Will unexpected mortgage rates kill bunge buying? – Orange County Register

“See the bubbles“Dig into trends that could point to economic and/or housing market troubles ahead.

Buzz: Despite promises of smooth financing from the Federal Reserve, we’ve just seen one of the biggest impacts on homebuyer purchasing power in history.

The source: My trusted breakdown of Freddie Mac’s weekly report on average 30-year mortgage rates with a history spanning half a century.

Trend

Last week, mortgage rates rose to 3.45% from 3.22% – a jump of 0.23 percentage points in seven days. That’s the highest rate since March 2020, just as the pandemic was heating up the economy and central banks at the Fed began bailing out the housing market.

But let’s see what a gain of just a week has had on the purchasing power of home hunters: Picture you being able to afford a $2,500 monthly mortgage payment. Currently, you will be borrowing $560,214, down from $576,619 seven days earlier.

That was a decrease of 2.85% in purchasing power – the 23rd largest percentage decline since 1971, greater than 99% for all periods. That means homebuyers will either borrow less or dig deeper into their household budgets to pay for their home. And sellers, take note of this change.

Dissection

The Fed assures financial markets and anyone whose life is tied to market volatility that there will be plenty of warning before they act to raise the interest rates they control. Between key rate cuts – and $1 trillion home loan purchases – the Fed has an active role in pushing mortgages to historic lows in the pandemic era

Well, it seems at least the mortgage markets aren’t waiting for the Fed to act out of fear that rising inflation will push all interest rates higher,

It’s not just a week. In three weeks, this sharp rise in mortgage rates sent mortgage rates up 0.4 percentage points from 2.95%. That reduced purchasing power by 4.9% – the 35th biggest drop since 1971, or more than 99% of all three-week maturities.

And let’s take a long look. Over the past year, the rate increased 0.66 points from 2.79%. That means house hunters have 8% less money to spend – the 451st biggest drop over a 12-month period over the past half-century, or 83% bigger over all time periods. five.

Another view

For all of you kids out there – or those with failed financial memories – let me remind you of the early 1980s when the Fed started squeezing the economy with skyrocketing rates to bring down the economy. heat another round of brutal inflation.

Reflections on home hunter’s worst week in 50 years, on buyer power: In the seven days ended March 14, 1980, purchasing power fell 8.6% as average mortgage rates from 14% down 15.4%.

Worst year? The years ended on April 4 and April 11, 1980 when the rate rose to 16.35% from 10.48% – a 33.5% cut in purchasing power.

How is it bubbling?

On a scale of 0 bubbles (here no bubbles) to five bubbles (five alarms alert)… FOUR FOUR Wings!

Well, roughly speaking, a 1/4 point spread on a mortgage up to 3% and a half doesn’t sound too bad. And, yes, on a historical scale, 3.45% is still a relative bargaining rate.

A key part of the arguments for a good 2022 for home ownership is that inflation will be moderate and mortgage rates will rise intentionally and modestly. And, remember, inflation is often a by-product of overspending — an economic positive, in an odd way.

The big lesson is that although the Fed is a powerhouse in the financial markets, it doesn’t have absolute power over interest rates.

With mortgage rates, the mindset of bond traders is an important factor. If they don’t want mortgage-backed bonds, interest rates are likely to go up.

Also, how many lenders want to make for a loan. If they focus on lending volume, borrowers will benefit from price competition. If margins are key, bargains can become scarce.

Maybe the past three weeks have been just a malfunction and over-anxiety reaction of the mortgage lender to bad news about the cost of living. But when was the last time the national inflation rate – 7% in December – was higher than mortgage rates? (And inflation has topped mortgage rates since April.)

Oh, yes, it was 1980. California home prices, by the way, increased 15% that year and 9% the following year, before falling 5% in 1982.

Jonathan Lansner is a business columnist for the Southern California News Group. He can be contacted at jlansner@scng.com