The boom is over. And there are wider effects.
By Wolf Richter for WOLF STREET.
Soaring mortgage rates are multiplying the effects of soaring house prices on mortgage payments, and they’ve 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 fell again this week and were down 17% from a year ago, hitting the lowest level since May 2020, according to the Mortgage Weekly Purchase Index. Bankers Association today. The index is down more than 30% from the peak in demand at the end of 2020 and the beginning of 2021, which was then followed by the historic price peaks of last year.
“The decline in purchase requests was evident across all loan types,” the MBA report mentioned. “Potential buyers have retreated this spring as they continue to face limited options of homes for sale as well as higher costs due to rising mortgage rates and prices. The recent decline in purchase requests is an indication of potential weakness in home sales in the months ahead.
The culprit behind plummeting volumes: the toxic mix of exploding home prices and soaring mortgage rates. The average interest rate on 30-year fixed-rate mortgages with a 20% cut and in line with Fannie Mae and Freddie Mac limits, jumped to 5.37%, the highest since August 2009, according to the measure Mortgage Bankers Association Weekly Today.
What this means for homebuyers, in dollars.
The mortgage on a home bought a year ago at the median price (per National Association of Realtors) of $326,300, and financed with 20% down payment over 30 years, at the average rate at the time of 3.17 %, came with a payment of 1,320 per month.
The mortgage on a home purchased today at the median price of $375,300, and financed with a 20% down payment, at 5.37%, comes with a down payment of $1,990.
So today’s buyer, already exhausted by runaway inflation in everything else, would need to find an extra $670 a month – representing a 50% increase in mortgage payments – to purchase the same home.
Now imagine that with homes in the most expensive parts of the country where the median price, after ridiculous spikes in the past two years, is $500,000 or $1 million or more. Homebuyers face massively higher mortgage payments in these markets.
The combination of soaring home prices and soaring mortgage rates is causing layers upon layers of buyers to leave the market. And we’re starting to see that in the decline in mortgage applications.
The Fed caused this ridiculous housing bubble with its crackdown on interest rates, including massive purchases of mortgage-backed securities and Treasury securities.
And the Fed is now trying to undo some of that by pushing up long-term interest rates. This is the Fed’s way – too little, too late – of trying to stem the housing bubble and the risks that the heavily leveraged housing bubble poses to the financial system.
What this means for consumer spending.
When mortgage rates drop, homeowners tend to refinance their higher-rate mortgages with lower-rate mortgages, either to lower their monthly payment, to get money out of the house, or both.
The wave of refis that began in early 2019, when the Fed made its infamous U-turn and mortgage rates fell, became a tsunami from March 2020, as mortgage rates plunged to lows. record over the next few months. Homeowners lowered their monthly payments and spent the extra money the lower payments left them. Other owners extracted money via cash back 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 stimulated the economy. And some was also invested in stocks and cryptos.
This effect ended months ago. Currently, mortgage refinance applications are down 70% from a year ago and 85% from March 2020. Refis no longer supports consumer spending, stocks and cryptos.
What this means for the mortgage industry.
Mortgage bankers know they are in a highly cyclical business. Faced with rising mortgage rates, collapsing demand for refis and falling demand for purchase mortgages, the mortgage industry began to lay off.
Add Wells Fargo, one of the largest mortgage lenders in the United States, to the growing list of mortgage lenders that reportedly began layoffs late last year and so far this year, including Better.com , the notoriously Softbank-backed mortgage “tech” startup, but also PennyMac Financial Services, Movement Mortgage, Winnpointe Corp., and others.
Wells Fargo confirmed the layoffs last Friday and a statement blamed “cyclical changes in the broader mortgage lending environment” but did not disclose where in its vast mortgage empire it would cut mortgage bankers, and how much.
So this boom is over. And the Fed has only just begun to raise interest rates, far too little and far too late, but it is finally plodding along to deal with this runaway four-decade inflation, after 13 years of rampant money printing – a inflation on a scale that most Americans have never experienced before.
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