Editore"s Note
Tilting at Windmills

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June 17, 2007
By: Kevin Drum

BUBBLE, BUBBLE...Interest rates are going up:

When potential home buyers call for mortgage rate quotes these days, "they're shocked; they almost don't believe you," said Jim Foley, senior vice president of George Mason Mortgage. "They're quick to get off the phone to make more calls."

The average rate on a 30-year, fixed-rate mortgage rose to 6.74 percent last week, up more than half a percentage point in four weeks, from 6.21 percent, according to mortgage financier Freddie Mac.

This really demonstrates what a bubble we've been living in. My first thought when I see a 30-year fixed rate of 6.74% is that it's an incredible bargain. Until about 2002, I hadn't seen a rate that low in my entire adult life.

But of course, compared to the past four or five years, it's pretty high. So high, in fact, that today's home buyers recoil in shock. What the bubble giveth, the bubble taketh away.

Kevin Drum 1:10 PM Permalink | Trackbacks | Comments (32)

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Comments

It's a mistake to buy a house with a home loan now. Wait a couple of years, then pick one up on foreclosure from some fool who over extended himself. It's no surprise that people who are buying new in this fashion aren't aware that 6.6% is good by historical standards.

Posted by: Lurker on June 17, 2007 at 1:23 PM | PERMALINK

They're in shock because they are being asked to pay 2002 interest rates on 2007 home prices. Of course this means you should offer 2002 prices to the seller, and pass the shock on.

Posted by: jussumbody on June 17, 2007 at 1:28 PM | PERMALINK

When I bought my first house, the rate was ~8% and that was good. That was back in '90-'91. To me, 6.74 is quite good but then I am not so stupid as to EVER consider an ARM or buying over what I can really afford.

Posted by: Praedor Atrebates on June 17, 2007 at 1:40 PM | PERMALINK

Oh, and I bought my first house as an FHA repo. There will be LOTS of repos available soon...lots of good deals.

Posted by: Praedor Atrebates on June 17, 2007 at 1:45 PM | PERMALINK

Our last home loan was 6.625% in the early 1990s, and this was cheap, We refinanced twice in two years as the rates went down.

If the cost of a mortgage goes up 10% and buyers are already stretched, then home prices must decrease by an equal proportion to attract buyers.

watch out below -- Im waiting another year for gravity to grab Wiley-Coyote finance. Check out maps of foreclosures and loans-in-trouble at

http://www.realtytrac.com/home.asp

Wiley Coyote, Super-Genius! I like the sound of that!

Posted by: troglodyte on June 17, 2007 at 1:52 PM | PERMALINK

I won't pay more than $200K for a house. My rent is about 1/3 of what a comparable mortgage would cost around here. I would have to live to 90 for buying to be a better deal than renting.

Posted by: MillionthMonkey on June 17, 2007 at 1:53 PM | PERMALINK

In the early 1980s mortgages were in the high teens and didn't go below 10 percent until sometime in the 1990's.

The 10year bond has been pretty turbulent of late, with bondholders no longer signing up for longer terms that aren't keeping up with the real underlying inflation rates. I believe that rates hit 5.25 a week or so ago, and the stock market did a one day tumble.

Borrowers being stunned by rates is the high 6 percent range is just another data point on mispricing of houses. One of the problems with the current markets is that the normal liquidity mechanisms (foreclosures etc) have not a lot of room to work. Buyers put nothing down on the houses and are probably underwater. That means the banks have to go to short sales. On top of all this, we are getting close to reaching the two year anniversary of the RE Market peak (8/2005), when the financing craziness was in full swing. There are probably a good 12-18 months of ARM reset disasters on the horizon.

Very ugly!

Posted by: RickG on June 17, 2007 at 1:56 PM | PERMALINK

Combine that with 18 months of political melt down and it should be a very interesting next year and a half.

Posted by: brodix on June 17, 2007 at 2:07 PM | PERMALINK

Anything under 8% is a bargain historically. If mortgage rates rise people will get locked into their homes and cannot sell them without losing the low fixed rate they currently enjoy. Increasing mortage rates traditionally meant increasing housing prices as fewer homes were available for sale.

Anyone looking to buy a home now has to take that into consideration. Whatever the mortgage rates and home prices are today they probably will be higher in the future.

Posted by: ken on June 17, 2007 at 2:17 PM | PERMALINK

Anything under 8% is a bargain historically. If mortgage rates rise people will get locked into their homes and cannot sell them without losing the low fixed rate they currently enjoy. Increasing mortage rates traditionally meant increasing housing prices as fewer homes were available for sale.

Anyone looking to buy a home now has to take that into consideration. Whatever the mortgage rates and home prices are today they probably will be higher in the future.

Posted by: ken on June 17, 2007 at 2:17 PM | PERMALINK

Let's face it; people don't take into account "historical" interest rates more than a couple of years back. And most of recent mortgage financing has focused not on how much interest one will pay over 30 years, or whether someone has an ARM or not. Most Joe Six-packs care about one thing: monthly payment. This is part of the reason why home prices have skyrocketed; a really low interest rate means a lower monthly payment. This gave "breathing room" for home prices to climb +10% per year the past few years.

The increase in interest rates we've seen over the last couple of weeks means a $100-200 increase in monthly payments. This will mean even more doom and gloom for one of the worst housing situations the US has experienced since the Great Depression. And as mentioned above, an ARM tsunami is looming just around the bend.

http://www.bubbleinfo.com/statistics-2007/2007/3/15/arm-reset-schedule.html

We already have record high foreclosures, record high inventory, and most markets are showing decreases in home prices. If interest rates continue to climb just as the ARM reset tsunami hits, things are gonna get UHG-LEE!

As the kids say, pass the popcorn.

Posted by: CKT on June 17, 2007 at 2:47 PM | PERMALINK

>"Combine that with 18 months of political melt down and it should be a very interesting next year and a half."

You are correct... just wait till the inflationary big-ba-boom (phrase borrowed from 5th element) hits this fall.

You're going to see increases in produce and basic commodities that basically mirror the curent run-ups in fuel. This ain't gonna be pretty.

Posted by: Buford on June 17, 2007 at 2:51 PM | PERMALINK

"Anything under 8% is a bargain historically. If mortgage rates rise people will get locked into their homes and cannot sell them without losing the low fixed rate they currently enjoy. ... Whatever the mortgage rates and home prices are today they probably will be higher in the future."

Maybe. But there are a lot of countervailing factors. For one, a lot of people are *not* locked in. People who bought in 2000-2003 and were able to afford their homes saw astronomical returns in many markets. They could sell for prices 15-25% below the highs of 2006 and still come away with a very healthy profit to apply toward the purchase of their next home. Others who bought more recently won't be able to keep making payments and will be losing their homes to foreclosure whether they like it or not. Still others who never bought are sitting on the sidelines and just can't buy homes at 8% on 2006 prices, period.

Where will the balance come out? I don't know, but inventories of homes on the market have been rising, and every bit of anecdotal evidence suggests that prices are flat or down as well. My guess is that the net weight of all factors will continue to pull home prices down for a while.

Posted by: TedL on June 17, 2007 at 2:55 PM | PERMALINK

Yeah, doesn't anyone remember 11% mortgages? Thought that happened when most of the baby boomers were young adults.

Posted by: doug r on June 17, 2007 at 3:05 PM | PERMALINK

"I hadn't seen a rate that low in my entire adult life."

But when you bought your home what was the price relative to your income?

Posted by: Linus on June 17, 2007 at 3:21 PM | PERMALINK

Anyone looking to buy a home now has to take that into consideration. Whatever the mortgage rates and home prices are today they probably will be higher in the future.

Um, Ken? Can you spot the basic economics logic that would have to be violated in order for both of those things to be higher in the future than they are right now?

Posted by: mrjauk on June 17, 2007 at 3:24 PM | PERMALINK

Kevin - just graphed this interest rate from 1971 to today over at Angrybear. Yes, mortgage rates were usually quite high before 2002, but I think you are forgetting about the latter part of 1998 when mortgage rates dipped to just over 6.7%.

Posted by: pgl on June 17, 2007 at 3:42 PM | PERMALINK

In 1983 I paid 20% down and my mortgage rate was 13%! I refinanced at 8% a few years later -- would have been about 1988, I think (and the refinancing was an unbelievable ordeal with very careful credit checks, insistence that we repair all kinds of small stuff around the house before the mortgage company would close the deal, etc.). A different world.

Posted by: jhill on June 17, 2007 at 4:31 PM | PERMALINK

My first loan on my home was at 7.375%, slightly larger than average because it was considered a "jumbo" loan. I refinanced a couple of years later at 6%. The rates had come down and what constituted a jumbo loan had gone up. I refinanced a year later at 5.375% and a year after that at 4.375% (a 15 year loan on that last refinance). I got lucky on that last one, hitting it at precisely the right time. Here in Seattle, the rates have never been lower, I believe.

My payments today are roughly the same as they were when I first bought the house, but I'll have it paid off in half the time. Two of the refinances were "no-cost" refinances. If I stay put another year or two, I'll have definitely made up all of the inconvenience and costs of the various refinancing. And if I stay here for the life of the loan, which is my current plan, I'll have saved something on the order of $250,000.

So yeah, I'm kind of "locked in" to my current mortgage and home. Fortunately, I like my job, home, and neighborhood.

Posted by: PaulB on June 17, 2007 at 4:57 PM | PERMALINK

Rates went from over 15% in the early Eighties to the low rates of twenty years later, and I predict they will go even higher over the next twenty years. Our subsidy by inexpensive foreign loans looks to end and W. Bush's high debt will have to be paid off with inflation.

Posted by: Brojo on June 17, 2007 at 5:29 PM | PERMALINK

Umm... does this quote really demonstrate anything? Maybe just that Jim Foley isn't that great of a mortgage salesman. It seems a bit of a leap to generalize the mortgage apetite of the entire nation from one guy's impression of his own business.

Posted by: luke on June 17, 2007 at 6:43 PM | PERMALINK

I'm closing on a home tomorrow; when I first worked with my mortgage broker he quoted me 5.875%; by the start of the following week when I was ready to lock the best he could do was 6.125%. The lender called him yesterday to try to claim we'd never locked the rate and would have to pay the current 6.6% or whatever. Fortunately my broker had the records to prove that we had in fact locked, but the lender tried reeeeally hard to weasel out of it. Almost like they're getting desperate about things...

Posted by: SMurph on June 17, 2007 at 7:42 PM | PERMALINK

Luke, you did read the rest of the excerpt, didn't you? this has nothing to do with jim foley; it's freddie mac, which knows quite a bit about mortgages, that is telling you that rates are up 50 basis points in 4 weeks.

the thing to keep our eye on is whether the recent selling by china of us government paper was just one of those things or an indicator of a shift of strategy by the central bank. if it's the latter, 10-year rates (and, therefore, mortgage rates) could jump quite a bit more.

and what a mess that would be. we are already at a point where household equity is at an historic low; if we have a combination of people trying to sell into a market that is both glutted and facing higher mortgage rates and a general crimp on economic activity resulting from higher long rates, that will not be fun....

Posted by: howard on June 17, 2007 at 8:34 PM | PERMALINK

I am glad to see we can agree on something Kevin 8).

Posted by: Rick Calvert on June 17, 2007 at 11:54 PM | PERMALINK

Yeah;
My parents keep telling me that when they bought their first home, they had to walk uphill, barefoot, in the snow, both ways, to the bank, to pay 29% on their loan.

And they liked it.

The thing about what Troglodyte says; the logic is sound, I won't argue with that - but we've been hearing bitter housing-market expatriates gloomily warn since 2001 that there was a housing bubble, and that it was going to collapse, and all those over-extended upper-middle class folks who stupidly bought when the market was high, were going to lose their houses, and THEN they were going to jump in and snatch up a foreclosure.

We've been hearing this talk for over 5 years. And it's only been the last 6 months or so that this self-fulfilling prophecy has shown any sign of coming true. Do we really believe that all these bitter renters are going to have the capital (and the willingness to bear high interest-rate loans) to jump in on all these bargains?

I'll tell you one thing - despite the dire changes in our local housing market, I also have several friends who run construction and contracting businesses, and they've never been busier. Business for the $7000 Granite Countertops is still trending upwards - and sharply.

Posted by: bungholio on June 18, 2007 at 12:10 AM | PERMALINK

This is great news!

It means that with every 0.10 the mortgage rates go up, that's 10K less of a house we can afford...

Therefore house prices need to start actually falling for purchasing power to catch up to what it was before the bubble started slowing down!

Posted by: Crissa on June 18, 2007 at 1:54 AM | PERMALINK

bungholio has a point about how the predictions of a housing bubble have been around for a few years, and the market is becoming bearish only now. Markets can remain irrational longer than most people can remain solvent, to quote JM Keynes. No one could predict exactly when the dot-com bust would arrive, and all stocks did not crash at the same time. Gradually enough people realized that Wiley Coyote had already chased the RoadRunner over the cliff and was pawing thin air. It still took over a year to fall (March 2000 - June 2001 -- at which time some of the telecom stocks rebounded a bit).

Cyber-bear websites argue that the yen-carry trade and price-insensitive purchases of Treasury Bonds and Mortgage-backed securities by Foreign Banks are keeping the US housing market afloat. Someone is buying all those neg-amortization loans. As credit tightens, things will get interesting. I would have guessed a significant decline by now, but I dont believe a true bust will accelerate before a major hedge fund gets burned on a leveraged MBS play and goes belly up. Watch the Bear-Stearns story unfold.

Posted by: troglodyte on June 18, 2007 at 6:18 AM | PERMALINK

Why are you looking at niminal rates? They're irrelevant.
It's real interest rates that are important. I dunno how old Kevin is but the current 3% real interest rates look very high as compared with, say, the minus (yes, minus) 4% in 1980.

Posted by: Tim Worstall on June 18, 2007 at 9:24 AM | PERMALINK

LOL! I bought my house in early 2001 and with points my loan was in the 6's. (6.375?) I don't remember exactly, because I refinanced since then, and currently sit at 5% fixed, but I got a good deal at the time and now people thnk that is a ripoff. These rates are still low by historical measures.

Posted by: Mr Furious on June 18, 2007 at 9:47 AM | PERMALINK

I got my 30-yr fixed (jumbo) home loan in 2003 for 5.125%.

Rate comparing, the new my-penis-is-bigger fight.

Posted by: anonymous on June 18, 2007 at 12:01 PM | PERMALINK

This might actually be seen as a good thing by the people who think higher interest payments are good because it allows them to have more deductions on their income taxes.

Posted by: Qwerty on June 18, 2007 at 1:33 PM | PERMALINK

I bought my first home at the bargain rate of 12%, bargain because we got 1% off from the going rate because my wife worked for the bank.

As jhill says, the refi was tough, with real inspectors and everything. I think it was because the local banks held the paper instead of selling it off to the Chinese.

Oh, and in the 5th Element I think it was the 'big ba-da boom," not the 'big baboom' quoted above.

So what will happen? I think somebody said it - inflation, but hey, if I can keep my job maybe I can get back to the 10+% raises I got a couple times. This current situation of "no raises, even Cost of living raises" is tough on the psyche. It makes one feel stuck in a rut. I mean I know that I am in a rut, but I don't want to feel that way.

Posted by: Tripp on June 18, 2007 at 2:04 PM | PERMALINK




 

 

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