How Clever! A House on a Cliff!
As of the writing of this article (weekend before the 4th), 30 year mortgage rates are now at roughly 4.4% on average nationwide - 4.39%, according to Bankrate. As recently as early last month, Bankrate showed average rates at 3.40% on a 30 year mortgage.
It's not that the current mortgage cost increase is unprecedented in modern history - it's just that it's uncommon to see mortgage rates change by a whole percentage point in roughly 2 months. A similar scenario actually happened back in 1994 - mortgage bonds declines by 2.3 percentage points in the first quarter. Bondholders lost a whopping trillion dollars in the 'massacre', as told best by Forbes.
Consequences of Tapers (and Tapirs)
As today's business press argues about the proper number of tapir jokes to make in articles discussing the Federal Reserve tapering, we here at DQYDJ decided to do some math (that's sort of our thing!). We've seen a few articles making the ridiculous argument that people will 'absorb the increase in cost'. I don't exactly know what that means - every increase in cost which doesn't come with an equivalent increase in salary has to come from some other category. That said, we have done the math in two ways - we grabbed the regional median average housing costs from the overall market, the Northeast, the South, the West and the Midwest. We then calculated what the change in cost would be monthly for a 20% down-payment 30 year mortgage. Finally, we calculated what the median price would be if people wanted the same payment they could get 2 months ago. The results? Not pretty:
| Region | Median Price | Equivalent Cost at Same Price | Difference in Monthly Mortgage Cost |
| Overall | $208,700.00 | $185,046.94 | $94.65 |
| Northeast | $269,600.00 | $239,043.54 | $122.27 |
| Midwest | $159,800.00 | $141,689.22 | $72.47 |
| South | $183,300.00 | $162,524.62 | $83.13 |
| West | $276,400.00 | $245,073.99 | $125.35 |
Regional prices from Realtor.org.
Oof, right? For the so-called (and non-existent) country-median house, in order to get the same payment you had back in the beginning of May you'd need to economize... you'd have to look at houses $23,653.06 cheaper. If you did buy a $208,700 house, you'd be paying $94.65 more a month (read: $34,074 overall) than you would had you bought the exact same house at the exact same price back in May.
Don't Worry, People Will Absorb the Increase!
Seriously, I don't get the absorption argument - a one percentage point increase is an absolutely massive increase in a very short time. If home prices continue to increase at their recent pace, it will be despite the changes in the bond market - not because of them.
I'm of the mind that increasing mortgages are a good thing - it's scary to be caught in a cycle where the Federal Reserve continues to purchase mortgage bonds indefinitely. Still... 1%? I expect to see the Fed hedge a bit, at least so people like me aren't able to infect the press with a snarky name like:
THE MORTGAGE CLIFF
(Please spread that name around, my ego appreciates it).
This Time It's Different
I know we recently did an expose on the Canadian housing market, but if you live in America, certain places here are getting pretty frothy as well. We last looked at the fundamentals of the Bay Area housing market way back in 2011... and found it "not that scary". Let's just say that I'm getting more apprehensive by the day (unless you think it makes sense that my house would appreciate at over 20% a year?).
Nationwide, we don't look as inflated as we did in 2006 - but please keep an eye out for euphoria. Apparently 7 years is beyond the memory of most people, and it'll only take a single shock - like, say, a 1 percentage point increase in mortgage costs - to begin another downturn.
Buyer beware!
