They say that one sign of creeping old age is that memories from past decades
are more vivid than those from past days or weeks. They're right. I don't remember
what I had for lunch yesterday but clearly recall bragging about refinancing
our mortgage for 6% back in the early 2000s. That was a killer rate at the
time, and my thought was that if banks were dumb enough to give us such cheap
money for 30 years, then we should take as much as possible.
This illustrates the relaxed attitude about debt that a lot of baby boomers
had back then, and also the way the previously-unthinkable becomes normal after
a while. Where a 6% mortgage seemed cheap ten years ago, now 4% seems expensive.
And apparently even 4% is now in the rear view mirror:
Say
goodbye to ultralow mortgage rates
CHICAGO (MarketWatch)--Mortgage rates spiked over the past week, causing
some to believe the ultralow rates of recent years could be gone for good.
The 30-year fixed-rate mortgage averaged 3.93% last week, according to Freddie
Mac's weekly survey of conforming mortgage rates. But the results to be released
this Thursday could very well shock the average mortgage shopper, as the
average rate for the 30-year mortgage could move closer to 4.5%--or maybe
even higher than that, said Dan Green, loan officer with Waterstone Mortgage
in Cincinnati.
"Since Wednesday morning [June 19], pricing is worse by roughly four points.
This means that last week's zero-point rate of 4.25% would require four discount
points today," Green said. A point is 1% of the mortgage amount, charged
as prepaid interest.
"Since May 1, rising mortgage rates have reduced the purchasing power of
U.S. home buyers by 18%," he said.
Surveys by HSH.com pegged the conforming 30-year fixed-rate mortgage at
4.56% on Tuesday, said Keith Gumbinger, vice president of the consumer loan
information firm. That's up from 4.33% on Friday.
Mortgage rates started rising last week, after Federal Reserve Chairman
Ben Bernanke spoke of the Fed's intention later this year to scale back the
stimulus program that kept rates low. Rates jumped again over the weekend,
a reflection of the unsettled market.
Gumbinger said it's likely the market overreacted and that mortgage rates
could move downward. But it's probable that very low rates are gone for good. "Do
I think we're going back to 3.5%? No. Do I think we should be closer to 4%
than 4.5%? Probably," he said.
Even if market did overreact, it doesn't necessarily mean that rates will
reverse, Green said. "Mortgage rates are trading on fear and sentiment, and
right now those forces are pulling rates higher."
What it means for housing
The rate spike reduces the number of people who could benefit from a refinance.
When people save on their mortgage each month, that extra money in their
pockets can be spent elsewhere, also helping the economy.
But the new concern, Gumbinger said, is how much rising rates will affect
the housing market recovery.
Even assuming a 30-year mortgage with a 4.33% rate, the monthly payment
on a median-priced existing home has risen by 11% from the low at the beginning
of May, Gumbinger figured. That also assumes a 20% down payment. The median-priced
existing home was $208,000 in May, according to the National Association
of Realtors.
"Active home buyers, and there are a lot of them, are finding that their
purchasing power has decreased," Green said. "It's not enough that there's
a race to beat rising home prices, but there's a race to beat rising interest
rates." Prospective buyers may now need to make new choices between amenities,
or in the size of house that they can afford, he said.
Borrowers on the cusp of affordability to begin with could become priced
out of the market in a rising-rate environment, Gumbinger said.
Some Thoughts
Mortgage rates are a crucial piece of the transition to a post-quantitative
easing economy. "Normal", historically, would be 7%, or roughly double the
rate that ignited the past year's mini-housing bubble.
What would this do to the average buyer's ability to get out of their existing
house and into a bigger, better one? It would definitely change the calculation
or the worse, but how much worse? The answer is probably not within the housing
market but the overall economy. Things nearly fell apart back in 2009 because
society-wide debt had grown to unmanageable levels. The only way to keep the
system together was for interest rates to fall to the point where debt service
costs were commensurate with a much smaller debt load.
In the ensuing four years we've lowered consumer debt a bit but replaced it
with a more-or-less equal amount of government debt. So the system remains
just as leveraged as it was in 2008. The plan seems to be to take that same
amount of leverage and impose the interest rates on it that were in place in
2008, and to hope for a different outcome. As with so many other things, you
have to wonder if they've thought this through.
