Sep212015

Rising mortgage rates don’t care about homebuyers’ attitudes

Rising mortgage rates are a mechanical limitation that offers no respect to consumers’ attitudes one way or the other.

home-buyers-desert

Buyer psychology matters, but not as much as the math of mortgage financing. Whatever happens to mortgage rates, people will still shop for homes, and they will still want to buy. Higher mortgage rates will force them to borrow less irrespective of the borrower’s attitude. So while it may be interesting to note whether or not rising mortgage rates influence homebuyers’ attitudes, it’s completely irrelevant to how much they can borrow to buy a house.

If mortgage rates go from today’s 4% to 5%, it will require a huge increase in aggregate wages to compensate. For example, each $100,000 of borrowing costs $477.42 at 4% amortized over 30 years. At 5% mortgage rates, the payment rises to $536, a difference of $59 per month. While that doesn’t sound like much, it represents a 12.4% increase in borrowing costs. Convert that to a $600,000 Orange County mortgage, and the increase is $354 per month.thick_skull

Since house prices are at the limit of affordability and sales volumes are weakening, in order to increase sales and increase prices by 4%, we need an economy that produces aggregate wage growth of 16.4% to offset the 12.4% increase in borrowing cost. Isn’t this something homebuyers should be worried about?

Economists glibly make comments about the impact of rising mortgage rates without taking the time to reason through what would really happen. If any of them had done the math, they would be far less sanguine about the impact of rising mortgage rates.

[In the following video, Nela Richardson ignores the obvious math problems associated with high mortgage rates, then repeats the false “tight credit” meme. IMO, she isn’t very bright.]

Do homebuyers really care about rising rates?

Diana Olick, Thursday, 17 Sep 2015

Do homebuyers care about rising rates?

The short answer is: sort of. Potential homebuyers certainly care if the monthly payment goes up for the same house they were considering a month earlier. That concern, however, comes in third place after the ability to get a mortgage and the ability to find a home they like, according to a survey conducted this week by Harris Poll on behalf of Trulia.

The silliness of polls like this is glaringly obvious. Homebuyer attitudes don’t necessarily reflect what’s really important.confident_Ponzis

It’s like polling people about what parts are most important on their car. People might rank the motor as more important than the brakes, but when you think about it, if the motor doesn’t work, the car doesn’t move, but if the brakes don’t work, the car doesn’t stop. The latter is far more dangerous — and thereby far more important.

Forty-two percent said they expect mortgage rates to increase over the next six months, while 20 percent think rates will stay the same. Of their biggest worry, 26 percent named ability to qualify for a home loan compared with 24 percent who pointed to rising rates. Millennials, ages 18-34, are even more concerned about their access to credit than about their rate. Thirty-six percent of millennials polled said access was their primary concern versus 26 percent indicating rising rates.

If the Fed raises rates a quarter point, that does not directly correlate to a quarter-point increase in mortgage rates. The average rate on the 30-year fixed loosely follows the direction of the yield on the 10-year Treasury bond. If rates did move a quarter-point higher, they would still be lower than they were in 2013, when the Federal Reserve first announced it would start to “taper” its investment in mortgage-backed bonds.

Realistically, rising mortgage rates won’t cause pain until they reach 4.5%. At that point, the cost of money will start to hurt sales. When rates hit 5%, appreciation will grind to a halt, and sales will really suffer.

Nearly two-thirds of the consumers polled said the maximum price they would pay for their first or next home was $250,000. With 20 percent down, the rate increase could mean some buyers would qualify for less on a mortgage, but it would not turn those buyers away.

federal_reserve_economistThis is not clear thinking. If rates rise without significantly higher wages, marginal buyers get priced out. Some buyers may opt to substitute down in quality just to own, but many others will not. A certain percentage will be unable to afford anything in the market, causing sales to plummet.

Consumer confidence in both the overall economy and personal balance sheets are what drives buyers to make what is arguably the largest investment they will ever make A hike in interest rates is a signal that at least the Federal Reserve is gaining confidence in the economy.

“If the Federal Reserve decides to raise rates this year, it will be because they are confident that the economy will weather any short-term shocks. Over the longer term, the strong economic fundamentals, including robust job growth, better-paying jobs, rising wages, strong consumer demand, and demographic currents in favor of the housing market will boost demand for homes,” said Selma Hepp, Trulia’s chief economist.

While the federal reserve may be confident the economy as a whole can absorb higher rates, it’s not clear that the housing market can. In my opinion, the Housing market is NOT strong enough to handle higher mortgage rates.

What the housing market needs right now is less anxiety over potentially rising mortgage rates and more houses for sale.

Ignore the realtor spin. The angst of market participants about rising rates is well founded.

Prices fall but cost of ownership rises

Many people who want to buy a house hope for lower prices because they want to spend less on housing. Unfortunately, it’s far more likely that even while home prices drop, the cost of owning that house will continue to rise for financed buyers.American-Gothic-House-Underwater

If mortgage rates do rise to 5% and borrowing costs increase the commensurate 12.4%, house prices may drift lower, perhaps even 5% or more lower, but even if that were to occur, the cost of borrowing money to own that house will actually go up simply due to the rising cost of borrowing.

If you’re waiting for lower prices to lower your monthly cost of ownership, don’t hold your breath. The house you want, the must-sell inventory you’re waiting for, that’s being occupied by an underwater borrower surviving on a loan modification. Whatever happens to resale prices, you can count on the monthly cost of ownership going up, at least as long as the banks have any say in the matter.

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