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Why “A 1% Mortgage Rate Surge Changes Everything”

ZeroHedge  |  Mark Hanson

Zillow is rapidly catching up with where the rest of the mortgage providers offer 30 Year Fixed Rates Mortgages, and as it reported moments ago, the 30 Year Fixed in the Zillow Mortgage Rate Monitor rose from 3.94% to 4.1% in the week ended today.

As we reported previously, the latest Wells 30Year Fixed refi rate is now 4.625%, with the overall complex about 100 bps higher from where it was just a few months ago. The move prompted none other than Frddie Mac to issue a warning about the future of the housing market.

Is that a big move? The answer, conveniently, comes from a just released note by housing expert Mark Hanson who explains why a “1% rate surge changes everything”

The Rate Surge Changes Housing Affordability Statistics

Redfin.com did a purchase market survey of 2400 ready-buyer users between Nov 7 and 11 – right when rates first started surging and were much lower than today – on how a 1% jump in interest rates would impact their purchase decision, if at all.

Note, today rates are 50 bps higher than when the survey was done and up greater than the 1% referred to in the questioning.

Bottom line: A 1% rate surge changes everything. Especially, considering the macro housing market – demand and prices – is controlled by the incremental buy or sell pressure.

  • 68% weigh rates heavily into their purchase decision; only 11% don’t care.
  • 72% of buyers would have to change strategy on a 1% rate-surge; 29% wouldn’t.
  • 46% OF BUYERS WOULD HAVE TO BUY A LESS EXPENSIVE HOUSE.

The metric I highlighted red is what I find the most important. It is exactly why I always assume most people buy as much as they can afford using contemporary mortgage rates and guidelines.

It’s important to remember, however, that a RATE-SURGE OVER A SHORT TIME-PERIOD actually creates a month or two of higher numbers followed by a sharper give-back period, which portends a much weaker than a year-ago Spring and Summer (when y2y comps haven’t been so steep since 2006).

PART 2) AFFORDABILITY LOST ON THE RATE SURGE (from my recent note on post rate-surge affordability).

Bottom line: The rate surge took away 11% of purchasing power, which will drag on house prices. It comes as houses cost the most ever to the end-user, shelter-buyer (see FOUR charts below).

ITEM A) MOST EXPENSIVE HOUSING EVER

BUILDER HOUSES

1) The average $361k builder house requires nearly $65k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $65k is needed.

For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper.

Bottom line: Reversion to the mean can occur through house price declines, credit easing, a mortgage rate plunge to the high 2%’s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.

The following chart compares Bubble 1.0 (2004 and 2006) to Bubble 2.0 on an apples-to-apples basis using the popular loan programs of each era.

Bottom line: Builder prices are up 19% from 2006 but the monthly payment is 43% greater and annual income needed to qualify for a mortgage 83% more.

RESALE HOUSES

2) The average $274k RESALE house requires nearly $53k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $53k is needed.

For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper.

Bottom line: Reversion to the mean can occur through house price declines, credit easing, a mortgage rate plunge to the high 2%’s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.

The following chart compares Bubble 1.0 (2004 and 2006) to Bubble 2.0 on an apples-to-apples basis using the popular loan programs of each era.

Bottom line: Resale prices are down 1% from 2006 but the monthly payment is 32% greater and annual income needed to qualify for a mortgage 68% more.

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