# More on That Rapidly Increasing Mortgage Rate…

How Clever! A House on a Cliff!

As of the writing of this article (weekend before the 4th), 30 year mortgage rates are now at roughly 4.4%  on average nationwide – 4.39%, according to Bankrate.  As recently as early last month, Bankrate showed average rates at 3.40% on a 30 year mortgage.

It’s not that the current mortgage cost increase is unprecedented in modern history – it’s just that it’s uncommon to see mortgage rates change by a whole percentage point in roughly 2 months.  A similar scenario actually happened back in 1994 – mortgage bonds declines by 2.3 percentage points in the first quarter.  Bondholders lost a whopping trillion dollars in the ‘massacre’, as told best by Forbes.

## Consequences of Tapers (and Tapirs)

As today’s business press argues about the proper number of tapir jokes to make in articles discussing the Federal Reserve tapering, we here at DQYDJ decided to do some math (that’s sort of our thing!).  We’ve seen a few articles making the ridiculous argument that people will ‘absorb the increase in cost’.  I don’t exactly know what that means – every increase in cost which doesn’t come with an equivalent increase in salary has to come from some other category.  That said, we have done the math in two ways – we grabbed the regional median average housing costs from the overall market, the Northeast, the South, the West and the Midwest.  We then calculated what the change in cost would be monthly for a 20% down-payment 30 year mortgage.  Finally, we calculated what the median price would be if people wanted the same payment they could get 2 months ago.  The results?  Not pretty:

 Region Median Price Equivalent Cost at Same Price Difference in Monthly Mortgage Cost Overall \$208,700.00 \$185,046.94 \$94.65 Northeast \$269,600.00 \$239,043.54 \$122.27 Midwest \$159,800.00 \$141,689.22 \$72.47 South \$183,300.00 \$162,524.62 \$83.13 West \$276,400.00 \$245,073.99 \$125.35

Regional prices from Realtor.org.

Oof, right?  For the so-called (and non-existent) country-median house, in order to get the same payment you had back in the beginning of May you’d need to economize… you’d have to look at houses \$23,653.06 cheaper.  If you did buy a \$208,700 house, you’d be paying \$94.65 more a month (read: \$34,074 overall) than you would had you bought the exact same house at the exact same price back in May.

## Don’t Worry, People Will Absorb the Increase!

Seriously, I don’t get the absorption argument – a one percentage point increase is an absolutely massive increase in a very short time.  If home prices continue to increase at their recent pace, it will be despite the changes in the bond market – not because of them.

I’m of the mind that increasing mortgages are a good thing – it’s scary to be caught in a cycle where the Federal Reserve continues to purchase mortgage bonds indefinitely.  Still… 1%?  I expect to see the Fed hedge a bit, at least so people like me aren’t able to infect the press with a snarky name like:

THE MORTGAGE CLIFF

## This Time It’s Different

I know we recently did an expose on the Canadian housing market, but if you live in America, certain places here are getting pretty frothy as well.  We last looked at the fundamentals of the Bay Area housing market way back in 2011… and found it “not that scary”.  Let’s just say that I’m getting more apprehensive by the day (unless you think it makes sense that my house would appreciate at over 20% a year?).

Nationwide, we don’t look as inflated as we did in 2006 – but please keep an eye out for euphoria.  Apparently 7 years is beyond the memory of most people, and it’ll only take a single shock – like, say, a 1 percentage point increase in mortgage costs – to begin another downturn.

1. Nice analysis – when you see the prices jump like that those small points make a big difference. Are you using the minimum downpayment in these calcs to highlight the variance?

• says

I would have used 3.5%/PMI, but the FHA has changed the formula a bit too much lately, haha. This is for 20% down, 30 year.

• JT says

They still allow for 3.5% down on a 4-plex. 😉 Sooooon….

• says

Haha, maybe I need to redo this for those FHA 4-plex buyers, eh?

2. Interesting thing is people seem to be seeking ARMs again (which aren’t inherently evil, just seem to cause issues with the uninformed)…which begs the question are we doomed to repeat history AGAIN.

• says

I’d say it’s pretty ironic that people who took out ARMs during the last bubble actually made out pretty well due to the historically low yields. Right now, just messing around with quotes (I had been planning on a re-fi, don’t know what I’ll do now… probably re-fi haha) you’re looking at 1.5 percentage point differences between a 30 year and an ARM – so for many ARMs, the most you’d ever be is 3.5 percentage points higher than today’s prevailing 30 year.

Decisions, decisions!

3. freeby50 says

When they say that people will absorb the cost I expect they just mean that people will come up with the monthly from somewhere, and generally that means cutting back on other less important categories in the budget or saving less.

I think we’ll see a mixed impact. Some people will settle for cheaper houses, some people will just pay the extra cost and cut spending elsewhere and others will just decide against buying altogether. Depends on where you are in the buying cycle too. I’m not entirely sure how much analysis the typical buyer puts into this kind of thing. I have a sense that a lot of people just go out shopping for whatever \$ value house their lender or realtor told them they can afford.

• says

Right – but I think it’s a pretty silly theory regardless.

Funnily enough, here in the Bay Area, sometimes my friends will buy a house and say “now I can’t eat out for two years”. Maybe the absorbing is really just switching to Ramen?

• freeby50 says

Yeah, actually “well have to eat out less” was the first thing that came to mind when I thought of some families cutting expenses to absorb the extra cost.

4. krantcents says

Funny how we feel the interest rates are rapidly increasing, but very little comment on how the interest rate was artificially low for so many years. If homes still increase in value and prices hold, people will absorb the increase. There will be less demand because affordability, but I believe price s will stabilize or fall because of higher interest.

• freeby50 says

Krant, “very little comment on how the interest rate was artificially low for so many years” What do you expect people to say? I thought that was a given that we all know that interest has been historically low.

You’d think logically that prices might drop due to higher interest but looking back at house prices vs interest rates I really see no direct correlation between the two.

• says

Remember this piece?

http://dqydj.net/mortgage_rates_vs_home_prices/

It’s there, but it weakened post-bubble. I would (to a degree) predict some effect from a 1+ percentage point move though. 12% salary increases for the same home price is no joke – there has to be some effect when the cost of something increases. The question is whether the market is so strong that it can continue to stay hot despite the rate (or the Fed continues QE Infinity, haha).

5. AvgJoeMoney says

Is there a way you can suggest that will make my house in Detroit appreciate by 20% for the next couple of years? It’d be great to unload it.

• says

Haha – maybe if you become mayor? Detroit is quite a serious case in the whole real estate aftermath – defaulting on some debt and mulling a bankruptcy. I’m watching closely.