Remember when Scott Bessent was going to reduce financing costs for everyday, middle-income Americans like himself by cajoling longer-end US Treasury yields lower?
I do. I remember that. That was the narrative just a couple of months ago, and like all narratives which fail to pan out, you don’t hear a lot about it anymore.
As it turns out, the bond market actually isn’t a fan of the Trump administration’s “big beautiful” unfunded tax cuts, and terms like “rule of law” and “institutional integrity” have found their way into the rates discussion. (Who knew democratic norms mattered?)
Last week, the term premium rose above 90bps, nearly double the October 2023 wides. That’s the polar opposite of the contention implicit in Bessent’s narrative. The US is becoming a riskier credit and the bond market wants more compensation to assume that risk in long-tenor obligations.
The result: Higher financing costs for everyday, middle-income Americans. On Wednesday, the MBA said the average 30-year fixed rose a third week to the brink of a seven-handle.
Recall that the post-Moody’s bond market trade was a bear steepener which crescendoed in a 12bps long-end selloff last Wednesday. Legions of homeowner hopefuls, already struggling to make the math work, are feeling it.
“Mortgage rates reached their highest level since January, following higher Treasury yields,” MBA VP Joel Kan said Wednesday. “Additional market volatility has added to the increase, keeping the mortgage-Treasury spread wider than it was earlier this year.”
Got that? The combination of fiscal worries tied to the Trump administration’s tax bill and market volatility stemming from Trump’s erratic behavior, are together pushing up the cost of financing on homes at a time when monthly housing payments continue to hit record after record.
Overall application activity slipped as rates rose, although I should note the drop was entirely attributable to refis, which fell 7%. Purchase apps managed to tick up as higher inventories “support[ed] some transaction volume, despite the economic uncertainty,” as Kan put it.
Meanwhile, in their latest housing affordability and supply report, the NAR said households making $100,000 can afford just 37% of home listings, basically unchanged from early 2024.
As the figure shows, that metric’s down dramatically — and I do mean dramatically — from pre-pandemic levels, when American families making six figures could afford two-thirds of all listings.
Households making the median annual income can afford just one in five listings, the same report showed, down from 49% in 2019. That income cohort, the report gently noted, is “made up of teachers, nurses and skilled trades workers.”
I suppose this goes without saying, but a setup where the “typical” family can only afford 20% of the available housing isn’t sustainable. Not without some manner of societal unrest.
conditions will require un-natural gymnastics eventually – for example: a fast growing area in my state was provided additional state lands to expand (city grew too fast because its climate is nigh perfect – $ came fast) – but as a condition of that ‘state gift’ the city had to allocate ~10% of the developing land for affordable ‘worker houses’, i.e., teachers, fire fighters, nurses, etc … an unnatural act, but necessary. Gladly, the city and state and moxie to make it work … how often will that happen?
without those types of unnatural gymnastics, things could continue to go way wrong.
When I lived in Switzerland, it was not uncommon to meet people with 50- or 100-year mortgages.
Everyone knows amortizing over a longer period lowers the monthly payment and increases “affordability” or at least your ability to service a huge chunk of debt at high rates. It happened with car loans so why isn’t it happening with housing?