Mortgage Rates Are Now Over 7%, But It’s Complicated
Mortgage News Daily reports Yes, Mortgage Rates Are Now Over 7%, But It’s Complicated
For our purposes today, we’re mainly focused on the presence of points and, to a lesser extent, the variations between lenders. As always, any rate you see in a major rate index or survey will assume essentially no “hits” (no upward adjustments to the rate or the upfront costs due to the particulars of your scenario).
The same is true of our daily rate tracking, which is now over 7%. But it’s important to note that you may or may not actually see a rate quote of over 7%. To truly understand why, you’d need a basic understanding of how mortgage-backed securities (MBS) translate to mortgage rates (there’s a primer for that).
If you don’t click the primer, here’s an attempt to distill a tome into a paragraph: MBS are bonds comprised of multiple mortgages. They’re offered in 0.5% increments called coupons. Each coupon is like a bucket that can contain a certain range of mortgage rates with +1.125% being the upper limit.
In other words, an MBS coupon of 6.0 would be required for a mortgage rate of 7.125 (6.0 MBS coupon +1.125%). A 5.5 MBS coupon could not facilitate rates any higher than 6.625% (5.5 + 1.125).
The problem is that 6.0 MBS coupons only existed in the history books up until last week. Even then, it takes a tremendous amount of time and market stability for new coupons to be liquid (i.e. to have plenty of buyers and sellers, thus making the true price very apparent at any given moment).
That brings us to the bottom line on 7% not necessarily being 7%. Most rate quotes and most major rate indices include upfront “points” or other cost assumptions (and in larger amounts than normal). The presence of points means you could definitely still get 6.625% today. You’d just be paying more for it upfront.
In fact, for some lenders, that’s your best bet because you’d actually be paying MORE for a higher rate! Yes, this seems crazy, but again, rates are based on MBS prices, and if investors are paying more for a 6.625% mortgage than 7.125%, the former will be a better deal. This isn’t the case at every lender because different lenders “guess” at the moving target of those higher coupon MBS (the stuff that isn’t liquid yet, thus making true price discovery a guessing game).
The presence of points in mortgage rate quotes is problematic–especially in the last 6-9 months as the value of a point exploded from 0.25% in rate to 0.5-.75% in rate depending on the day and the lender. A rate quote of 6.625% with 1 point is conveyed as “6.625%” in headlines, but that extra point represents extra interest expense the same way a higher rate would. There are different ways to translate points to rate, but based on the average value of a point at the average lender, a “no point” rate would be over 7% today.
Highest in Over a Decade or Over Two Decades?
The last time I see mortgage rates over 7 percent was 2001. So that would be over two decades ago. But that 7 percent was Freddie Mac, and this 7% is Mortgage News Daily.
It’s not an apple-to-apples comparison because MND accurately factors in points to make rate comparisons between lenders comparable.
Making Sense of the Strong New Home Sales
Brief August Dip in Mortgage Rates
Earlier today I noted New Home Sales Jump an Astonishing 28 Percent in August.
The trend is still hugely negative, but why the bounce?
I discussed three reasons in GDPNow Forecast for 2022 Q3 Barely Positive Despite New Home Sales Surprise but just added a fourth after looking at mortgage rates.
- Existing home sales are far bigger and thus more important.
- August sales will start construction with a delay.
- For whatever reason, the numbers may not hove been a huge surprise to the model.
- At the beginning of August, mortgage rates dipped from over 6 percent to 5 percent. Rates did not stay near 5 percent for long, but perhaps thousands of people bought the dip.
Dip buying no doubt explains some of the bounce. Nonetheless it added nothing to GDP.
And I strongly suggest negative revisions, reasons why coming up.
This post originated at MishTalk.Com
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Economists don’t get it. The economy is being run in reverse. There have been 12 boom/busts in the housing cycle since WWII (including Covid-19’s)
Higher interest rates impound savings, inducing nonbank disintermediation.
CBs’ disintermediation is not predicated on interest rate ceilings.
Disintermediation for CBs can exist only in a situation in which there is both a massive loss of faith in the credit of the banks and an inability on the part of the Federal Reserve to prevent bank credit contraction as a consequence of currency withdrawals from the banking system. The last period of disintermediation for the CBs occurred during the Great Depression, which had its most force in March 1933. Ever since 1933 the Federal Reserve has had the capacity to take unified action, through its “open market power, to prevent any outflow of currency from the banking system by forcing the banks to contract credit.
I closed on a rental property in March of 2021 that rents for 1050. It was a 100k property and I put 25k down. My rate was 3.5% and my payment was exactly 490.That home today, in Sept 2022 would sell for 145k (very rapid appreciation here in NC) and all the houses just like it are selling for 145k. If I had to buy that home today I’d get an 8% interest rate, and have to put 36k down, 11k more than before. I’d also pay a monthly payment of 900 even, or 410 more than before. Rent did rise, but only around 100. I can rent that unit for 1150 now.
Monthly profit if purchased in 2021: 1050-490=560
Monthly profit if purchased in 2022: 1150-900=250
And that’s before the cost of maintenance. I do my own property management which is unusual. If a property manager was required you’d make nothing in 2022.Anyone who borrowed money to purchase a rental property will not be able to do so now profitably. Since most rental property is purchased that way, I believe there is a severe housing correction coming right up. I’m not selling anything because my loans are at the 3.5% rate and I don’t care about property prices, only rent profitability, and mine are extremely well cash-flowing.
One hurricane hitting Florida is perfectly normal. Large hurricanes have hit Florida for thousands of years. While climate change may be real, this is definitely NOT any evidence of it.
For those comparing rates from years ago, home price was low, now we’re at all-time highs and still climbing. Sales have pulled back and homes are sitting longer, with absorption rates coming back to normal. Unless home price changes, real estate will be dead for those of average means. If you live in upper-middle to wealthy communities, it will still be competitive, but most don’t. Average home price in our ground zero community is $860K in Massachusetts, so while not Malibu, it’s still out of reach for most.
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