Surging mortgage rates may scare sellers into action
realtors have many standard tools they use to manipulate buyers. Most of what they say is half-truth or outright bullshit designed to create a false urgency in buyers to facilitate sales commissions. One of the more common lines of faulty reasoning is that buyers should worry about being priced out when mortgage interest rates rise and they should buy before the situation gets any worse.
With the collapse of the housing bubble, most people realized that rising interest rates will not price them out. In fact, rising interest rates is far more likely to hurt sellers and force them to lower their prices to sell. Surprisingly enough, real estate prices do go down, and if everyone really is priced out, prices must fall — and they do.
The recent uptick in mortgage interest rates is being touted as a reason buyers should act. However, given the realities of the marketplace, it’s sellers who are actually more motivated than buyers to act.
With stock prices, after a big drop, many sellers are holding their shares waiting to get out at breakeven. As the prices nears their breakeven exit point, sellers become anxious to get out while the gettin’s good. Rarely does a real estate market have such an abundance of anxious sellers withholding their overhead supply, but this is one of those rare times. Many sellers can’t sell because prices haven’t reached their debt levels yet, but many who have discretion to sell are finding rising interest rates motivation to list and sell their homes.
By Leah Schnurr — Wed May 29, 2013 3:05pm EDT
(Reuters) – Worries the Federal Reserve may begin to slow its stimulus efforts sent U.S. mortgage rates last week to their highest level in a year, a surge that could be a headwind to the nascent housing recovery should they march much higher.
At the same time, the jump in rates appears to have spurred some prospective buyers to lock in cheaper prices while they can, according to data from the Mortgage Bankers Association released on Wednesday.
The MBA said interest rates on fixed 30-year mortgage rates surged 12 basis points to average 3.90 percent in the week ended May 24. It was the highest level since May of last year and the biggest jump in 14 months.
If mortgages were to get markedly more expensive from their recent record lows, that could price some buyers out of the market and put a dent in a housing comeback still in its early stages.
Rising interest rates will foil the banks plans to reflate the housing bubble. In my list of the The 10 biggest obstacles to reflating the housing bubble, rising interest rates are number 1. Lenders need to get peak prices to cover their bad loans. If buyers simply can’t afford these prices because interest rates rise, what is going to happen? There are only three options. Will all home sales cease? Will the federal reserve buy even more mortgage debt to lower rates again? Will banks be forced to sell and take big losses?
Analysts, however, said rates were unlikely to continue to rise at such a fast pace.
Rates also remain low by historical standards and homes look affordable with prices back at only 2003 levels. Combined with demand from potential homeowners who have been waiting for the housing market to stabilize before buying, the increase in rates could prompt shoppers to jump in over the short-term.
“People who were on the fence, they tend to get a sense of urgency as they see interest rates rise,” said Bob Walters, chief economist at Quicken Loans. Rates averaged between 5 and 6 percent over the last decade, Walters said.
This time around, those “people” may be sellers rather than buyers.
Indeed, the MBA’s gauge of loan requests for home purchases rose 2.6 percent last week, even as refinancing applications tumbled 12.3 percent. The overall index of mortgage application activity was down 8.8 percent.
Fed chairman Ben Bernanke said last week the Fed could scale back the pace of its bond purchases at one of the “next few meetings” if the economic recovery looked set to maintain forward momentum. Along with improving economic data, the comments sowed concerns among investors that the Fed’s ultra-loose policy could end sooner than expected.
The Fed is currently buying $85 billion a month in bonds and mortgage-backed securities as it seeks to keep borrowing rates low. Analysts said the Fed would likely be at pains to make sure any withdrawal of its bond buying program did not shock the market.
In my opinion, if mortgage rates hit 4%, the federal reserve will increase its buying to prevent rates from rising any higher. I don’t see where they have any other options. Letting rates rise to where prices fall doesn’t serve the banks who still need to restore collateral backing to their bad loans.
“Before the Fed actually does anything, we will get more signs, more warnings like this, so by the time something actually happens everything will be built into the market,” said Polyana da Costa, senior mortgage analyst at Bankrate.com.
Rates are unlikely to keep going up so quickly and should remain below 5 percent, da Costa said.
“I don’t think we have an economy that would support that and I think if it got to that point, the Fed will step in again,” she said.
5%? That would be a disaster. I think we will start to see sales weaken even at 4%. There is no way the federal reserve will allow rates to rise all the way to 5%. Affordability would crumble.
Bernanke also suggested last week the Fed could refrain from selling off some of the mortgage-backed securities it has acquired when the time comes to tighten monetary policy.
Rates had already been on the rise before Bernanke’s comments and have gained 31 basis points since the start of the month, according to MBA.
The low rates combined with a number of other factors have helped the recovery in the housing market gain traction over the past year. Prices have climbed, foreclosures have slowed, inventories have tightened and more homeowners are back above water on their loans.
Low rates and restricted supply are the only factors boosting the market. Owner occupant demand is in the doldrums, and investors are only active in select markets.
“While the move in rates could cause some near-term hiccups in housing demand, we do not think that it will change the broader story of increasing homebuyer activity,” said Michael Feroli, an economist at JPMorgan in New York.
While more expensive rates could squeeze out some buyers at the margin if they can no longer afford the home, those that have waited to refinance their current mortgage could have the most to lose, said Walters.
“They need to move,” he said.
Anyone who plans to refinance has real urgency, but then again, they are owners and potential sellers, not buyers.
Does four years squatting make up for $120,000 lost?
The former owners of today’s featured REO bought in 2004 with a substantial down payment. They refinanced in 2005 and extracted all but $120,000 of it. Apparently, they couldn’t afford the payments on an $850,000 mortgage, so they quit paying sometime in 2008. The bank “worked with them” for about four years. Actually, there is no evidence of any loan modifications, and it appears they simply squatted while the bank decided what to do. The balance on their $850,000 grew to $1,098,837 by the time the bank foreclosed. Based on the rental value of four years squatting, these owners probably got the rest of their down payment back in free housing.
[idx-listing mlsnumber=”PW13100447″ showpricehistory=”true”]
$999,900 …….. Asking Price
$970,000 ………. Purchase Price
8/11/2004 ………. Purchase Date
$29,900 ………. Gross Gain (Loss)
($79,992) ………… Commissions and Costs at 8%
($50,092) ………. Net Gain (Loss)
3.1% ………. Gross Percent Change
-5.2% ………. Net Percent Change
0.3% ………… Annual Appreciation
Cost of Home Ownership
$999,900 …….. Asking Price
$199,980 ………… 20% Down Conventional
4.40% …………. Mortgage Interest Rate
30 ……………… Number of Years
$799,920 …….. Mortgage
$196,668 ………. Income Requirement
$4,006 ………… Monthly Mortgage Payment
$867 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$208 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$5,081 ………. Monthly Cash Outlays
($1,073) ………. Tax Savings
($1,073) ………. Principal Amortization
$322 ………….. Opportunity Cost of Down Payment
$270 ………….. Maintenance and Replacement Reserves
$3,527 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$11,499 ………… Furnishing and Move-In Costs at 1% + $1,500
$11,499 ………… Closing Costs at 1% + $1,500
$7,999 ………… Interest Points at 1%
$199,980 ………… Down Payment
$230,977 ………. Total Cash Costs
$54,000 ………. Emergency Cash Reserves
$284,977 ………. Total Savings Needed