The magic number in 2018 was around 4.8%. In 2006, it was around 6%. But with today’s house prices? Here are the signs.
by Wolf Richter about Wolf Street.
The average weekly interest rate for 30-year fixed-rate mortgages with matching loan balances rose to 4.06% for the week ending February 18, the second consecutive week above 4% and the highest since July 2019, according to Mortgage. Bankers Association today. The average rate for FHA-backed 30-year fixed-rate mortgages rose to 4.09%.
So where is the magic number beyond which this highly inflated housing market begins to feel the pressure of high mortgage rates?
But mortgage rates are still ridiculously low, in the face of CPI inflation which jumped to 7.5% and is now always Fueled by the Federal Reserve’s continued interest rate suppression and quantitative easing – making it the most reckless Fed ever.
The “magic number” in 2018.
In the fall of 2018, as mortgage rates headed towards 5%, the housing market began to crash and stocks fell. The magic number at the time seemed to be around 4.8%, and when mortgage rates rose higher than in September, everything started to fall apart.
After the S&P 500 fell about 20% on Dec. 24, 2018, and with the housing market weakening, Fed Chairman Powell succumbed to Trump’s daily hammer and took the now infamous turn.
However, at that time, early 2019, inflation was less The Fed’s target, as measured by the core PCE yardstick, is 1.6%, which gave Powell a fig leaf.
Today, inflation is the worst in 40 years and soaring, and inflated “basic personal consumption expenditure” is 2.5 times The goal of the Federal Reserve. It’s inflation now that beats Powell on a daily basis – he made a fool of himself by calling this monster he unleashed ‘temporarily’ when everyone already knew he was going to take it to the next level.
So where is the magic number this time after which the housing market starts to feel the pressure?
Home loan applications to buy a home have fallen sharply for three consecutive weeks, coinciding with rising mortgage rates, and in the week ending February 18 hit their lowest levels for a brief period in August 2021. , then during the closing period, to enter at the bottom. From the range in 2019. The MBA Mortgage Application Index fell 28% from pandemic highs in January 2021 (data via Investing.com):
“The Magic Number” 2006.
Not shown in chart: Back at the peak of housing bubble 1, in January 2005, the MBA’s Buy-Mortgage Index reached 500 – double the current level – before crashing.
At the time, the Fed was in the midst of a rate hike cycle, raising the federal funds rate from 1.0% in June 2004 to 5.25% in July 2006, pushing the average fixed mortgage rate over 30 years at 6.4%. At that time, the housing market began to collapse very slowly.
The Nasdaq index began to fall in the summer of 2007, and gradually everything exploded globally, punctuated by the Lehman crash in September 2008.
High mortgage rates, when house prices are already high, are very difficult in housing markets. And higher interest rates are generally hard on stocks.
So where was the magic number at that time? Apparently, 6.4% for a 30-year fixed rate mortgage, at bubble 1 house prices, was above the magic number.
Mortgage applications are down.
Rising mortgage rates mean families are having difficulty refinancing their mortgages. This is happening despite the historic explosion in real estate prices which brings with it plenty of real estate equity that can be mined with a cash withdrawal benchmark.
The MBA Mortgage Refinance Demand Index has fallen to its lowest since June 2019 and is at 74% of epidemic highs – mortgage rates are just starting to rise and are still ridiculously low given that inflation in the CPI soared. At 7.5% (data via Investing.com):
The magic number now.
First-time home buyers, faced with high mortgage rates and rising prices, have already pulled out of this ridiculously inflated market by the Federal Reserve, as investors and cash buyers crowded into the market. .
In January, first-time buyers fell to just 27% of total home purchases, down from 30% in December and down from 34% for all of 2021, according to the National Association of Realtors.
Going forward, “some middle-income buyers who barely qualified for a mortgage when interest rates were low, will no longer be able to afford a mortgage,” NAR said.
With each increase in house prices and each increase in mortgage rates, more and more potential buyers disappear from the table. At first, no one noticed, but then the layers started to pile up, and at some point ordinary shoppers – like first-time buyers – started to falter. This is what we see now.
At first, cash buyers and investors may be able to make up the difference. This is what happened during the period of the “housing bubble 1”, which was partly driven by investors, who then became the heart of the mortgage crisis when they left several properties in that time.
Individual investors, or second home buyers, crowded the market and accounted for 22% of home purchases in January, down from 17% in December and 15% in January last year, according to NAR.
All cash purchases jumped to 27% of home purchases in January, from 23% in December and 19% in January 2021, according to an NAR report.
But in January, mortgage rates were still in the 3.5% to 3.7% range, well below the 4% line. Indeed, visible layers of first-time buyers are beginning to exit a market artificially inflated by the Fed’s reckless monetary policies, which are now faced with rising but still artificially low mortgage rates.
So the current magic number for the average 30-year fixed-rate mortgage appears to be a little north of 4%, the level at which layers of potential buyers, like first-time buyers, are disappearing from the market. It is already happening.
For now, like last time, enthusiastic investors are making a difference, but if we learn anything from the disaster of 15 years ago, that investor enthusiasm will also wane in these ridiculously inflated markets when interest rates interest will increase in the face of rising house prices. As is the case in America’s most luxurious real estate bubbles:
Do you like to read WOLF STREET and want to support it? Use ad blockers – I completely understand why – but do you want to support the site? You can donate. I really appreciate. Click on a mug of beer and iced tea to learn how:
Would you like to be notified by email when WOLF STREET publishes a new article? Register here.