Good news: Mortgage rates fell dramatically last week.
Amid a steep decline in US yields, the average 30-year rate dropped 40bps to 5.3%, according to Freddie Mac.
That counted as the largest one-week decrease since 2008 (figure below), although it’s likely small comfort to prospective buyers still staring at borrowing costs double those seen just six months ago.
When combined with the prior week’s smaller decline, the two-week decrease amounted to more than half a percentage point — “not nothin’,” as they say.
On Wednesday, the MBA said mortgage applications nevertheless fell WoW. “Rates are still significantly higher than they were a year ago, which is why applications for home purchases and refinances remain depressed,” Joel Kan, the MBA’s Associate Vice President of Economic and Industry Forecasting, said, adding that “purchase activity is hamstrung by ongoing affordability challenges and low inventory, and homeowners still have reduced incentive to apply for a refinance.”
Many market observers continue to suggest that constrained supply will keep prices buoyant irrespective of any drag on demand the Fed manages to engineer via sharply higher rates and allowing mortgage-backed securities to roll off their $9 trillion balance sheet.
This is an important debate. The pandemic housing boom crescendoed in Q1 of 2022, when the value of real estate rose by $1.7 trillion, offsetting more than half of the $3 trillion in value destruction households suffered on corporate equity holdings.
It was the sixth consecutive quarter during which home prices rose by at least $1 trillion (figure above).
Those gains are widely viewed as a contributor to America’s inflation problem, both directly and indirectly. Directly through the (lagged) effect on shelter inflation and indirectly by further incentivizing retirements among workers for whom the $40 trillion, six-quarter bonanza in stocks and housing represented a once-in-a-lifetime economic windfall.
Whether or not the Fed can cool the market is a hot topic. New research from Fed economists Elliot Anenberg and Daniel Ringo found that over the short-term, demand explains the vast majority of fluctuations in home prices. And rates go a long way towards explaining demand.
Specifically, demand accounted for 80% of price variation from 2002-2021 in the researchers’ preferred model. In the same paper, Anenberg and Ringo estimated that just a one percentage point increase in mortgage rates lowers housing demand by more than 10%. From record lows hit early last year to the local peak late last month, mortgage rates were more than three full percentage points higher, implying a ~32% drag on demand.
According to the latest monthly mortgage monitor from Black Knight, home affordability has virtually never been worse in the US. The report had plenty to say about constrained inventories, but whatever explanation you prefer for nosebleed prices, the bottom line is that homeownership is now a Herculean lift for average Americans.
“The average home price is now more than six times the median household income, the largest multiple on record since the early 1970s,” Black Knight said, adding that “as of mid-June, it takes 36.2% of the median household income to make the mortgage payment on the average-priced home purchase, well above the 34.1% post-1980s peak in July 2006.”