Don’t Miss a Post. Subscribe now.

How High Will 30-Year Mortgage Rates Go in 2022?

May 3, 2022

•

1:07 pm

•

47 comments

•

Economics

Monthly average Freddie Mac mortgage rate and 10-year yield via St. Louis Fed, chart by Mish

Chart Notes

The mortgage rate is a monthly average of Freddie Mac data via the St. Louis Fed.
Freddie Mac rates tend to be on the low side vs Mortgage News Daily averages.
The average spread since 1972 is 1.71 percentage points.

May 3, 2022 Rates

30-Year Mortgage: 5.55%
10-Year Treasury Yield: 2.99%
Spread: 2.56 Percentage Points

Mortgage Rate Convexity

The spread may seem a bit high but the chart shows spreads often rise in recession and when treasury yields rise. Some of this is due to Convexity Hedging.

The rise in Treasury yields creates the need for investors who hold mortgage-backed securities (MBS) to reduce the risks on the loans they manage and limit the negative effects of slower loan prepayments when interest rates climb, a move known as “convexity hedging”.

When interest rates rise, homeowners do not typically re-finance their mortgages and that limits the flow of prepayments. When prepayments fall, the duration is extended on an MBS because the holder is getting less principal every month.

Front-Running Quantitative Tightening

I also strongly suspect hedge funds are front-running expected Fed Quantitative Tightening (QT).

How nasty that might get is uncertain. But if the Fed does aggressive balance sheet reduction, including mortgages, we are likely to see a sustained jump in mortgage rates even if the yield on 10-year notes levels off.

How High?

6.0% or higher seems easily within reach.

Any 45 basis points combination from a treasury yield rise, convexity hedging, or balance sheet reduction would do it.

Another full point from here, to 6.5% is also within reach.

If the Fed hikes to 3.25% as many expect (but I don’t) things could get even nastier.

Anything Else?

Yes.

Much depends on how fast the Fed can cause a recession, destroy demand, and crush the stock market and housing too.

S&P 500 Earnings Estimates for 2023 Rise, It Won’t Happen

If you think earnings and the stock market will rise with this going on, I’ve got news for you.

The S&P 500 Earnings Estimates for 2023 Won’t Happen.
In the first quarter of 2022 the GDP Declined 1.4% Sounding Recession Bells.
If You Think I’m Bearish Please Read John Hussman

I repeat my April 22, 2022 message Expect More Stock Market Pain Because It’s Coming

Feelin’ Lucky?

This post originated at MishTalk.Com.

Thanks for Tuning In!

Please Subscribe to MishTalk Email Alerts.

Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.

If you have subscribed and do not get email alerts, please check your spam folder.

Mish

Subscribe to MishTalk Email Alerts.

Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.

This post originated on MishTalk.Com

Thanks for Tuning In!

Mish

Comments to this post are now closed.

47 Comments

Newest

Oldest Most Voted

JeffD

4 years ago

Rates should hit 6.5% and stay there for the forseeable future.

MPO45

4 years ago

JOLTS report shows 11.5 million jobs open, highest on record. Perhaps wages will continue to go up….

Casual_Observer2020

4 years ago

Reply to MPO45

JOLTS report showed 2M job openings during the great recession. So we know it is off by at least that much. The source I use says there about 6M openings total which means JOLTS way way off.

https://blog.linkup.com/data-seekers/2022/04/22/monthly-jobs-recap-march-2022/

MPO45

4 years ago

Reply to Casual_Observer2020

Pick whatever number you want, we all know 10,000 boomers exit the workforce every day. the drip…drip…drip of productivity leaving the economy will turn into an ocean in a few years….

Dean_70

4 years ago

Mortgage rates are already high enough to cause a house crash. Anything higher than existing rates will just accelerate and intensify the pain. This fall prices will crash, they are already starting the downturn in many large cities.

Tony Bennett

4 years ago

Reply to Dean_70

Yes.

Housing initial reports are a month or more in arrear … and face revisions. Factor in most lock in rate 30 to 45 days prior to closing and data well dated.

Someone locking in a rate TODAY … with closing in June (early July) … initial housing report on NOW … July earliest.

Billy

4 years ago

The government has it’s ways to manipulate housing affordability. They also have ways to manipulate the stock market which effects retirements. One helps the brand new voters who have a lifetime of voting ahead. Another effects the baby boomers. They also have a way to manipulate how and who we blame it all on.

The 30 year was just at 2.5% and is heading to 6%.

So if you were looking to buy a $700,000 home a few months ago and you had 20% to put down, your payment(P&I) would be $2,020.77 based on 2.5%

If you waited until now, $2020.77 would get you a $445,000 home.

Zillow is still predicting home prices will go up over 10% this year.

So either loans become creative again, or the stock market comes back fast, or the rates come down from 5.5%, or Zillow is completely wrong.

QTPie

4 years ago

Reply to Billy

Folks are going to shift to ARMs in the hopes of being able to refinance in a few years.

Captain Ahab

4 years ago

Reply to QTPie

And therein lies the danger. Do not presume the Fed has control of anything except when and where it holds its meetings.

KidHorn

4 years ago

Reply to Billy

Or most home sales are paid with cash.

Mr. Purple

4 years ago

Reply to Billy

Billy is right … there are always more things in the universe than are dreamt of in housing-crash zealots’ philosophies.

Maximus_Minimus

4 years ago

Mortgage rates can never go to historic levels of 5%, even though then inflation was immeasurable and unemployment high.

That’s why the so called messaging goes in both directions, so they can never be wrong. Bunch of mendacious crooks.

Jmurr

4 years ago

Reply to Maximus_Minimus

It already has.

Maximus_Minimus

4 years ago

Reply to Jmurr

Of course, I meant interest rates, not mortgage rates.

Captain Ahab

4 years ago

Reply to Maximus_Minimus

You’re either serious or sarcastic. Look at Mish’ chart. From 1974 to 2010 (Fed effect) rates were consistently WELL ABOVE 5%. NEVER?

Maximus_Minimus

4 years ago

Reply to Captain Ahab

I sleepily typed mortgage rates instead of interest rates. Mortgage rates are some percentage above interest rate.

Casual_Observer2020

4 years ago

My answer to the 30 year mortgage rate is 7%. Can’t wait until the Republican House and Senate attempt to dissolve the Fed in a year or two (likely after Republican becomes President). You think now is chaotic but once monetary policy starts getting set by the whims of who is in office, then we go further down the path of not Japan but Russia or Venezuela.

Lisa_Hooker

4 years ago

Reply to Casual_Observer2020

Americans might get lucky and go down the path of Brunei.

RonJ

4 years ago

Reply to Casual_Observer2020

Is it true that the Biden Administration wants the digital currency under the control of the Treasury, instead of the FED?

KidHorn

4 years ago

Reply to Casual_Observer2020

Everything you write sounds like absurd democratic propaganda. The republicans are going to eliminate the FED? if they wanted to do so, they could have done so many times in the past.

Captain Ahab

4 years ago

Reply to Casual_Observer2020

And you know this how? i strongly suspect free capital markets will establish a market rate based on REAL economic factors.

Tony Bennett

4 years ago

Reply to Casual_Observer2020

“Can’t wait until the Republican House and Senate attempt to dissolve the Fed in a year or two (likely after Republican becomes President).”

…

I wouldn’t hold your breath. ZERO calls from anyone in Republican leadership to do away with Federal Reserve.

On the other hand -coming out of the Great Financial Crisis – Republican leadership made public calls to do wind down / spin off private GSEs and to repeal Affordable Care Act (obamacare). Between 2016 and 2018 elections Republicans controlled White House / Senate / House of Representatives. What happened?

Mr. Purple

4 years ago

Reply to Casual_Observer2020

Where are the 60 votes to dissolve the Fed going to come from. Congress is a neutered institution.

Esclaro

4 years ago

One thing that is not mentioned is in states like Texas with astronomical property taxes and homeowners insurance, rising property values are pricing people out of their houses. An annual property tax of $10,000 or $15,000 is not unusual. Texas is no longer a low tax state. At least if you are taxed on your income, you have the money to pay the tax. A lot of Texas homeowners don’t have this kind of money – a perfectly ordinary house that was valued at $150,000 a couple of years ago is now valued at $600,000. It’s insane!

TexasTim65

4 years ago

Reply to Esclaro

It’s not just Texas. Florida has the exact same issue and probably quite a few more states do as well because the home insurance part can’t be capped by a ‘prop 13’ style amendment like they have in California (and a similar one here in Florida).

Casual_Observer2020

4 years ago

Reply to Esclaro

If they were truly a low tax state they would limit property taxes to say a 2% increase. Like California. Texas does have breaks on property taxes for retired people and those that don’t have kids in the public school system. At least my parents town does. The rise in their property taxes is limited because of this.

TexasTim65

4 years ago

Reply to Casual_Observer2020

The problem with limiting taxes to 2% (or some other number) is that over the years you end up with 2 classes of people. The guy in house A who lived there for 20+ years and pays 5K and the guy next door in house B who just moved in and pays 10K. That’s blatantly unfair when both homes are worth the same. It gets even worse because the guy in house A has no reason to reign in politician spending either because he isn’t paying for it because his taxes are low and capped so out of control spending and taxing is never addressed like it would be if everyone paid the same amount for the same home value.

The real answer is that if home values double then property taxes need to halve to maintain the same amount of tax money per home. Unfortunately politicians love to spend money they have / don’t have so the never want to see lower taxes.

KidHorn

4 years ago

Reply to Esclaro

The average property tax in TX is about $4,200. Lower than where I live. And Texas has no income tax. Many states have far higher taxes than TX.

QTPie

4 years ago

Just wanted to note that one of the Fed members (don’t remember which one) has said recently that not only should the Fed reduce its holdings of MBS, but that it should consider getting out of of the business of purchasing and holding MBSs altogether.

The Fed’s actions have had a very large effect on the mortgage market. In a relatively short period of time, the volume of MBSs they own as a percentage of the entire MBS market became much higher compared to the percent of the total market that they own in treasury securities. As such, their continued involvement in the market has created major distortions which heavily contributed to the insane run-up in house prices in the past couple of years. The market is seeing their retreat from the mortgage market as a major event and is front-running them accordingly.

BTW, with refi’s having nearly dried out due to the increase in rates, the task of rolling off their MBS portfolio is going to be no simple task.

KidHorn

4 years ago

Reply to QTPie

I agree the FED needs to get out of the mortgage business. They got into it to bail out the banks when lehman and bear went under. Prior to that almost everything was treasuries.

They just have to not reinvest anything back into MBS. Might take 15 years for 90%+ to disappear.

Doug78

4 years ago

7.8%

thimk

4 years ago

I’m not in the camp that housing valuations will take a significant drop. There still exists meaningful demand to support a tepid downward spiral and long term supply constraints . Similarly to the new car market , plenty of demand , lack of supply and inflationary pressures everywhere . people want something tangible today .

jimmy Carter economics

Housing inventory FRED>>

https://fred.stlouisfed.org/series/ACTLISCOUUS

Tony Bennett

4 years ago

Reply to thimk

That is an interesting chart.

Only goes back 5 years.

You think a drop of 75% in listings in that time frame normal?

Leverage (unfavorably impacted by higher rates) + demographics (rapidly aging AND slowing) does not support continued low inventory.

Plenty of demand? Maybe, but credit worthy to purchase median home of $450K?

thimk

4 years ago

Reply to Tony Bennett

Good points ,

Mr. Purple

4 years ago

Reply to thimk

I agree with you Thimk.

Higher interest rates kill new home construction, constricting supply. Higher interest rates also cause homeowners to remain in place to keep their low-interest loans, constricting supply. Homeowners will also wait out a deceleration in price appreciation (or drop) if not forced to sell, constricting supply.

Also, the various state governments have the power to support and stimulate their housing markets through grants, loan assistance and subsidies.

There will be no crash in housing, but perhaps a lost few years of appreciation. Perhaps.

killben

4 years ago

“Much depends on how fast the Fed can cause a recession, destroy demand, and crush the stock market and housing too.”

“If the Fed hikes to 3.25% as many expect (but I don’t)”

Given that you do not expect the Fed hikes to 3.25%,when do you think recession is going to happen (or is it underway)

Mish

4 years ago

Reply to killben

It may be underway now

I said 3rd or 4th Q

dbannist

4 years ago

Here’s a handy place to see how much interest rates change the amount you pay per every 1000 you borrow on a 15 and a 30 year note.

https://www.hsh.com/mopaytable-print.html

For example, at 3% for a 30 year you’d pay $4.21 in a monthly payment for every $1000 you borrow. At 6% you’d pay $6.00 for every thousand you borrow, nearly a 50% increase.

On one of my rental houses a year ago I took out a 30 year note at 3.5% for 75k. Monthly payment is 350 or so. If I made that loan today it would be a 6% note and I’d pay $450 a month. That would remove $100.00 worth of incentive for me to buy this home due to the lower profit. I make 500 a month now but if I bought the home today I’d make 400 a month.

Interest rates rising as fast as they are are not stable and has moved the goal lines for a very large swath of potential homebuyers who must now sit on the sidelines. Realtors are of course pushing the hot market but it’s not going to be hot for very long.

Tony Bennett

4 years ago

“Much depends on how fast the Fed can cause a recession, destroy demand, and crush the stock market and housing too.”

…

Has anyone started a pool predicting when Cramer will be screaming to the tv camera that Powell doesn’t know what he’s doing and where the eff is the bailout (for the top 10%, naturally)??

I would guess Septemberish, but the everything bubble so massive I think something will “break” (likely offshore) sooner … I’ll sit this one out.

Mish

4 years ago

Reply to Tony Bennett

That’s funny because I thought about that yesterday and nearly Tweeted it

Tony Bennett

4 years ago

This is for March … a 100 bps or so ago on average 30 year mortgage …

“Homebuyer affordability declined in March, with the national median payment applied for by applicants rising 5.0 percent to $1,736 from $1,653 in February.

…

A typical borrower’s principal and interest payment was $387 more than in March 2021,” said Edward Seiler, MBA’s Associate Vice President, Housing Economics, and Executive Director, Research Institute for Housing America.”