Ten days ago, we wrote that the "US Housing Market In Peril As "Increase In Mortgage Rates Has Shocked Consumers." Fast forward to today when the same "shocked consumers" referenced in the WSJ piece must be on the verge of a nervous breakdown because according to the Mortgage Brokers Association, rates on US fixed-rate mortgages rose to their highest levels in more than two years, sending weekly home loan application activity to its weakest since early January, according to the latest MBA data.
The Washington-based industry group said 30-year fixed-rate conforming mortgages averaged 4.27%, the highest level since October 2014. up from 4.23% the prior week.
Likewise, interest rates on 15-year fixed-rate mortgages averaged 3.53%, their highest since September 2014. MBA's seasonally adjusted mortgage market index declined 0.7% in the week ended Dec. 2 to 414.1, the lowest since 398.5 in the week of Jan. 8.
Home borrowing costs have climbed with a surge in U.S. 10-year Treasury bond yields, which hit their highest levels since July 2015 last week, following Donald Trump's U.S. presidential election victory. Traders have bet on faster economic growth and inflation if Trump and the Republican-controlled Congress enact big tax cuts and federal spending, together with stricter trade policies.
The spike in 30-year mortgage rates, which have risen about 0.50 percentage point since the Nov. 8 election, has reduced refinancing activity, something we highlighted yesterday showing the collapse in the total poll of eligible refinance candidates.
More importantly, an analysis by Mark Hanson posted two weeks ago when rates were lower than they are today, explained why for homebuyers who need a mortgage, houses have never been more expensive. We repost the full article below:
Marc Hanson: "Houses Have Never Been More Expensive To Buyers Who Need A Mortgage"
Houses have NEVER BEEN MORE EXPENSIVE to end-user, mortgage-needing shelter buyers. The recent rate surge crushed what little affordability remained in US housing. It now it requires 45% more income to buy the average-priced house than just four years ago, as incomes have not kept pace it goes without saying.
The spike in rates has taken "UNAFFORDABILITY" to such extremes that prices, rates, and/or credit are now radically out of scope.
At these interest rate levels house prices are simply not sustainable even in the lower-end price bands, which were far more stable than the middle-to-higher end bands (have been under significant pressure since spring).
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The Data (note, for simplicity my models assume best-case 20% down and A-grade credit, which is the "minority" of lower-to-middle end buyers).
1) The average $361k builder house requires nearly $65k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $65k is needed.
For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper.
Bottom line: Reversion to the mean will occur through house price declines, credit easing, a mortgage rate plunge to the high 2%'s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.
2) The average $274k builder house requires nearly $53k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $53k is needed.
For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper.
Bottom line: Reversion to the mean will occur through house price declines, credit easing, a mortgage rate plunge to the high 2%s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.