- Interest rates for mortgages are going up and the new tax law removes some of the tax incentives for homeownership.
- While the US housing market is still strong, there could be trouble ahead.
The average interest rate for 30-year fixed-rate mortgages with a 20% down-payment and with conforming loan balances ($453,100 or less) that qualify for backing by Fannie Mae and Freddie Mac rose to 4.64%, the highest since January 2014, according to the Mortgage Bankers Association’s Weekly Mortgage Applications Survey, released this morning.
This chart (via Trading Economics) shows the recent spike in mortgage rates, as reported by the MBA. There are two spikes actually: The spike off near-historic lows in the summer of 2016 (the absolute low was in late 2012) when the Fed stopped flip-flopping about rate hikes; and the spike when the subsequent rate hikes started belatedly driving up the 10-year Treasury yield late last year. It’s the 10-year yield that impacts mortgage rates. Note that, except for the brief mini-peak in 2013, the average mortgage rate would be the highest since April 2011:
The average interest rate for 30-year fixed-rate mortgages backed by the FHA with 20% down rose to 4.58%, the highest since April 2011, according to the MBA. And the average interest rate for 15-year fixed-rate mortgages with 20% down rose to 4.02%, also the highest since April 2011.
This may be far from over: “What worries investors is that if inflation increases faster than expected, the Fed may be obliged to ‘slam on the brakes’ to keep the economy from overheating by raising interest rates faster than expected,” the MBA mused separately.
The difference between 2011 and now? Home prices
Home prices have skyrocketed in many markets since those years of higher mortgage rates, such as 2011 and before. The S&P CoreLogic Case-Shiller National Home Price Index has surged 40% since April 2011:
That’s the national index, which papers over the big differences in individual markets, with prices lagging behind in some markets and soaring in others. For example, in the five-county San Francisco Bay Area, according to the CaseShiller Index, home prices have surged 80% since April 2011 [from The US Cities with the Most Magnificent Housing Bubbles]:
So with home prices surging for years and with mortgage rates now spiking, what gives?
Today the National Association of Realtors reported that sales of existing homes fell 4.8% year-over-year in January – the “largest annual decline since August 2014,” it said – even as the median price rose 5.8% year-over-year to $240,000.
I’m not sure if the new tax law, which removes some or all of the tax benefits of homeownership, has had an impact yet since it just went into effect [What Will the Tax Bill Do to the Housing Market?]. But the lean inventories and falling sales combined with rising prices tell a story of potential sellers not wanting to sell, and this could be exacerbated by the new tax law.
And they have a number of financial and tax reasons for not wanting to sell, including:
- They’d lose some or all of the tax benefits that they still enjoy with their existing mortgages that have been grandfathered into the new law.
- Given the higher mortgage rates that they would have to deal with on a new mortgage (which might exceed their existing rate by a good margin after repeated refinancing on the way down), and given the high prices of homes on the market, they might not be able to afford to move to an equivalent home, and thus cannot afford to sell.
Housing markets move very slowly. But the first thing that happens when the dynamics change and things get iffy is that sales are slowing down even while prices still rise.
If the Fed raises rates four times this year, and if the yield curve steepens even a little to edge back toward a normal-ish range, as I expect it to, average interest rates for conforming mortgages may well be around 6% by year-end. And that, I think, would mark the real pain threshold for the housing market.
The chorus for four rate hikes is getting louder. Read… Four Rate Hikes in 2018 as US National Debt Will Spike