The Fed has no good options left. It’s either tighten and risk systemic collapse, or ease and destroy the currency. Pick your poison.
Last week, U.S. mortgage interest rates rose to their highest levels since July 2007 during the Great Recession.
The average rate for a 30-year, fixed-rate loan climbed to 6.7 percent by Thursday last week, rising from 6.29 percent the week before, according to the Federal Home Loan Mortgage Corporation’s (Freddie Mac’s) survey of lenders.
It was the sixth consecutive week of rising rates, which now have more than doubled the level of about 3 percent where they began this year.
Rates have risen with the U.S. Federal Reserve’s key federal funds interest rate, which the central bank has hiked relentlessly since last spring in a so-far vain attempt to control inflation.
Usually, mortgage rates are more closely tied to the yield on the 10-year treasury note, which bounced wildly last week in the wake of the U.K.’s financial crisis.
The bond market’s gyrations account for a wider-than-usual disparity among rates offered by different lenders. Higher rates would deflate the housing market that was artificially pumped up by cheap mortgage rates.
Now buyers can’t afford to pay more as a result of higher mortgage rates and many owners who were planning to sell the home they own to buy another one are hesitating because of far higher rates.
Many potential buyers will continue renting, shut out of the home-buying market by the combination of rising interest rates and stubbornly high home prices.
By the end of August, sales of existing homes had fallen for seven consecutive months.
Applications to refinance existing mortgages have plunged 85 percent, year over year, according to the Mortgage Bankers Association (MBA).
The cratering market in refinancing will drag mortgage loans in general down by 48 percent compared to last year, the MBA predicted.
The market crashed first for modest-and middle-income households, as fewer were able to afford down payments or qualify for mortgages at higher interest rates.
The figures prove the point: the percentage of homes sold to first-time buyers has been steadily slipping in recent months. Historically, those buyers make up 40 percent of the market; by February of this year, they comprised just 29 percent.
Therefore, the higher interest rates rise, the deeper the housing market will decline.
Burdened by student debt and rising living costs, even more Americans will spend a greater proportion of their lives, or perhaps all of their lives, renting instead of realizing their dream of home ownership.
In the week ended September 30, demand for mortgages to purchase a home plunged by 13%, seasonally adjusted, from the already beaten-down levels in the prior week, according to the Mortgage Bankers Association today. Compared to the same week last year, purchase mortgage applications dropped by 37%. They fell through the lows during the lockdowns and hit the lowest level since October 2015! Purchase mortgage applications are an indication of housing demand over the next few weeks.
The weekly drop was in part caused by Hurricane Ian, and in part by the spike in mortgage rates into the 7% range:
Applications for mortgages to refinance an existing mortgage plunged by 18% compared to the prior week, seasonally adjusted, and by 86% from a year ago, to the lowest level since January 2000. No homeowners in their right minds are going to refinance an old 3% or 4% mortgage with a new 7% mortgage, except to extract emergency cash, which will cost them dearly, and they might be able to accomplish the same for a lot less with a HELOC. So the HELOC business, which has totally died down since the Financial Crisis, should perk up again.
The mortgage refi business is crucial for the mortgage lenders. The largest mortgage lenders in the US – Rocket Companies, which owns Quicken Loans, United Wholesale Mortgage, which owns United Shore Financial, and LoanDepot, all have cut staff by thousands of people each, and their stocks have crashed. The entire industry is trimming back to survive. Some mortgage lenders already filed for bankruptcy. Others have shut down.
Since mid-August, when the summer bear-market rally ended, the average 30-year fixed mortgage rate spiked by 171 basis points.
The average 15-year mortgage – if you can handle the payment at the current prices – spiked by 52 basis points from the prior week to 5.96% (green line), the highest since October 2008.
But wait: even these much higher-than-last-year mortgage rates are still far below the rate of inflation, with CPI inflation over 8%. But mortgage rates are catching up.
This chart shows the weekly 10-year Treasury yield (green) and the weekly 30-year fixed mortgage rate (red). Note how to what extent the mortgage rates have out-spiked the somewhat lethargic 10-year Treasury yield:
The chart below shows the spread (the difference) between the 10-year Treasury yield and the 30-year fixed mortgage rate.