Mortgage rates spiked up in the last two days, here’s an excerpt from Adam at MND:
Tensions remain high in the primary mortgage market as mortgage rates have extended their losing streak. We’re in a tough spot here…
The best conventional/FHA/VA 30 year fixed mortgage rates have risen into the 4.25% to 4.50% range for well-qualified borrowers. The best conventional/FHA/VA 15 year fixed mortgage rates have risen into a range between 3.500% and 3.875%.
This liquidation of long trading positions is a necessary evil in the recovery process. That cleansing process was once again evident today in the bond market and it might continue to play out over the next few days, but once it’s washed out, I think we’ll at least see 4.25% no cost loans on the board again. When that occurs we’ll revisit the notion of mortgage rates moving back below 4.00% again…until then we’re stuck in a waiting game…
What’s the difference? Here are the P&I payments for a 30-year mortgage:
| Rate | $500,000 | $697,500 |
| 4.0% | $2,387.08 | $3,329.97 |
| 4.5% | $2,533.43 | $3,534.13 |
| 5.0% | $2,684.11 | $3,744.33 |
Regardless of the situation, homebuyers always have the option to buy down their interest rate – and the seller can contribute too. But if you think that you can comfortably afford your mortgage payment at 4%, but the thought of 5% is unaffordable, you should re-evaluate your house-buying plans. Homeownership is expensive – there are repairs, improvements, utilities, furniture, etc. to consider, and if a couple of hundred dollars per month can make or break you, then proceed with extreme caution.
Will home prices come down if rates go up? Only with regards to the long-term trend. Sellers are already extremely resistant to lowering their price, and if you find the perfect house, don’t be surprised if the competition from other buyers erodes your ability to get a discount.
I will be buying in a year or two. While I wait/look, I put money into TBT- my plan is for this to hedge me against rising rates. If rates rise, TBT will go up (i.e offsetting any potential rate costs I may be faced with later next year)
Just throwin this out there as an FYI
This is critical: “But if you think that you can comfortably afford your mortgage payment at 4%, but the thought of 5% is unaffordable, you should re-evaluate your house-buying plans.”
I know the “common wisdom” has been to stretch yourself as far as you can go on the monthly payments, but that is asking the universe to kick you in the ass with some major failure like a $3000 pipe leak under the house.
What people have been doing for the past 15 years is maxing out what they can afford on a monthly basis and putting everything else on the credit card. Furniture, improvements, toys, ect. The whole thing was a set-up for debt overload.
Even if rates go up to 6 or 7% you are still getting a great deal.Rates are extremley low now as the fed tries to stabilize housing.
If rates go up, house prices are going up. History repeats itself.
What if you think about it based on income even though it seems like people that are buying have plenty of cash.
500,000 @ 4.0 = 2387 which = (2387/0.35)*12 = 81480 annual income or the more conservative (2387/0.28)* 12 = 102,300.
500,000 @ 5.0 = 2684 which = (2684/0.35)*12 = 92022 annual income or the move conservative (2684/0.28)*12 = 115028.
So an 1% bump in rates translates to a 12% increase in salary if you want to remain at the comfort of 28%-35% gross income. Anything more than that and you probably are looking at one disaster from bankruptcy assuming you don’t have a bunch of assets socked away.
The more I observe, the more I am convinced that housing market is more driven more by psychology/mood than “calculation” or facts. Often times, facts/calculation are used to justify the action having already taken. This rate thing is one of several possible factors to move the mood of mass.
livinincali…
Between 1970 and 1980, US house prices tripled. Quadrupled if you look at just California. During that same time period, 30-year mortgage rates went from 7% to around 16%.
When the housing bulls start running, they ain’t looking at affordability charts and spreadsheets.
“Between 1970 and 1980, US house prices tripled. Quadrupled if you look at just California. During that same time period, 30-year mortgage rates went from 7% to around 16%.”
Can you provide any data to that effect I don’t see it. I see a little over a doubling between 1970 and 1980 in nominal terms (i.e. $25K to $55K). They tripled by about 1987 and quadrupled by around 1990 but stayed there until 1997 or so at $100K before they launched in this latest bubble. This is national data from http://mysite.verizon.net/vzeqrguz/housingbubble/
As for wages the nominal wage for an average day of work in 1970 was 28.00 in 1980 it was 57.04, in 90 it was 81.00 and in 2000 it was 118. Today it is 152.
http://www.economicpopulist.org/content/wages-versus-gold-look-historical-data
So based on that information the nominal wage went up (57.04/28) = 103% while housing went up (55/25) = 120% from 1970-1980. Now the difference is 152/28 = 442% for wages and 175/25 = 600% for houses at a national level.
I guess my point was to soundly afford a home based on interest rates and tighter lending standards you either have to bring a big downpayment to the table or you’d need a pretty big increase in salary to afford a 1% increase in rates.
I guess you can be right because if somebody will loan them the money people will buy the absolute maximum they can borrow. Give us loose lending standards again and sentiment becomes important again. No loose lending standards and it becomes a matter of wages again.
psychology/mood
A lot to be said for that sentiment, I think in the past the ‘mood’ as more to do with instigating a purchase than anything. It is connected to the emotional aspect of homebuying – it’s not a purely logical decision.
My source is the ‘unadjusted’ housing prices at the bottom of this link:
http://www.census.gov/hhes/www/housing/census/historic/values.html
Buying a house is an emotional decision and not a pure logical one. In some ways it’s just like getting married!
i dont care what the mortgage interest rate is….it could 10% or 30%…DOESNT MATTER….because i have no intention of ever paying my mortgage payment….!
i’ll just live here for free for years(?..!) and then go ‘buy’..(hahaha ..love that word buy) another no down arm pick a pay plan house and squat in it for years….
GameAgent
Housing prices rose from 1970 – 1980 because demand outstripped supply (i.e. too many baby boomers for too few homes). The same age demographic is now retiring and there is excess supply in the marketplace, so I don’t think that is the right comparison to make. Home prices rise because demand outstrips supply, incomes rise, or people use more debt to finance a home.
Oh, and LM, be careful with TBT – it’s a levered ETF, so its not meant to be held long-term. The daily rebalancing feature is a huge problem in a volatile market, even if the market is broadly trending in the same direction you hope it will. You may not get the hedge you are looking for.
Realist
You are correct about TBT- you do have to understand how etfs work. But the next 6-8 months I think you could basically hold it and still do pretty well and thereby “hedge” yourself against a higher rate come summer.
cheers!
What’s surprising is interest rates on conventional loans have risen from 4.25% to 4.625% in the past few days. However, jumbo loan rates have not changed much and are at 4.875%. That means there is only a .25% premium for a jumbo loan, which are higher risk. Rates were at least 1% higher recently, and 2-3% higher at the height of the housing crisis. That would seem to be good news for the higher end homes to me, that banks are more willing to make jumbo loans at attractive rates.
FYI: rates are per Wells Fargo.
It’s not a couple of hundred dollars that make or break the deal..it’s the fact that the same homes 9 years ago were more than 50% less. That’s what’s truly outrageous.