“Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.
Buzz: Despite promises of a smooth increase in home financing costs from the Federal Reserve, we’ve recently witnessed one of the largest quick hits to a house shopper’s buying power in the past half-century.
Source: My trusty spreadsheet’s analyzed Freddie Mac’s weekly report on average 30-year mortgage rates going back a half-century. That history includes the double-digit rate insanity of the early 1980s.
The Trend
Remember how cheap mortgage rates were boosting home “affordability” in the pandemic era? That facade all-but ended at the start of 2022.
The average mortgage rate rose to 3.56% on Jan. 20 from 3.05% four weeks earlier. That’s a 0.51-percentage-point jump in a month. That’s also the highest rate since March 2020, just as the pandemic was icing the economy and central bankers began their housing market bailout.
That one-month rate increase curbed a house hunter’s buying power, meaning borrowers must concede to smaller loans, find spare cash to fill in the gap, or dig deeper into their household budgets for higher mortgage payments. Sellers and industry cheerleaders should also note this change.
Look at it this way: Imagine you can afford a $2,500 monthly mortgage payment. Just before Christmas, that check would have given you a $589,000 loan. By Jan. 20, that amount was down to $553,000.
That’s a 6.2% cut in buying power — the largest drop in five years. It requires a borrower to find an extra $36,000 … or the selling price must be adjusted!
My spreadsheet tells me this was the 25th-largest percentage drop in buying power since 1971, bigger than 99% of all four-week periods in the past half-century.
The Dissection
Between cutting key rates and acquiring $1 trillion in home loans, the Fed played a very active role in pushing mortgage rates to historic lows in the pandemic era. The Freddie Mac average hit 2.65% at the start of 2021.
Over the past year, the Fed assured financial markets (and anybody with assets tied to market gyrations) that plenty of warning would be provided before they acted to increase the rates they control.
Well, it seems that mortgage markets aren’t waiting for the Fed to act. Recently we’ve seen the biggest jump in the Consumer Price Index since the early 1980s. Too many people fear rising inflation will quickly push all interest rates higher,
And it’s not just one month of rising rates.
Using a long-term view over the past 52 weeks, mortgage rates are up 0.79 points from 2.77%. That means house hunters have 9.5% less to spend. Saying it’s the 343rd largest drop in a 12-month period in the past 51 years isn’t that impressive. But it’s still bigger than 87% of all year-long periods.
Another view
For all you young kids out there — or those with failing financial memories — let me remind you of early 1980 when the Fed began squashing the economy with soaring rates to cool another rough patch of inflation.
Let’s ponder the house hunter’s worst month in the last half-century, in terms of buyer power: In the four weeks ending March 21, 1980, buying power was cut 15% as the average mortgage rate went to 15.7% from 13.6%.
Worst year? The 12 months ending April 4 and April 11 of 1980 when rates surged to 16.4% from 10.5%, cutting buying power by 33%. No typos, I said 16.4% rates and one-third less money loaned!
How bubbly?
On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … FOUR BUBBLES!
Yes, roughly speaking, a half-point rate bump on a mortgage to 3.56% doesn’t sound so bad. And, yes, 3.56% on the historical scale is still a relative bargain.
Yet a large part of the upbeat arguments for 2022 homebuying was that inflation would moderate and mortgage rates would rise deliberately and modestly. And, remember, inflation is usually the byproduct of too much spending — an economic positive, in an odd way.
What we’ve gotten in early 2022, however, is a huge reminder that while the Fed is a financial powerhouse, it does not have absolute say in what interest rates do.
With mortgages rates, the mindset of bond traders is a big factor. If they don’t want mortgage-backed bonds — or can find better deals in other fixed-income niches — home-loan rates likely will rise.
Also, there’s how much a lender wants to make on a loan. If they’re focused on their mortgage-making volume, borrowers benefit from price competition. If profit margins are more the key, rate bargains can become scarce.
OK, so perhaps 2022’s start is just a hiccup, an overly anxious reaction by mortgage forces to bad cost-of-living news. But when was the last time the national inflation rate — 7% in December — was above mortgage rates? (And inflation has topped mortgage rates since April.)
Oh, yes, that same 1980 when Ronald Regan won the presidency, the “Empire Strikes Back” was the top movie, and the Rams lost a Super Bowl played in Los Angeles.
PS: California home prices rose 15% in 1980 and 9% the next year before falling 5% in 1982. But if you factor in that era’s sky-high, cost-of-living surges, 1980 was actually a 1.5% price gain as inflation ran 13.5%; homes fell 1.5% in value in 1981 after 10.5% inflation and fell another 11% in 1982 as inflation “dipped” to 6%.
UPDATED: Mortgage rates from Jan. 20 were used for a fresh look at these market moves.
Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com
