Posted on June 18th, 2008 in Mr Mortgage's Personal Opinions/Research
Affordability is a moving target with many parts, which many forget about when offering up housing forecasts. One, which has come into play recently and very swiftly, has the power to throw the housing market another, long-lasting and punishing blow.
We already know that housing prices are being pummeled due to massive REO supply entering the market, priced far below recent comparable sales. I have done numerous reports on it. The following is the latest. Record-Breaking May Foreclosure Report
We also know that when all of the ‘exotic/affordable’ loan programs went away literally overnight, housing took a sharp downturn with the CA median home price losing 27% since Sept 2007. Going to a 30-year fixed, fully documented mortgage environment overnight, has taken its toll on prices. The following is the latest piece I did on this topic. CA Housing stats, The Real Story…4.25-years Supply?!?
Now bond yields and mortgage rates are soaring, which is an affordability wild-card housing prices can’t handle. Most analysts and economists make their housing predictions based upon an average 30-year fixed rate over many years or the present rates, both of which are historically low and have been since 2003 (see chart below). Turning around this trade, with inflation levels that make owning Treasuries a money-losing proposition and rate overseas leading the way, maybe next to impossible. Rates are going up and arguably have been far too low for far too long.
In the past month, rates on a 30-yr fixed mortgage at no points have soared from 6% to 6.75%. When rates rise, affordability falls. Every .25% increase in mortgage rates takes away approximately 2.5% in purchasing power. Therefore, roughly 7.5% of purchasing power has evaporated in the past month. This, of course, varies from individual to individual, but assumes a household with a steady income buying at the maximum allowable debt-to-income ratios, which is typical.
People are focusing so much on the loss of loan programs and tightening of guidelines and have completely forgotten about one of the most basic of housing affordability factors, mortgage rates. This is, unless they plan to pay cash.
If rates climb back to levels last seen in 2000 and 2001 (7.5% to 8.5%), an additional 7.5%-12.5% purchasing power could evaporate. In the past, mortgage rates were a leading indicator for home prices and the health of the housing market in general. Now, that the days of free money and ‘heartbeat loans’ are over, ‘old-school’ factors like employment, income levels, interest rates, consumer sentiment and the health of the broader economy will have a significant influence once again.
Average 30-yr Rates at No Points
Today’s Rate 6.750%
YTD 2008 6.375%