“Fixed U.S. mortgage rates jumped to the highest level this year, signaling the Federal Reserve’s plan to lower borrowing costs has stalled. The average 30-year rate rose to 5.29 from 4.91 percent a week earlier…The last time the rate was higher was Dec. 11, when it was 5.47 percent. The average 15-year rate rose to 4.79 percent from 4.53 percent.”
∙ U.S. Mortgage Rates Jump to Highest Since December [Bloomberg]
∙ It’s Like The Fed (And Taxpayers) Just Bought You A Couple Of Points [SocketSite]
“Historically cheap”?
Perhaps on a nominal basis, but what about on a real basis?
I’m thinking then, not so much….
Yawn..it’s seasonality…itll come back down by winter.
Yawn..it’s seasonality…itll come back down by winter.
are you serious? is there seasonality to the mortgage market? if so I’d love to see a source.
besides, what season changed from last week to this week? or from last month to this month?
as I’ve said for a few weeks now, I’m focused on the 10 year Treasury. there is still some discussion about whether or not this rapid rise in 10 year Treasuries is a harbinger of doom, or if there can be some “green shoots” held within.
I’ll try to dig up a pretty good article I read about this situation later.
The 10-Y Treasury action is darn relevant: we went on a 5-year cheap debt bender and woke up last year with a crippling hangover. The mixologist’s advice is to drink some more to make the pain go away. Eventually that’s going to fail. You can’t binge your way out of this.
Reality eventually kicks you in the butt. And the reality today is that the bar will not take our IOUs at the price we’re willing to pay.
Yes, fixed tracks 10 year notes, and, yes, fixed is still at historical low. But if it goes well above 6%, which it might next year, I’d consider variable. Historically, variable is supposed to be cheaper in the long run. It’s the teaser rate that gave ARM bad name lately.
Historically, variable is supposed to be cheaper in the long run
this is technically true depending on the time period you choose, and has a LOT of caveats. the idea was most recently made famous by Mr. Greenspan himself during the height of the bubble. This is the same Mr. Greenspan that
-denied there was a housing bubble
-then stated it would be impossible to ever know if one was in a bubble anyway
-and then stated that even if we were in a bubble, it would be better to just let it pop and clean up afterwards, as opposed to trying to stop the bubble (that we can’t see).
in short:
although the argument quoted above is theoretically true, in practice it is significantly less clear.
Especially when we are living in an era of extraordinarily low interest rates.
hard to imagine we’ll ever see them much lower than in 2005 (when there was a financial mania that lowered risk spreads to dangerous levels) or lower than now (when we have massive govt propping up of the mortgage market, supplanting any private sources)
i’ll stay in my 30 year 5% fixed thank you!
Variable rates are a great product but not for everyone. There is one rule you need to keep in mind: Do a variable only if you can afford the fixed one as well. Use a variable rate as a medium to save money, not as a way to be priced-in.
If you can’t afford a fixed, you shouldn’t be buying!
Good advice Fronz – So if we agree that rising rates will hurt affordability and hence demand, I did a quick calculation with round numbers to quantify the impact. Purch Price – 1,250,000
80% Loan = 1,000,000
Current rate = 5.25
monthly payment = 5,522
if all you can afford is 5,522 a month what happens if rates rise?
Example
pmt = 5522
New Rate = 6%
NEw affordable loan= 921,029
NEw affordable Purch Price = loan/80% = 1,151,286
That former 1,250,000 home is now only affordable when priced a hunded grand lower at 1,151,286! YIKES! ( Admit, prop taxes drop a bit, so the price will fall slightly less than this)
Variable should be cheaper for the same reason your 6 mo CD pays less than 5 year CD: the lender wants to get paid premium for the higher rate risk that he assumes. But yes, do mortage your house, wife and kids at 5% fixed.
That’s a good approximation/illustration, ben there, of the intuitive idea that higher rates will cause a lowering of the asset price.
Most people expect a more inflationary future (some expect siginificantly higher inflation, more than 5-8%). Now think about what happens when mortgage rates rise not 1%, but 5+%, and you get an idea why inflation won’t *work* for a still too-leveraged economy.
Regardless of inflation or rates, count on a few very negative headwinds to SF valuation going as well:
1. Reduction of available deductions for the “rich” (in case you don’t know it, that’s everyone making more than $150K – it will have to be).
2. Increased marginal rates on income taxes at state and Federal levels.
3. Increased energy taxes and feed through to consumer prices due to the carbon tax trading fantasy that these clowns will actually get implemented.
4. Taxation of medical benefits previously received tax free by employees.
5. Removal of social security tax limits, likely meaning incomes above $106K – certainly all those above $200-250K – will be subjected to another 12.4% tax hit, and that’s assuming that the rate itself doesn’t rise from 6.2%/6.2% employer/employee tax (and if you think it’s the employer who pays this tax, you don’t understand how this works).
All of these – and I expect most of them are inevitable now – will slowly strangle consumers and producers of wealth further. If you think about it, you can see how high inflation would make all of this worse.
Remember, poor people are disproportionate users of government services, and “rich” people are disproportionate contributors. Do you see services going down under Obama, or up? Someone has to pay, and the economics of it means that it is going to be borne by the $100K+ earners (mathematically has to – consider that the median income in the US is in mid-5 figures). Good luck SF!
ben there,
Agreed on the mechanical effect of IRs with prices. But it applies mainly to a seller’s market where people will go to their monetary limits to buy a home.
In buyer’s markets, prices will adjust to whatever pain the sellers or the banks can take through paper loss, real loss or writedowns. At this point, interest rates are not the most important thing in the world. When I bought an REO in 1999, the price was so low that I did a 5-Y mortgage on a 50% financing. Whether I was getting a fixed 5.5% or 6% was irrelevant to my decision to purchase. I shopped for good rates because I could, not because I had to.
what about those that all ready bought? best to hold a current prop 10 years if a person had say under a 6% rate, or sell now to those thinking and believing bottom is here, wait, than jump back in again in a year or more when the real bottom hits?
gowiththeflow,
Closing costs and commissions and the pain of moving out will make this pretty unpractical. It’s a home, not a financial instrument or an investment.
Plus, you run the risk of NOT finding a buyer and being stuck or following the market down.