Mortgage News Daily says mortgage rates officially top eight percent. Let’s crunch some mortgage payment numbers.
I have previously crunched housing affordability numbers before, but never at 8.0 percent.
Case-Shiller is based on repeat sales of the same home over time. It is the best way to look at prices but it does lag.
The Housing Bubble Is Expanding Again
For 12 years, home prices, rent, the overall CPI and hourly earnings all rose together. That changed in 2000 with another trendline touch in 2012.
After a brief dip the index shows home prices are rising again.
If we accept the latest index as being the best guess as to where prices are now, we can calculate how much homes are overpriced.
How Much Are Homes Overpriced?
If the 12-year trend of home prices rising with average hourly earnings stayed intact, the home price index would be 211, not 308.
Based on average hourly earnings, home prices are ((308-211) / 211) percent too high, roughly 46 percent too high. If you prefer, home prices would need to fall ((308-211) / 308), roughly 31 percent.
Alternatively, if home prices stagnate for years, wages may eventually catch up.
Mortgage Rates Top 8.0 Percent
Housing Affordability at 8.0% vs 3.0 Percent (Lead Chart)
Assuming 20 percent down, let’s calculate the monthly payments from the Mortgage News Daily Widget in January 2020 vs now.
The calculation assumes a person was able to refinance at 3.00 percent or less somewhere along the line. That was easily doable with rates dipping all the way down to 2.65 percent.
In January of 2020, the Case-Shiller home price index was 213. It’s 308 now. That means the exact same home priced at $400,000 then would now cost $400,000 * 308 / 213 = $578,404.
To compare monthly payments, we crunch monthly payments on a $400,000 home at 3.0 percent vs a $578,404 home at 8.0 percent.
With 20% down ($80,000) the mortgage then would have been $320,000. With 20% down now ($115,681) on a $578,404 home means a mortgage of $462,723.
This calculation also assumes a buyer can come up with the difference in down payments of $115,681 now vs $80,000 then.
Monthly Payment More Than Doubles
The MND calculation shows a mortgage payment of $1,602 in 2020 would now be $3,395.
Notably, this calculation is not based on median or average price which could realistically mean anything. Rather it’s on the exact same house!
Existing Home Sales Drop Another Two Percent to a 13-Year Low
Home sales were 6.34 million in January of 2022 at a seasonally-adjusted annualized rate. They are now 3.96 million.
That’s a 37.5 percent in less than two years. Rising mortgage rates explain why.
This is a transaction crash.
For discussion and many additional charts, please see Existing Home Sales Drop Another Two Percent to a 13-Year Low
CPI Fatally Flawed
The Consumer Price Index (CPI) ignores asset bubble inflation. Nonetheless, the Fed and other economists are slaves to such measures.
The Fed and economists in general don’t count home prices in their measures of inflation on the basis homes are a capital expense not a consumer expense.
This is like ignoring cancer in your arm because it’s not in your leg.
My point is “inflation matters, not just consumer inflation”.
How the Fed Destroyed the Housing Market and Created Inflation in Pictures
For discussion of this dual-track housing bubble with rising prices despite a transaction crash, please see How the Fed Destroyed the Housing Market and Created Inflation in Pictures
This is a global phenomenon, as monetary policies were coordinated by all central banks. Policies like these are supra-national and I’m convinced they’re part of an agenda. There’s no denying that what’s going on isn’t some kind of agenda.
And while it may vary somewhat from country to country, the societal impact of this is enormous.
Just speaking for myself and for the Irish situation here, it’s absolutely destroying happiness, trust, social cohesion and plans for the future.
If there’s any single cause for inequality at the moment, this would be number one.
Politicians that have dozens of properties and are landlords themselves, are in charge of regulating the housingmarket. Which they do by mass-immigration, selling entire blocks to investors and deliberately slowing down new construction.
In the past, this kind of behaviour would be struck down with pitchforks. Sadly, in these modern times, people bitch and moan on the internet.
And the European elites are doing everything in their power to create censorship law after censorship law. Because even they realize, the mainstream media are losing the informationwar.
But everywhere you look you’re witnessing societal breakdown.
Eventually, something will break and something will change.
” Policies like these are supra-national and I’m convinced they’re part of an agenda. There’s no denying that what’s going on isn’t some kind of agenda.”
When rate policy is regulated by bankers, banks will benefit.
Whether intentional or through bias.
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Housing is a valuable, limited, useful asset. Urban areas are becoming unlivable, so quite a bit of housing stock is becoming useless to productive people (particularly families). Suburban real estate values have exploded, and aren’t really coming down. I was just looking at Santa Cruz real estate, and it seems be up like ~70% since 2016.
I vote for the 31% drop in housing prices. This economy has got totally screwed up depending on low interest rates. The best bet is for 6-8% mortgage rates, 0-2% inflation, 5% interest on savings, and housing prices which somewhat match inflation. Then people can afford to save for a home because the price increase is less than the interest rate on savings.
wow. an optimist. i’ve lived in hoods that lost 70% and 1 in 3 losing their abodes. i suspect that is more what will be coming down the pike over the next decade. FFS the feds are broke. 2 trillion deficit, withouot the BS student loan credit. gonna spend trillions in mideast. again. this time defending real assholes, the zionists. if FEDs are bust, all the states will follow. tax the fuck out of everyone, bust up promises of pensions private and public…………and on and on. this stuff happens. not far fetched. read some history. look at argentina or greece etc. or USA in civil war or 30s………PS donald trump of queens won’t save ya.
Pensions?
A bird in the hand is worth two in the bush.
“I vote for the 31% drop in housing prices.”
Then increase supply of homes by alleviating labor shortages, NYC has a crisis with 100’s of thousands of immigrants, no idea what to do with them, hint, hint.
As for low rates, 40 years of job creating tax cuts that created jobs in China, Mexico, India, Taiwan, Indonesia…. and go figure, real wages fell while household income has doubled while government debt soared as a result of reduced revenues.
That debt now has compounded interest, it’s unsustainable and the middle/lower earners ~US~ can’t afford the tab.
I assume that’s you, by the way.
If rates go up now for too long, we can’t afford servicing.
It’s no coincidence government debt has tripled over that time either, they have the same problem, rates go up and, welp, they may have to consider raising taxes on, dare I say it – the donor class, the “job creators” who’ve done wonders for China’s economy.
Gotta love that “Trickle down”.
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It is a systemic change. Harvard and Columbia U support Hamas, but western gov
support Israel. After years of raids and invasions from Africa, Muslim states, the
southern border, Antifa and BLM ==> the western world enter a survival mode.
Harvard, China, Putin, the Arab world, Bklyn… vs Biden, Macron, Sunak, Scholz, Israel…strike back with T&T.
Gaza = Mariupol & Bakhmut, Fatahland in Lebanon, Palestinian neighborhoods
near Damascus and Jordan.
So in Minneapolis, the same (as in 2020 Summer of Love) Jacob Frey is mayor and Zach Metzger is running for city council and agitating big-time for the Palestinian cause.
Only makes sense in the fun-house mirror or … ?
Fiat currency fundamentally trends long term is at a 0% or below interest rate. Debt dictates this trajectory.
Is anyone on this board surprised at housing costs?
There is no way out. It’s too late.
GOOD POST MISH. great comments. we are only a few short years into inflation times. it will most likely last 20 years like the last spell of 1965 to 1984. and like last time, the taxes, utilities, insurance and less services like policing and garbage………will destroy real wealth of r/e for many. the scores of hoods across this land that were left to rot………will occur again. might not be detroit and camden this time, it might be some exurb or rural county or shiney new city in sun belt. nobody knows. but this has barely stared. and we are much weaker and less productive as a nation than 50 years ago, and doing dumber and dumber things from borders of ukraine to israel to mexico and on and on…………….pack a lunch, this ride will come in fits and starts and wreck millions……..for many years. anyone pitching good deflation is nuts.
TT, great comment.
thanks
Those who got 3%/4% mortgage rates will “never” move. They have a target on
their back, b/c they are so inelastic.
The rudderless congress may force JP to resume his raids in order to pay 5%
dividends to those who park in T-Bills, while insisting on debt reduction.
They can rent out the house with the 3% mortgage. Jamie Dimon isn’t delivering their mail to peep through the windows.
It sucks to be a young person trying to buy a home these days. But the cure for high prices is high prices. Just give it time.
At 8%, people will be trying to pay these homes off much faster, can’t think of a better investment than paying that mortgage off quick.
Mortgage rates didn’t really start taking off until end of 2021, so i would use Case Shiller home price in that range instead of January 2020. Let’s say 250, with the current 308. So a $400,000 house is now $492,000. So with that basis the new calculation shows mortgage payment of $1,602 in December 2021 would now be $2,891. Even if Case Shiller was still 250 the new mortgage, at 8%, would be $2,348.
While that home price surge coincided with Fed NIRP in 2020, you might also recall labor supply fell off a cliff at the same time, rates are back up yet prices aren’t reciprocal.
We have a labor supply problem, wages are climbing as a result, home prices are climbing as a result, higher rates aren’t doing much more than create a nuisance in service costs of households/government.
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Affordability coming
“…one funeral at a time.”
Max Planck
Age demographics – where is the “you are here” on the curve?
I’m excited about this, I’m going to pick a few up 🙂
Excess deaths are going to have a significant affect on our economy. MSM isn’t talking about this.
Good point LC
“Excess deaths are going to have a significant affect on our economy. MSM isn’t talking about this.”
It is only partially true to call it excess deaths, as Normal Deaths are baked into the cake also . The Baby Boom has a corresponding Funeral Boom starting 74 years after 1946. It was initially called Covid 19, but history will tell that it was the start of higher Total Death Trend due to many more people fulfilling their natural lifespan. The Excess Deaths will be the portion deaths caused by short sighted medical experimentation.
It’s like a snake digesting a basketball. Follow the movement of the bump. I’m part of the Baby Boomer bump that is moving thru the snake. Demographics are a huge deal in planning the economy.
“Demographics are a huge deal in planning the economy.”
Tell that to Congress, if you can get them to stop fighting over Trans rights, woke and what books we’re allowed to read, the really important issues.
They just assume the Fed can fix everything.
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The generations coming after the Boomers, the X and the Millennials, are much bigger so if you are hoping for a huge overhang of housing to cause prices to collapse you will be waiting in vain.
There are a lot of X and the Millenials that can’t afford to buy or rent so they’re moving back in with Mom and Dad which also affects our economy.
I would like to buy a house and have the cash to do so, but would like to see prices come down. It is discouraging to see house prices 50% higher than they were four years ago. If only we had free market capitalism in this country!
Dennis, housing is up because labor supply is low. this is why real estate is sticky, laborers are making near 6 figures in some areas.
Increase the labor pool, wages drop, home supplies increase, home prices drop.
Maybe hand out hammers at the Southern border in exchange for temp work visa’s.
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I rather like it that labor has bargaining power again. I like that some are making close to 6 figure incomes. That money rolls back into the economy and hopefully the demand will continue for their type of labor.
Doug, it’s unfortunate, but I can only upvote once.
I do too.
But with near 6 figure incomes they will be able to bid up prices for things they really want.
Around here it’s the “southern border” labor that’s been building the houses for years. Not just pandemic or post-pandemic, decades.
They don’t even bother with a “local” foreman anymore. Maybe a “local” site supervisor for a development or one that cruises around from house to house for custom builders.
It’s moved from the framers to the roofers to the electricians to the plumbers now. “Driving out costs” all the way. Not even mentioning the cheap materials.
ZIRP got us into this mess (mostly) and going back to ZIRP won’t help, not even temporarily IMHO. It’s going to be a long hard slog out of this swamp.
Look at new construction prices. Builders are willing to make deals to move inventory. We’re looking to retire next year and have leverage to pay cash for new construction. Also, some people that signed contracts to purchase new construction won’t close on them. They may no longer qualify for a mortgage with the higher rate or will back out because they won’t accept the high rate.
In related news, Bill Ackman just covered his treasury shorts.
I feel like such a wimp, covered mine over a year ago.
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A long time ago, when the human world was still a normal place, high interest rates would bring housing prices down…Will they this time ? Who t f still knows these days what tf will happen in a algorithms controlled environment !
Mish, you have an error in your top screen shot (the one that shows the 1600 vs 3400 payment).
You accidentally typed in 380K cost instead of 320K cost (which you talk about much further down). Looks like you subtracted 20K from the 400K house cost rather than 20% (80K). So in reality the monthly cost would be less than 1600 and the total interest paid lower than 196K.
With an FHA loan, you only need 3% down, so on a $420,000 median priced home, that would be $12,600.
Total amount financed would be about $410,000 to include closing costs. Average property tax in the U.S. is about $4000 and average homeowner insurance is $1800. Assuming no HOA fees, the total monthly mortgage payment would be $3491.
People can just get a 2nd, 3rd, or 4th job or better yet “upgrade their skill set” and the payment suddenly becomes affordable. What’s the problem?
I think most people are going to be moving to “hunker down city “ for the next few years.
Rising food prices, student loan repayments, car payments, job losses, increasing property taxes and insurance rates for homeowners, car insurance rates rising and utilities too. Don’t forget supporting two (2) wars.
The average American is kinda bummed out. I’ve told my friends and family, no gifts for Christmas. I will bake you something and spend time with you. Retail sales will be crashing if anyone is depending on me.
Been giving canned goods as gifts for years. They’re among the favorite gifts we ever share.
We blundered into a 15-yr refi rate (2021) under 2%. I’m sure our mortgage company now hates us. :]
They don’t care. They got their transactional fees and promptly sold the mortgage to Freddie or Fannie or an investment firm.
Very few mortgage holders hang on to mortgages these days. They pocket the fees, sell the paper and move on to the next loan.
Well, someone is now holding 1.9% paper on which we pay monthly, and that can’t be making them real happy.
Most likely pension funds and other bonds. It could very well be you yourself depending on where your money is invested or whether you are in a pension plan.
They are getting the cash flow that they can now reinvest in higher rates. I wouldn’t worry about them.
For now. Once the next recession arrives, cash flow will tank.
At that point, what matters is does Congress trot out rent & mortgage relief?
That’s all that matters. If they do, then housing will remain in a perpetual bubble until we have our Greece moment, whenever that might be (e.g., 5, 10 or maybe 15 years from now).
Nice, refi’d my 30 with 20 left to a 20 at 2.375% Nov 2021. I often think of my bank with loving ridicule.
Hey, my aunt’s house mortgage topped 22% when she bought in 1981. Of course, the purchase price was $35,000, a reasonable price for wages in those days…
I bought a three family house in Brooklyn NY in 1981 for 69k paid 30k cash and 39k private 10 year note at 12% Had to get creative
Housing is not crashing. Prices are still going up.
What is happening, like Mish said, is that transactions are crashing. Some do not believe this to be a problem.
It’s a huge problem for realtors, mortgage brokers, furniture stores, and anyone else who depends on these transactions occurring.
It’s also a huge problem for anyone who wants to move or needs to for health\work related issues.
It’s also a huge problem for anyone near retirement age who does not have a paid for house that wanted to relocate for their golden years, since they are chained to their current mortgage.
I have wondered, however, how hard it is to transfer a FHA mortgage to a new owner. I know at least some of them are transferable, but I personally do not know anyone who has done it, or know much about it myself. I suspect we’ll see more people doing this if it is indeed possible.
First, in order to ‘assume’ a mortgage, the buyer needs to be qualified for it. Let’s assume that’s a non issue.
What is the issue, let’s say the home is selling for $500K w/ a $300K assumable 3% mortgage, there’s $200K of equity the buyer has to pay the seller to close the deal.
That’s the issue, there’s NOT alot of buyers walking around with 100’s of $1000’s in a wheel barrel looking to buy. Not to mention, FHA is generally used for first time home buyers because of the low down or soft credit.
I agree with your post, let’s add some additional color. Housing makes up 16% of GDP, if we’re to put cold water on the housing market, that’ll directly impact GDP.
What happens when GDP shrinks? We still have mandatory spending, military, etc., what’ll happen is that it’ll indirectly get added to the national debt.
An assumable FHA mortgage could offset some of the trouble though. I’m immune to rates, since I have a paid for house with no loan. Let’s assume I do have a loan but have 200k equity. Couldn’t I sell my home and transfer that equity to the new owner in whatever location I move to?
While this would be a minor part of the housing issue, it could at least alleviate some of the frozen market for a subset of buyers I’d think.
I personally do not think many people are aware of this possibility, but higher rates will make it better known.
Housing transactions are definitely frozen at the moment. That will, as you said, definitely affect GDP going forward. Frankly, it’s the interest on the debt that should be scaring everyone right now. Higher interest rates take years to filter through the T-bill market as they reset relatively slowly, but as they reset, it will also take years to undo that, meaning the the national debt is going to quickly consume every political debate as it drains the funding for stuff in the USA.
We are screwed and higher inflation must stay. It’s the easiest way out even if it is terrible.
Yes, the Fed is defaulting on T-bonds by hyper inflating and debasing the dollar. The Fed lies. True inflation is ~25%.
Debasing the dollar also defaults on the value of transfer payment obligations of the welfare state. The value of EBT cards, unemployment, AFDC, welfare, section 8, and minimum wage is falling precipitously. The welfare class are not enjoying the lifestyle to which they had become accustomed. Net out is rising property crime in the cities.
Expect the Fed to debase the dollar until USA minimum wage for unskilled labor equals the world price for unskilled labor. The median household income in nations lacking rule of law; as for example San Francisco, Chicago, Portland, Detroit; is $4/day. USA minimum wage in those cities is near $100/day. The dollar must be debased until $100 purchases $4 before US unskilled labor is competitive. That much inflation conveniently expunges the national debt.
With your estimate of inflation at 25%, does that mean you believe your dollars today will be worth less than 25 cents in five years? Punch in 100 dollars and multiply by 0.75 five times. If you’re correct, that is, assuming your claim is an actual claim and not intentional hyperbole, what are you doing to protect your home equity from losing 75% in the next five years?
@Randocarlson
Hyper inflation is difficult to quantify. Around here the price of an egg has risen from ten cents to a fifty cents in three years. You can pay $1/egg if you please. Rent is up 50% in three years. Gasoline is up 100% in three years. Electricity is up 80% in three years. Part of the problem is a local referendum raising minimum wage to $15/hour. Another part is bankruptcy of the electric company for obeying the law prohibiting trimming forests to prevent forest fires. Green energy costs twice as much as fossil fuels. So I picked 25% inflation as medium ground.
I do expect inflation will continue at a horrific pace. Assets that have pricing power ultimately revalue in the debased currency. Common stocks of necessities should survive and maintain value. The market for conspicuous consumption could get thin. Mish is pointing out that incomes do not support the cost of homes. Homes may not have pricing power. I think farm land will hold real value in the debased currency. In the long term necessities retain value, but in the long term we are all dead.
And that much inflation totally ruins every retiree with a 401k trying to live out a retirement.
Most of that 16% is not housing sales and what part is, basically is new home sales (existing home sales do not add to GDP)
https://eyeonhousing.org/2023/01/housing-share-of-gdp-lower-in-the-fourth-quarter-of-2022/
Realtors will feel pain from fewer sales but GDP will barely notice unless new home sales crater (unlikely since builders are offering incentives to move inventory).
I do not think FHA mortgages are assumable any longer but I may be mistaken. I assumed an FHA mortgage in 1979. Interest rates were 13%. Mine was 6-5/8. BUT, I had to put down around 50% which was the seller’s equity. As a first time buyer, I was only able to do this because it was the absolute cheapest house, a fixer, and in a bad part of town. Fortunately, I was in good standing with the bank of Dad (thanks, Dad). The sales price was $62k. Zillow estimates that same house at over $1M today, some 44 years later. That’s what inflation did.
No — prices are not going up. Look again: Down YoY, and sales are in the toilet.
Go seed your bumper crop of BS elsewhere.
It’s interesting how you’re so stuck on ‘price inflation’ here on this post. Showing what such an impact the asset bubble has had on the housing market. With housing appreciating at extraordinary rates, yes, it’s an issue and needs to be contained with other economic factors (wages, employment, inflation, GDP, etc.)
Let’s roll back the interest rates from 8% to your 3%, let’s focus on what the Federal reserve has done to CRUSH demand vs. prices.
That same housing example w/ 3% interest is a pmt of $1951. Yes, it’s $350 more a month, but not nearly as dramatic.
so as I read I see that avg income is now $81,000
didn’t seem right but ok
went to potluck from church yesterday
talking to mechanic(21 and married)
said something to him about the avg income
he shook his head – yep
he’s coming to look at my house – great starter for him
at $305,000 it’s only $2,100 PITI with 20% down
8% interest is the only thing tempering house values right now. Cut rates to 3% and values will skyrocket. The situation is far too complex for any one solution. 100% financing for well-qualified 1st-time homebuyers, legislation favoring owner-occupiers over corporate ownership, and rising wages seem like a decent place to start.
The “solution” is complete economic collapse. The economy is an inferno and y’all aren’t even trying to piss on the highest flames, you acing like it’s 1994 up in this biotch.
The Fed, after creating this mess, just doesn’t get to “willy nilly” cut rates just because everyone doesn’t like the housing price bubble they created.
That doesn’t do ANYTHING to squash overall inflation. In fact, all it will do is create MORE housing inflation which would be VERY BAD.
What’s needed is a moderate recession. But, then the ONLY question that remains is this?
Will Congress trot out rent & mortgage relief if we actually find ourselves in the middle of a REAL recession.
That’s really the ONLY question that matters outside of how much bond buying the Fed will do?
what we need is a deep and painful recession and deflate massively bubbled asset prices back to prices 3, 5, 7 years ago but the FED and elected criminals will never allow any struggle or normal cycle to occur
I totally agree. I’m a HS math teacher, so my job is recession proof with my 15 years of experience.
And my main point is that it’s not the Fed who can’t dictate rent & mortgage relief policies. It’s the elected criminals that you speak of.
The UniParty is alive and well. The GOP had something like 3 or so times the earmarks vs the Dems in this last CR.
Oh, so as long as you’re unscathed — bring on the recession. “FU — I got mine”
You are the picture of everything that is wrong in America today.
“I’m a HS math teacher, so my job is recession proof with my 15 years of experience.”
Are you sure about that, chief? You think local governments are gonna be spared the brutal fallout of decades of profligate credit expansion?
Is your job depression-proof?
FU ed strong. everyone rode the criminal ZIRP train and asset pump thelast few years and you want NO CONSEQUENCES? Really? And I bet you are 100% silent on the millions pushed in to food and housing insecurity because of the massively bubbled asset prices, the wealth effect and the 40 year high inflation. Where is your concern for those folks the last 4 years? Those silent on that are EVERYTHING that is wrong in america. F your long positions and risky leverage