seeing 5% rates,” said Vishal Garg, founder and chief executive of Better Mortgage.