The boom is over. And there are broad effects.
By Wolf Richter for WOLF STREET.
Soaring mortgage rates are multiplying the impact of skyrocketing home prices on mortgage payments, and have taken layer after layer of homebuyers out of the market over the past four months. And we can see that.
Mortgage applications to buy a home continued to fall this week, falling 17% year-on-year and hitting the lowest level since May 2020, according to today’s Mortgage Bankers Association Weekly Purchasing Index. The index is down over 30% from peak demand in late 2020 and early 2021, followed by historic price spikes over the past year.
“The decline in purchase applications was evident across all loan types,” states the MBA report. “Potential homebuyers have pulled back this spring as they continue to face limited home-selling opportunities and higher costs from rising mortgage rates and prices. The recent drop in home orders is indicative of potential weakness in home sales in the coming months.”
The culprit of the volume slump: The toxic mix of skyrocketing house prices and rising mortgage rates. The average interest rate on 30-year fixed-rate mortgages, down 20% and in line with Fannie Mae and Freddie Mac limits, rose to 5.37%, the highest since August 2009, according to the Mortgage Bankers Association weekly measurement today.
What this means for homebuyers, in dollars.
The mortgage on a house bought a year ago at a median price (according to the National Association of Realtors) of $326,300 and financed at a 20% discount over 30 years, at the then average interest rate of 3.17%, came in at a payment of 1,320 per Month.
The mortgage on a house bought today at the median price of $375,300 and financed with a 20% down payment, at 5.37%, comes in with a payment of $1,990.
Today’s buyer, already weakened in everything else by runaway inflation, would have to shell out an additional $670 a month — a 50% increase in mortgage payments — to buy the same home.
Now imagine that with homes in the pricier areas of the country, where the median price is $500,000 or $1 million or more after the ridiculous spikes of the last two years. Homebuyers in these markets are facing massively higher mortgage payments.
The combination of rising house prices and rising mortgage rates is causing layers and layers of buyers to exit the market. And we’re beginning to see that in the decline in mortgage applications.
The Fed caused this ridiculous housing bubble with its rate cuts, including massive purchases of mortgage-backed securities and Treasuries.
And the Fed is now trying to reverse some of that by raising long-term interest rates. It’s the Fed’s way of trying—too little, too late—to contain the housing bubble and the risks that the leveraged housing bubble poses to the financial system.
What it means for consumer spending.
When mortgage rates fall, homeowners tend to refinance their higher-interest mortgages with lower-interest mortgages to either lower their monthly payments or get cash out of their homes, or both.
The Refis wave, which began in early 2019 when the Fed did its infamous about-face and mortgage rates fell, turned into a tsunami from March 2020 as mortgage rates fell to record lows over the next few months. Homeowners lowered their monthly payments and spent the extra money the lower payments left them with. Other homeowners took cash out via cash out refis and spent that money on cars and boats and they paid off their credit cards to make room for future spending and that money was recycled in various ways and boosted the economy. And some of that has also been invested in stocks and cryptos.
This effect ended months ago. Meanwhile, mortgage refinance applications are down 70% year-on-year and 85% since March 2020. Refis no longer support consumer spending, stocks and cryptos.
What it means for the mortgage industry.
Mortgage lenders know they are in a highly cyclical business. With mortgage rates rising, demand for refis collapsing and demand for purchase mortgages falling, the mortgage industry has started laying off people.
Add Wells Fargo, one of the largest mortgage lenders in the US, to the growing list of mortgage lenders that have reportedly started firing late last year and so far this year, including the most notorious Softbank-backed mortgage “tech” Startup Better.com, but also PennyMac Financial Services, Movement Mortgage, Winnpointe Corp. and other.
Wells Fargo confirmed the layoffs last Friday and issued a statement blaming “cyclical changes in the broader home loan environment,” but didn’t say which locations of its sprawling mortgage empire it would cut mortgage lenders in and how many.
So the boom is over. And the Fed has only just started raising interest rates, way too little and way too late, but it’s finally trudging forward to deal with four decades of rampant inflation after 13 years of rampant money printing – inflation rolled into one On a scale the majority of Americans have never seen before.
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