It wasn’t all that long ago that five-handle mortgage rates seemed like a real possibility again.
The local low in late-September was 6.13% on the MBA’s gauge and a little lower on Freddie Mac’s weekly Primary Mortgage Market Survey.
Somewhere around then, I was chatting with the collective of agents, hammer-swingers and number-crunchers you have to assemble if you want to build something, and the mood was… well, constructive, if you’ll pardon the accidental pun. “We’re in a falling rates environment.” I heard that, or some version of that, over and over again, and I didn’t push back. These weren’t mortgage brokers, and I anyway didn’t want to come across as the smug know-it-all I most assuredly am.
But I remember coming away from those planning sessions wondering how it was possible that people whose lives depend on the evolution of financing costs for all things to do with dwellings (building them, selling them and so on) hadn’t at least considered the possibility that those costs, like anything else that’s market-based, aren’t going to move in a straight line. And at the time, mortgage rates (and, as far as I could tell anyway, the rates on construction loans and probably the cost to builders of financing their projects) had gone down pretty much in a straight line since early May, and literally in a straight line since July 4.
Fast forward two months and guess what? Mortgage rates are knock, knock, knockin’ on seven’s door. Again.
The MBA’s index ticked four basis points higher this week, Wednesday’s update showed. It was the fourth straight weekly increase and the seventh in eight.
Rates are now 6.90% on that gauge, the highest since the week of July 10, which was the last time we saw 7%. (I guess I should say the week of July 10 was the last time a perfect borrower saw 7%. I don’t know what the distribution of owners to renters is among the readership here, but any of you who’ve never been through the song and dance are gently advised: You can’t take a screenshot of the Freddie Mac rate from FRED, print it out, slap it on the desk of your local loan officer and say, “I want that rate, let’s get this done.” That’s not how it works.)
Notably, the steady up-creep (if you will) isn’t dissuading buyers. Applications increased over the week, with both purchases and refi activity rising 2% or so.
The figure shows the divergence. Remember: Rates are still ~100bps off the highs, and those highs were 12 months ago. If you bought then with a conventional, you’re eligible to refi now, and although current rates are still high enough to give new buyers heartburn, they probably look “good” to you.
MBA VP Joel Kan noted that FHA applications rose 7% over the week. There are all kinds of reasons buyers opt for an FHA loan, not all of them “bad,” but generally speaking, an archetypal borrower without a lot of baggage and a decent median credit score will get a conventional.
Apropos of that — and a lot of other socioeconomic dynamics in America besides — Redfin’s Dana Anderson this week lamented that Americans earning under $50,000 a year are at pains to make their housing payments, and in some cases, that struggle’s leading to hunger pangs.
“Nearly three-quarters of US residents who earn less than $50,000 per year sometimes, regularly or greatly struggle to afford their regular mortgage or rent payments,” Anderson wrote, editorializing around the results of a Redfin-commissioned study. “Of those people, 24% report they have skipped meals to afford their monthly housing costs.”
(“Honey, I don’t want to stress you out, but are we going to eat today?” “Leave me alone goddammit, you know I don’t like to be bothered when I’m playing Call of Duty!” “I know, I’m sorry it’s just…” Sound of beer bottle breaking against a wall…)
I’m the Trustee of a modest trust, the main asset of which is a Residential REIT. Selling would result in up to an 80% marginal tax rate due to a long chain of 1031’s that were rolled into this. So I’m stuck crossing my fingers that it will not go belly up while the funds are still needed for elder care.
I’m in touch with the CFO and other officers frequently. I often ask questions related to their preparedness for higher interest rates. About half of their buildings will be refinanced in the next 4 years. They all are in complete denial that rates can go higher from here. I think it’s groupthink because the reason they give as to why they can’t go higher is because the government couldn’t afford the interest payments. When I remind them the Iraq War, the tax cuts a few years back, and many other things are simply being paid for with printed money they maintain those were one offs. They all supported the President-Elect and are very happy he won. I keep thinking getting what they wanted may cost them their company if interest rates spike right when they have peak refunding needs.
So at least with this one REIT, the suits there aren’t any more aware of the possibility interest rates can rise than the folks H was speaking to in the article. When I talked to them about the election last week, I thought of Michael Collins knowing he’d signed his death warrant and how completely unaware they were that getting what they wanted may result in bankruptcy.
I remember getting a 9.25% mortgage in 1985 thinking I hit the jackpot. I would have killed for a 7.
Yeah, there’s certainly an argument to be made — and I’ve made it repeatedly — that the prices are the problem, not the rates. I mean, government guaranteed or not, these are 30-year loans for hundreds of thousands of dollars to people, most of whom, let’s face it, have no business buying something that costs hundreds of thousands of dollars. That transaction shouldn’t come at no cost to the borrower. Some money can be free, and probably should be free. But all money can’t be free in every context. If all money’s free — if leverage is readily available at virtually no cost — then the whole setup ceases to work properly. That’s when you get froth and runaway price growth. The result of that is what we have now. Ideally, you have a balance where borrowers are paying a rate that accounts for the inherent riskiness of what it is they’re asking a lender to do, but they (the borrower) isn’t being asked to pay an absurd price for something people arguably have a “right” to in developed countries into which they pay taxes. Note from that quick exposition that this is pretty simple really. It’s amazing the lengths we go to to overcomplicate things.