Unlucky Number 7: Mortgage Rates Jump After Fitch Move

Thanks Fitch!

US mortgage rates sport a seven-handle again, and you can thank, in part anyway, the agency’s asinine decision to cut America’s credit rating.

There’s a vociferous debate about whether Fitch’s move was the proximate cause of last week’s bond selloff. I’ve been over that and over it+. At the least, we can say the downgrade didn’t help, and one has to wonder if Fitch pulled the trigger based on the refinancing estimate. If there’s any truth to that suggestion, it’s unfortunate. To get the estimate and then pull the trigger the next day, on the eve of the refunding announcement, feels almost spiteful, not to mention irresponsible given illiquid August trading conditions in Treasurys.

Fast forward a few days, and the MBA said the 30-year fixed jumped 16bps to 7.09% in the week to August 4.

It’s the first time since November that rates have breached 7% on the MBA’s data.

Mortgage applications dropped a third week. MBA VP and chief economist Joel Kan cited Fitch and the refunding, only not in that order. “Treasury yields rose last week and mortgage rates followed suit, due to a combination of the Treasury’s funding announcement and the downgrading of the US government debt rating,” he said Wednesday.

Applications were down 27% YoY. Refis remain very challenged, and fell 37%. Notably, FHA loan rates also exceeded 7%, and were the highest in more than two decades.

I suppose you can blame fiscal “irresponsibility” in D.C. for all of this. After all, it’s not Fitch’s fault that the US government doesn’t have its fiscal house in order. Or at least that’s what Fitch would tell you.

What I’d tell you (again) is that although Fitch was absolutely correct to decry deteriorating governance in the US, rattling off a litany of debt and deficit statistics that any GOP congressional aide can recite from memory on the way to declaring America a worse credit than nations which depend on US security guarantees, was pointless. That’s particularly true given that investment mandates long ago shifted away+ from strict AAA requirements in an explicit attempt to strip agencies like Fitch of their capacity to elicit forced selling.

Frankly, Fitch and the rest shouldn’t even bother rating the US. What’s the point? If they downgraded the US to junk, investment mandates would just carve out an exception for Treasurys. Because without US bonds, notes and bills, the financial universe comes to a screeching halt overnight.

Coming quickly back to housing, the higher mortgage rates go, the longer the resale inventory shortage will last, the more onerous the affordability calculus will be for would-be homebuyers and so on. Late last week, Redfin said the typical mortgage payment was $2,605 during the four weeks ending July 30. That was up almost 20% YoY, and not too far from record highs.

Separately (but relatedly) Dana Anderson noted that first-time buyers now need to earn 13% more compared to last year to afford the typical US starter home. Wage growth is nowhere near that even in sectors where it’s still running hot.