Higher Mortgage Rates Are Not a Threat

Here's where 30-year fixed rate mortgages stand today, according to BanxQuote. Yes, they have moved up, but not by much, and they are still very close to all-time lows. They were a whole lot higher in 1999 and 2000 and the housing market was booming, as was the economy. Indeed, it is precisely when the housing market and the economy are booming that interest rates tend to be high. High interest rates are the result of a strong economy (and often a tight Fed); they don't drive the economy. Well, high rates do sometimes kill the economy, but usually that happens only after an extended period of Fed tightening, which makes money scarce—that's what kills the economy. Today that is simply not a problem.

If mortgage rates move higher it will be because there is a lot of demand for mortgages, which in turn will happen if the housing market recovers. Higher interest rates are not something to worry about right now. They are something to hope for, truth be told.

Comments

[Clive Corcoran:]

Cheerful news but based on questionable premises.

"If mortgage rates move higher it will be because there is a lot of demand for mortgages, which in turn will happen if the housing market recovers."

Rates are moving higher because of an overwhelming amount of supply and a relative lack of demand for long dated Treasuries and other MBS product. The factors driving T bond rates are far more dependent on decisions of global asset allocators and speculators than on the simple housing demand equation you allege.

Jun 05 05:22 AM

[Jasper M:]

I agree with Mr. Corcoran, here.
Interest rates are most certainly Not always the result of a strong economy. They can be the result of inflation. And they can be the result of widespread fears of DEFAULT.
Higher Variable mortgage rates will increase the size of shadow inventory, depressing values of even fixed rate mortgages, precisely when their home 'owners' are the mostly likely to have to sell.

I predict the author will see his "hoped for" high interest rates. I predict he will not be celebrating.

Jun 05 05:31 AM

[CautiousInv...:]

I would argue that the yield on the 10 year treasury is the principal driver of mortgage rates.

And the yield on the 10 year is being driven by a multitude of factors, including worries over uncontrolled Treasury borrowing, a falling currency, inflation fears, hedging and concerns over how responsive the Fed will be in unwinding its balance sheet.

It's not a typical reflation growth scenario and a signal that things are rosy.

Jun 05 06:25 AM

[Joanito:]

A difference of only a half point or so can add or subtract $100-150 or more to a monthly mortgage payment, which, for the average citizen, is a lot of money. As mortgage rates tick higher, the doors of the housing debt markets are slamming shut for the vast majority of would be borrowers. What should they do with their extra coin in a given month I wonder? If the average citizen is qualified for a conventional 30 yr fixed mortgage, should he or she go after one, thus ensuring that any and all extra income will go toward servicing said note for a house that, as far as anyone can tell, will be much cheaper in a year or two (credit card debt, savings, and employment insecurity be damned)? Sure banks make more money when rates are higher, if mortgages are in high demand, but the statistics I have seen since rates started their most recent climb show mortgage applications falling off a cliff within days of mortgage rates going on the increase. How would you consider a robust dropoff in the number of mortgage apps. as an increase in demand. I am guessing that this rate increae is tied to ludicrous increases in U.S. national debt issuance that the rest of the world is already choking on. The fed's nightmare scenario of the market pricing debt much more expensively than their precious stated target rates is beginning to unfold. They never were able to control interest rates really. This recent rise reflects the increased risk premium that shaky borrowers are forced to pay if they want to borrow, and that is all.

Jun 05 07:43 AM

[Living4Divi...:]

Nice article and nice chart -thank you for posting it.
" Indeed, it is precisely when the housing market and the economy are booming that interest rates tend to be high. High interest rates are the result of a strong economy (and often a tight Fed); they don't drive the economy. "

Actually it's the other way around. Housing booms when interest rates are dropping. According to your excellent chart, rates were dropping from 2000 to 2005ish. That coincides with the boom in housing. It's interest rates that lead housing, not the other way around.

I agree with the others, mortgage interest rates are driven by a multitude of factors: the national savings rate, worries about inflation/devaluation, demand for US bonds by foreign investors (mostly sovereign), the actions of the Federal Reserve, and the investing public's general appetite for bonds vs. stocks.

I used to be naive and think the Federal Reserve was the sole driver of mortgage interest rates. While they have the largest impact, they cannot, for long, overcome the market's powerful forces.

Jun 05 07:50 AM

[Vikram Saxena:]

The difference between the past and now is that most buyers do not want to use ARMs anymore. Even first time buyers want the safety of a fixed rate mortgage since the future appreciation of houses is still questionable. The current recovery in home purchases is being driven by first time home buyers who find homes affordable. Further the Fed wants to re-capitalize the balance sheets of US households by offering them low fixed rate refinancing options. I will be curious to see how many homes which went under contract last month actually close.

Jun 05 08:04 AM

[Bull Run:]

What drives the housing market? 1) Disposable income, which means jobs that are not of the min. wage category. 2) Housing affordability 3) Availabilty of affordable credit. If interest rates are Zero which they are today, it's NO sure bet that housing market will take-off, without someone in America employed. In the 1970's GM was America's largest employer and GM's average wage was, $17.50 / hr. today, America's largest employer is Wal Mart with an average wage in the $9/hr. Gm workers in the 70's could buy a home, support a family, but today's Wal-Mart workers cannot afford to "salt their porage".

Jun 05 10:12 AM

[Living4Divi...:]

I agree with your post Bull Run.


On Jun 05 10:12 AM Bull Run wrote:

> What drives the housing market? 1) Disposable income, which means
> jobs that are not of the min. wage category. 2) Housing affordability
> 3) Availabilty of affordable credit. If interest rates are Zero which
> they are today, it's NO sure bet that housing market will take-off,
> without someone in America employed. In the 1970's GM was America's
> largest employer and GM's average wage was, $17.50 / hr. today, America's
> largest employer is Wal Mart with an average wage in the $9/hr.
> Gm workers in the 70's could buy a home, support a family, but today's
> Wal-Mart workers cannot afford to "salt their porage".

Jun 05 10:52 AM

[doubleguns:]

Higher rates in a BOOMING economy might mean things are going great but higher rates in a crawling economy will be a death blow.

Jun 05 12:08 PM

[Jeff Nielson:]

As others have indicated, the conclusion of this propaganda/drivel defies not only common sense but also simple arithmetic.

Furthermore, with Reuters reporting that the "surge" in recent sales are primarily bottom-feeding speculators (see "U.S. housing-sector stability dependent on vultures" www.bullionbullscanada...), higher interest rates are a CRITICAL variable.

With the speculators being more debt-leveraged than any other class of U.S. home-buyer, the spike in interest rates today guarantees that the "buyers" of today will be the (new) "foreclosure victims" of tomorrow,

Wishful thinking will NOT alter reality.

Jun 05 12:29 PM

[Moon Kil Woong:]

Great comments all. I fully concur that higher rates today will be driven by inflation and or a loss of confidence in long term treasuries. I also like the comment that the Fed can't fight market forces forever.

The fact of the matter is, low rates have driven housing booms, higher rates just turn off the spigot. The fact that these low rates in historic terms aren't spurring a boom is very negative not positive.

Higer rates are a threat but not as big of a threat as inflation and dollar depreciation. That's why the Fed should be raising rates and shrinking it's balance sheet, not engaging in more quantitative easing. We can suffer a recession. We can't suffer stagflation.

Jun 05 01:09 PM

[tunaman4u2:]

A 1% mortgage increase in a 2 weeks span IS a threat

Jun 05 01:34 PM

[DONE_SONZ:]

It would be like a croc taking the US into a death roll.Hold your gold.

On Jun 05 12:08 PM doubleguns wrote:

> Higher rates in a BOOMING economy might mean things are going great
> but higher rates in a crawling economy will be a death blow.

Jun 05 04:26 PM

[nathanredondo:]

This article is a hypersimplification which overlooks some key facts that counter its optimistic assertion- higher mortgage rates are indeed a result of the return of demand for credit. The trouble is, since they are tied to the 10 yr treasury, the fed borrows money from bondholders AT THE EXPENSE of the mortgage market. Couple this with a weakening dollar shooting commodity prices (Oil at $70/bbl) through the stratosphere and we have a case study in how gov't intervention can turn a severe recession into outright depression.

All this cash that Obama is borrowing has to come from somewhere, and it will be the same pool as the mortgage market. This is going to kill whatever housing market we have left when interest rates on a 30y fixed go to 7%

Jun 05 05:38 PM

[FLBankster:]

It may have not been an issue back in 1999-2000 when banks we're doing no-doc 95% LTV deals like they were handing out fortune cookies, but it is now. Now you need somewhere between 20%-30% to buy/refi a house - FHA can't fill the gap on all of them. Just wait until all of those ALt-A/Option ARM resets happen over the next 24 months and we'll see how much yield increases will affect the market. If mortgage rates start ticking up even after all of the resets occur we'll see fresh lows and de-leveraging like never before. Stay tuned.

Jun 06 12:33 AM

[sethmcs:]

Higher rates lead to lower prices. Housing will not hit bottom until the median income can afford median priced house with interest rates at more historical norm 6-7%. People don't like to hear that their 160k house is worth 90K but its probably true.

Jun 06 12:30 PM

[Dirty Oil B...:]

So, will climbing rates continue to put pressure on new home builders? making them a better canidate for shorting?

Jun 07 02:38 AM

[Ditech Home...:]

Most Alt-a and option arm loans have high margins that can cause the rates to spike when reset. To avoid some refinance issues or defaults, the servicing lenders could offer a simple modification at a reasonable cost to lower the margin before the loans reset.

Jun 11 12:37 PM

[casualMBA:]

WHile Califa has an interesting, informative chart, hisgher interest rates ARE INDEED A THREAT. And they are not a result of a strong economy, but a choker of one, if they are indeed high enough.

Joanito makes an excellent in the comment that mortgage apps FELL OFF A CLIFF two weeks ago when the mortgage rates spiked...perhaps homeowners can console themselves that less new housing starts with shore up sagging existing homes values, but they are trading ANTICIPATED re-sale solace for for STAGNATING recovery...WHERE IS THE TOLERANCE IN THIS ECONOMY "...FOR INTEREST RATES AT MORE HISTORICAL NORM OF 6-7%"(sethmcs) ?... In the two week rise of a full percentage point in interest rates, mortgage apps fell off approximately 25%...That, Kind Califa, is a casual relationship...Anyone care to predict our seasonally adjusted housing starts this month? And next month (they've already been decided by builders across the nation)?

Jun 18 09:34 PM