As we first noted two weeks ago, while the average 30-year fixed mortgage rate had eased a few basis points to 3.93 percent, the yield on the 10-year treasury and 30-year mortgage bonds were quickly ticking up in reaction to Federal Reserve Chairman Ben Bernanke’s remarks concerning a tapering of the Fed’s Quantitative Easing program.
Over the next week, the average 30-year mortgage rate jumped to 4.46 percent, up from 3.35 percent at the beginning of May.
With 20 percent down, the average mortgage payment for a median priced home purchase in San Francisco, which was $870,000 in May, would be $3,510 per month at last week’s rates versus $3,067 at the rates of two months ago.
At 3.35 percent, an income of roughly $140,000 would have been needed to qualify for a $700,000 loan (an $870,000 purchase). At 4.46 percent, it’s closer $160,000 a year. At 5 percent, it’s $170,000 per year. And at 6 percent, call it roughly $190,000.
Looking at it another way, a monthly budget of $3,000 a month which would have covered the payments on a $680,000 mortgage two months ago would now cover the payments on a mortgage for just under $600,000, a drop from $850,000 to $750,000 in purchase price assuming 20 percent down.
Keep in mind that since 1990 the rate for a 30-year fixed mortgage has averaged 6.75 percent, 8.67 percent since 1971. The income needed to qualify for a $700,000 loan at 8.67 percent? That would be around $240,000 a year.
Uneasy Expectations For Higher Mortgage Rates [SocketSite]
Mortgage Rates Roiling From Taper Talk [Freddie Mac]

Comments from Plugged-In Readers

  1. Posted by lyqwyd

    One thing to note: while it’s technically true that if one assumes 20% down, the affordability drops from $850,000 to $750,000 I would argue it’s more accurate to say the affordability drops from $850,000 to $770,000 as the amount of available cash of the buyer is not dependent on interest rates.
    20% of $850K is $170,000. Adding a loan of $600,000 to that amount results in a total of $770K purchase price.
    Probably not a major difference, but worth pointing out in my opinion.

  2. Posted by eddy

    There is another way to look at it. A cash buyer taking out a loan for $1M can deduct about 36k a year at 3.35% or 52k if structured as an IO. At 5% is 50k or 66k if IO. 🙂
    I think 5% is the mark where you start to see an impact on buyer behavior. Houses are still flying off the shelf. 1961 G-reen just closed for $4.65M at $1289/psf for a no view, ho hum vic with an ho hum remodel. Mind boggling. 655k over asking. 10 days from listing to firm. I don’t think these buyers are sweating the change in interest rates.

  3. Posted by Brahma (incensed renter)

    Eddy, please. Did you read the post above?
    The editor’s talking about homes that working people can afford; the part of the market that’s around the “median priced home purchase in San Francisco”, which was emphatically NOT $4.65M or anything even in that ballpark.

  4. Posted by SocketSite

    1961 G-reen just closed for $4.65M at $1289/psf for a no view, ho hum vic with an ho hum remodel…I don’t think these buyers are sweating the change in interest rates.
    Either do we. Of course you’re talking about the top 1.6 percent of the market when you’re talking about sales over the $4 million mark in San Francisco.
    Drop the mark to over $1 million and you’re still only talking about less than a third of the sales in San Francisco over the past year.
    And the below a million dollar market, which still represents the majority of sales in San Francisco, tends to be the most sensitive to rates.

  5. Posted by elmoJFudd

    Interest rates are not nearly a relevant in SF when such a large portion of purchases are by cash speculators/hot Chinese money looking to rent the units.

  6. Posted by anon

    Interest rates affect the return on cash holdings which changes the opportunity cost for tying up cash in real estate. Part of the reason Chinese money was flowing into RE was that Treasuries had such ridiculously low yields.

  7. Posted by eddy

    Yes, I’m aware of the impact of interest rate on buying power as well as the intent of the post. I’m just saying that there are more ways to view the data than those presented. The green street house sold for $2.5 in 2002 (300k under asking) and while this is not a perfect apple its pretty close and a stunning increase over a decade; even if you assume the buyer financed the whole purchase at then 7% prevailing rates of the day (and never refi’d). Another way to look at it would be to say that there really has never been a better time to buy with rates as low as they have been / are.
    But the market here is officially out of control and buyers in this market could easily find themselves trapped in 5 years. I think the 1961 Gren buyers would have a hard time replicating this outcome. And it will not get any easier if interest rates are much higher. Then again, I found myself saying the same thing in late 06/07 and we still had 18-24 months of insanity.
    Anyone that bought in late 09/10/11 really managed to pick pocket the market getting post bubble prices with no competition and low interest rates.

  8. Posted by anon

    Actually $2.5 at 7% is about 17k monthly and $4.65 at 3.35% is about 21k monthly. Almost exactly flat when you factor in inflation.

  9. Posted by The Milkshake of Despair

    Given that market rates by definition exist in a market which is a big interconnected feedback system, I’d expect the market to react and drop rates if a spike like this dries up the mortgage sales pipeline.
    Long term it seems like rates must eventually revert towards the historic norms though I have no explanation why other than I doubt that the Fed can keep their rates low forever.

  10. Posted by Wai Yip Tung

    a large portion of purchases are by cash speculators
    Anyone has information about what portion of purchases are really all cash?

  11. Posted by hangemhi

    ^ last I heard it was just over 40% cash in SF.
    As for purchasing power, yes rates just went up, but SF jobs have been rising for a while – and for high demand workers 14% raises aren’t out of the question. SF purchasing power is also a function of the stock market… and that’s gone up for 4 years now.
    Finally, I’d put money on interest rates not going up from here, and probably even dipping again, over the next 6 months or so, because the U.S. economy isn’t quite as good as the SF economy. So we may get a summer slow down, but if I’m right this Fall is going to be en fuego.

  12. Posted by elmoJFudd

    If(when?) the Chinese economy contracts then SF RE will go with it either in price or volume IMO
    We have had record low interest rates and record low inventory combined with hot foreign speculative inflows the last couple of years.
    What happens when both interest rates and inventory normalize along with the Chinese economy returning to their mean?
    The only real (and probable) hope for RE values is for “real interest rates” to stay below the increasing inflation rate thus staying negative longer term. In this scenario %14 pay raises are realistic in the future (along with %14+ increases in bread loaf costs)

  13. Posted by WTF

    Seriously? Who buys a home with 20% down anymore? Many of the people who bought in our building either paid cash or had huge down payments.

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