THEY GOT IT WRONG: MORTGAGE RATES RISE AT FASTEST PACE IN 35 YEARS

Go back to the beginning of the year. Ms. Fannie Mae missed her prediction that the average 30-year fixed mortgage rate would barely move up from 3.1 percent to 3.3 percent by the end of this year. And even those doing the banking business got it wrong, with The Mortgage Bankers Association having forecasted that the average mortgage rate would climb to just 4 percent by year’s end.

They got it wrong.  Climbing up at its fastest clip since 1987, the Federal Home Loan Mortgage Corporation reported that mortgage rates hit 6.3 percent… which in real terms drove up the real cost of servicing mortgage payments by 50 percent in just 6 months.

Again, to illustrate how the actions taken to win the COVID War by artificially juicing economies and equity markets with cheap money, the mortgage rate was 2.93 percent a year ago and began 2022 at about 3.11 percent.

Fixed mortgage rates are tied to yields on the 10-year Treasury note, which are rising with the U.S. Federal Reserve’s boosts in interest rates.

Last week, the note’s yield notched its highest rate since 2011, having more than doubled this year. In response, the benchmark 30-year mortgage rate has almost doubled.

Home buyers are paying an average of $740 more a month to cover payments for a median-priced home than they did a year earlier, according to Realtor.com.

However, the median price has been skewed up to $428,700 currently, according to the U.S. Federal Reserve, because most home sales have been occurring in the market’s high end, as we reported in “Pace of Existing Home Sales Slowest in Two Years” (24 May 2022).

The higher rates also are affecting other aspects of the housing market.

New housing starts in May fell 14.4 percent year on year to their slowest pace in 13 months. The number of building permits was off 7 percent from the month before and April sales of existing homes sank to the slowest monthly pace in two years.

“The Fed is having a profoundly disruptive effect on real estate markets,” chief economist Michael Fratantoni at the Mortgage Bankers Association, told The Wall Street Journal.

“Demand for housing has dropped pretty sharply and we’re beginning to see commercial real estate slow,” he said.

To support the housing market during the COVID crisis, the Fed sank  interest rates to a historic low of 0.25 percent and began buying mortgage bonds at a clip of $100 billion a month through much of 2021.

The housing market’s current reversal “has been brewing for a long time,” strategist Walter Schmidt and FHN Financial said to the WSJ. “It’s all because the mortgage-backed securities market is losing its single biggest buyer.” 

In the past month, 19 percent of listings at online brokerage Redfin have reduced their asking prices, and fewer people are applying for mortgages now that interest rates have virtually doubled in a year.

TREND FORECAST: With inflation showing minor signs of cooling and consumers draining their savings, which we highlighted in “Americans: Spending More, Saving Less” (7 Jun 2022), the U.S. housing market will collapse should mortgage rates hit double digits.

And, as we had forecast, even moderate rate increases will end the artificially boosted housing boom. Indeed, in April and May, new home sales fell 19 percent, year over year, to their slowest pace since April 2020. Existing-home sales also are slackening as we have noted in this and previous Trends Journals.

The hardest hit will be first time home buyers who made up just 27 percent of all transactions, down from 31 percent a year ago and dropping to a 13 year low it hit during the Great Recession.

Again, minus a wild card event, while we do forecast a steady drop in home prices, we do not forecast a housing market crash. Unlike the Panic of ’08, this time, many homes were paid for with cash. Therefore, there will be no subprime fiasco that artificially drove up home prices like they did back then from people who could not afford to own them.  

TREND FORECAST: We had forecast for more than a year that the housing market would turn down sharply when the Fed raised its interest rate to or above 1.5 percent. The Fed raised its key interest rate to 1.5 percent last week, sending mortgage rates into the 6 percent range. 

Again, this housing bubble was artificially inflated with record low interest rates and not because the middle class was growing because their wages were rising. Therefore, it is simple math. The higher mortgage rates rise, the deeper home prices will fall.