As mortgage rates surge to 7.7 percent, Goldman Sachs revises is 6.5 percent forecast. 
Mortgage Rates Easily Launched to New Long Term Highs by Upbeat Data
Mortgage News Daily reports Mortgage Rates Easily Launched to New Long Term Highs by Upbeat Data
Mortgage rates were already close to the highest levels in more than 20 years yesterday–an unpleasant milestone that was easily surpassed after today’s Job Openings data came in much higher than expected.
Interest rates are always dependent on the economy and inflation–sometimes more than others. Even without the Federal Reserve, rates would still need to pay attention to these things and stronger econ data would still imply higher rates, all other things being equal.
Job openings have been declining since March, and that’s a good thing for rates, technically, but the decline hasn’t been as quick as expected. Then days like to day cast doubt on the decline. Openings jumped to 9.61m from 8.92m previously. They’d need to be under 8m for the Fed to feel that its policies were having the desired impact on the labor market (and thus, on inflation prospects).
The average mortgage lender is now offering rates over 7.7% for top tier conventional 30yr fixed scenarios. Many borrowers are now seeing 8% rates (or seeing high upfront costs required to buy one’s rate down into the 7’s).
Goldman Changes Forecast from 6.5 Percent
Yahoo!Finance has this amusing report: Goldman Sachs calls an audible: Mortgage rates going up, after all, in 2023
In January, the firm’s housing economists predicted mortgage rates would land at 6.5% by the end of this year. Now? Well, never mind. Goldman Sachs believes rates will run higher.
“We are revising our forecasts for mortgage rates higher, to 7.1% for year-end 2023 and 6.8% for year-end 2024 from prior forecasts of 6.6% and 5.9%, respectively,” Roger Ashworth, managing director at Goldman Sachs, wrote in a note for the firm’s housing team.
Job Openings Rise in August, Quits and Layoffs Vary by Sector
Yesterday, I commented Job Openings Rise in August, Quits and Layoffs Vary by Sector
The number of job openings is very suspect for many reasons: Companies do not take down filled positions, survey responses are sporadic, companies are not really looking to hire but if the perfect candidate comes along they will, motivation reasons, and it costs northing to leave an opening in place.
There is no reason to have any faith in the number of job openings. However, the direction of the trends is likely accurate.
By direction, I meant lower. This data is very noisy and response rates are miserable.
“The response rate is all the way down 32% — traditionally it has been closer to 70% and was 50% pre-Covid.”
Sentiment Changed
Regardless why, sentiment towards bonds has changed. The desire to hold them is falling. That’s what’s happening, no more, no less.
And when the 10-year treasury yield rises, mortgage rates tend to rise as well.
Why the Selloff?
- Because market participants, right or wrong, believe the economic data is strong and that will force the Fed to hike more. The recession theory went out the window.
- Also, there are concerns over budget deficits. Such concerns don’t matter until they do.
We can guess why but here are a few more reasons for the change in sentiment. People can see the Inflation Reduction Act is not reducing inflation.
And the extreme polarization in Congress makes it perfectly clear “No one will do anything about anything because the political system is totally broken.”
It’s Not China Dumping
I’ve seen numerous Tweets placing the blame on China dumping treasuries. One of them got 100,000 views. It’s nonsense. China is not dumping treasuries.
For discussion and rebuttal of the China dumping theory, please see Bond Bulls are Getting Crushed in a Relentless Selloff, It’s Not China.
Stocks are on deck for a major repricing lower. Don’t blame the shorts when it happens.
Pre Fed, mortgage rates were 5-7%. In Manhattan, which was well understood. And with a massive immigration boom lifting every boat everywhere, reducing risks. Along with very low inflation, due to proper Gold convertibility. “No” debasement risk, huge population growth and very rapid industrialisation and growth.
Compared to now: Huge debasement risk (more like debasement guarantee..), tepid population growth, an economy in freefall if you remove unsustainable deficit spending and unbacked printing, along with huge, persistent inflation. Effectively no industry left anywhere. Certainly not anywhere near Manhattan…. No Jobs, No Hope; and only arbitrarily printed Cash, to paraphrase the comedian. I wouldn’t lock my Gold up for thirty years, for anything less that 15% in Gold returns, in this environment. And that is assuming realistic transaction prices. At today’s inflation-driven mania “prices”; I’d want 150%, in order to lock my Gold up for that long.
Point being: I’m not THAT weird. Noone else would lend real money, which they actually had to work for and which they could lose if they mislent, into this nonsense either, for 8% nominal. Not when effective inflation (~outstanding credit growth, in these days of de facto universal bailouts of all debt) is in the double digits “forever.” IOW: ALL is simply made up, five year planner, redistribution driven nonsense. There is no economics-anything underlying any of it. Just The King, Party and Central Bank decreeing something on a whim… Entirely arbitrary. And, being entirely arbitrary, The Fed and government can make it whatever they feel suits them and their closest buddies personally. With no checks, no balances, no constraints, no market. Just pure arbitrariness.
As interest rate doubles home price should head toward half. ?? That would wipe out all appreciation on my house but then again it’s just the same house now as then only older .
“…companies are not really looking to hire but if the perfect candidate comes along they will” – PROVIDING THE PAYCHECK IS SMALL ENOUGH.
It would be an interesting comparison of the actual construction cost of a 2023 home vs. a 1993 home. (adjusting for inflation). Also, land valuations make up a big portion of the total cost of a residence. My lot is assessed at $200K for a 10K sq.ft. lot. My 2500 sq.ft. physical house is estimated at $350K replacement cost in case of total catastrophe. The house would sell for $750K within 4 weeks in our area (Orlando).
Those numbers are nonsense. For starters, there simply isn’t enough skilled professional labor and the concomitant incomes to support those kinds of prices in Central Florida. The reality is that your lot is probably worth a tenth of that in a normal, healthy market. If you really believe you could sell for that, do it now.
Florida and the other sand states are always the most egregiously speculated in any real estate bubbles & they also overcorrect the most. As for Orlando, it will soon be back in the toilet where it belongs. Horrid little berg.
i’ve looked at towns which haven’t changed population and looked at cost of renting a 2 bedroom apartment in a 100 year old structure today versus 50 and 100 years ago, versus the lowest wage worker and middle wage worker. also there is an insightful study of how many calories a miniumum wage worker 100 and 50 years ago had to expend to purchase the rental apartment or house or calories of food for the table. bottom line, life is easier now. our minimum wage folks work in ac and heated fast food joints. a century ago the unskilled laborer was lumping construction or mining in back breaking long hours…………now if we only go back to the 70s for many folks life has gotten more expensive today. but of course the work life and amenities are much more bountiful. econimics is a very soft science. no hard and fast rules. but no doubt the financialisation of our empire since 70s has been profound. we are a crumbling weakened empire……….in so many ways. the greatest generation screwed the boomers. the boomers screwed the millenials. there is NO NOBLESSE OBLIGE IN PAX DUMBFUCKISTAN.
I found this very helpful website:
https://www.longtermtrends.net/home-price-median-annual-income-ratio/
That is what no one talks about and consciously ignores.
Homes from the 1970’s are 4 to 10 times the value now. Incomes for working class are basically the same as they were in the 1970’s, and now they have raised rates 400 percent relative to the last 20 years.
Plus you have 10 million illegals that walked in that will press working class wages down even further while they live 10 people to a one bedroom home and undercut everyone by 50 percent.
Also, inflation in necessary goods are only changes in business models where companies have gotten a taste of how much people will pay, done the math and maxed them out.
Same with diesel. Diesel is the cheapest fuel, but the most used. So they make less of it to sell it higher.
Now you have plug and play academics that are using historic data that is irrelevant to current events and models to make decisions like raising central bank lending rates which is unnecessary and only accelerates the problems by factors.
If you want to stop inflation you don’t raise rates, you stop printing trillions of dollars per year more than you take in.
Mish, is there a way to graph the cost of owning the typical home from 1950 to the present relative to income?
I see versions of “well, in 1980 I paid an 14% rate and I was fine” pretty much on every financial article discussing the 10 year rate, but there is scant information on the cost of owning a home relative to income, which is what really matters.
I’m firmly of the opinion that homes are more unaffordable today than at pretty much any time in the past, but I can’t graph it.
It’s probably all but impossible to do it in a meaningful manner.
For example homeowners insurance just started in 1950 and would have been wildly different than today. Same with property taxes and likely utilities (might not have paid for water, sewer etc) too. So all those costs won’t be comparable (even to 1980 they probably aren’t either) and those costs often make up a larger monthly cost than the mortgage (here in Florida my taxes and home insurance dwarf my mortgage payment and I don’t have flood insurance either)
Even if you just wanted to compare average monthly mortgage payments to average salary you’d still be missing the fact that home sizes have increased dramatically since 1950 and even since 1980 (3000 sq ft homes were unheard of in 1950 and rare in 1980 yet are common now). You’d have to instead compared payments per sq ft (ie a mortgage of say 1000 month on a 3000 sq ft home is 33 cents a sq ft and then do the same for 1950).
We can come reasonably close to the ballpark but I do not have property tax or insurance cost data.
Case-Shiller takes care of house sizes etc.
property tax is based on state
Florida, Texas, NY, NJ, IL, CA
huge VIG – some more than mortgage
our VIG in AZ is ~1%
True enough.
I did not know that home insurance started in the 50’s. That’s helpful to know.
If I was to buy a home today that I bought just 2.5 years ago, my mortgage would have more than doubled in price. 1100 now to 492 in 2021.
In my mind, that’s unprecedented. Something has to break when the most expensive bill a family has doubles in just 2 years.
Yes, I understand it’s largely mitigated by people just not swapping their 3 percent mortgage for an 8% one by not moving. What happens to the economy when people stop moving? Not good things for furniture makers for sure. What else? No one knows.
Not to worry, Daniel. It’s only just started. Wait until the effects of the strikes and wage hikes take effect.
I cannot go back that far. But I have done that type of post before.
I will do an update after I revise my Case-Shiller housing price charts.
I can go back to 1988.
I’m pretty sure I remember you doing a post on this, but with mortgage rates where they are, I personally would enjoy seeing the comparison with income of today to the income of yesteryears for home affordability.
I’m getting weary of all the “My first home was at a 12% mortgage and I was fine” post by people who aren’t making fair comparisions.
1990 or rather homes built after 1990 is probably a reasonable date to do meaningful comparisons.
I see above you mentioned Case-Shiller takes care of housing sizes but do they also adjust or have a way to adjust for what’s in the house itself? By that I mean my parents built their first home in the mid 60s the year I was born. That home didn’t have central AC or a dishwasher etc. Even the 2nd home we moved to in 1978 (built in 77) still didn’t have central AC or a dishwasher or many other features we all take for granted now in homes built after say 1990. Those things would make those homes cheaper to buy and maintain even if the quality of life wasn’t equivalent to todays standards (we slept in finished basements during heatwaves in the summer).
The typical AC costs 10% of the cost of building a home.
I do not believe Case-Shiller factors that in, nor the cost of new building codes and permits.
Houses today cannot be directly compared to houses of 1950, but I can’t think of any better way to do that than what Mish proposes.
Where did you make this number up from? Today, the average new house (2,300 SF) costs at most $300K to build, including land. A new HVAC system does NOT cost $30K. Using code minimum, the condensing unit costs about $1,800 and the furnace costs about $1,000. The duct materials adds another $1,000, so the total cost is in the low $4K range. Double that to say $9K at most and that’s a long way from $30K.
Ducts, at a minimum, cost around 5k to install.
Maybe ducts cost 1k to install in 1970 but this is 2023. I had a bid to replace my ducts, it was over 7k. No way can ducts be installed even new for 1k.
A new condenser unit for a 2500 sf home is around 5k, and that’s on the cheap end. When you include labor to install it, extra insulation to make that AC stay inside and all that goes with it (electrical anyone?) you are looking at around 30k for all of it, including insulation.
Yes, indeed, keeping our homes cool in summer and warm in winter does indeed cost the typical home 30k or more today in initial construction costs.
No, Case Shiller does not effectively evaluate the upgrade in finishes, which is one of my big complaints about their methodology. As you mentioned we have a lot more now, from A/C, heat pumps, high-end built-in appliances, spa tubs, stone countertops, double paned windows, and high efficiency insulation all of which would have been rare or non-existent. However, there are some minuses as well. We rarely see the same quality of hardwood floors that we saw 75 years ago, as the old growth forests don’t exist either. I also believe the last six months of Case Shiller is hiding another thing: Loan buydowns and sellers paying more closing costs. These are hiding some of the price decreases, which is another reason why for some markets prices appear to be going up slightly.
I know what you mean. My first place didn’t have a butler’s pantry or a scullery. Small kitchen.
Whatever. My first mortgage in 1977 was 8-3/4%.
Mine first home mortgage was at about the same rate. The home price was, however, 50k.
Yea and what did your home cost?
7.5% 1997 @ $100k.
took out 1st loan in ’94
have like 12 payments left
7.875% FHA ARM
walked it all way down to 2.62%
I’m paying it off in 3 more payments – in Jan goes to 4%
been great rental – lived in it for 1st 2 years
Just another sign that the pendulum of rates is just gaining momentum.
My fear is that we could see 20% within 8 years.