What this means for future home sales and consumer spending

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The boom is over. And there are wider effects.

by Wolf Richter for wolf street.

Rising mortgage rates are compounding the effects of booming house prices on mortgage payments, and they have driven layer after layer of homebuyers out of the market over the past four months. And we can see that.

Mortgage orders to buy a home fell again this week and are down 17% from a year ago, hitting the lowest level since May 2020, according to the Mortgage Bankers Association’s weekly purchase index. today. The index is down more than 30% from peak demand in late 2020 and early 2021, which was followed by a historic price rise last year.

“The decline in applications was evident across all loan types,” he said. MBA report She says. “Potential buyers are down this spring as they continue to face limited choices of homes for sale, combined with rising costs from rising mortgage rates and prices. The recent drop in purchase orders is an indication of potential weakness in home sales in the months ahead.

Cause of volume reduction: the toxic mixture of Explosion of housing prices Mortgage rates are rising. The average interest rate on 30-year fixed-rate mortgages with a 20% decline, matching the limits of Fannie Mae and Freddie Mac, jumped to 5.37%, the highest rate since August 2009, according to the Mortgage Bankers Association weekly gauge.

What this means for dollar home buyers.

A mortgage on a home bought a year ago at an average price (according to the National Association of Realtors) of $326,300, financed 20% less over 30 years, with an average price of 3.17% at the time, was accompanied by a payment of 1,320 each month.

Mortgage on a home purchased today with an average price of $375,300, minimum financing of 20%, 5.37%, with a down payment of $990.

So today’s buyer, who is already suffering from runaway inflation on everything else, would have to invest an extra $670 per month – representing a 50% increase in mortgage payments – to buy same a house.

Now calculate that with homes in the most expensive parts of the country where the median price, after ridiculous increases over the past two years, is $500,000, $1 million or more. Homebuyers face significantly higher mortgage payments in these markets.

The combination of rising house prices and rising mortgage rates is having an effect on the layers and categories of buyers leaving the market. And we’re starting to see that decline in mortgage applications.

The Fed caused this ridiculous housing bubble with its suppression of interest rates, including massive purchases of mortgage-backed securities and Treasuries.

The Fed is now trying to undo some of that by raising long-term interest rates. This is the Fed’s way – too little, too late – of trying to contain the housing bubble and the risks to the financial system, which have been pushed to their limit.

What does this mean for consumer spending.

When mortgage rates drop, homeowners tend to refinance higher-rate mortgages with lower-interest mortgages, either to lower their monthly payments, or to get money out of the house, or both. .

The wave of governors that began in early 2019 when the Fed rolled out mortgage rates became infamous and became a tsunami that began in March 2020 as mortgage rates plunged to record lows over the next few month. Homeowners lowered their monthly payments, cashing in on the extra cash that lower payments left them. Other owners extracted money through cashback and spent that money on cars and boats, and they paid off their credit cards to make room for future expenses, and that money was recycled in various ways and stimulated the economy. Some of them are also invested in stocks and cryptocurrencies.

This effect expired months ago. So far, mortgage refinance applications have collapsed 70% from a year ago and 85% in March 2020. Refis no longer supports consumer spending, stocks and crypto -currencies.

What does this mean for the mortgage industry.

Mortgage bankers know they are in a very cyclical business. Faced with rising mortgage rates, collapsing demand for rehabilitation and falling demand for mortgages, the mortgage industry began to lay off individuals.

Add Wells Fargo, one of America’s largest mortgage lenders, to the growing list of mortgage lenders that reportedly began layoffs late last year and so far this year, including mortgage company Softbank. Better.com. , but also PennyMac Financial Services, Movement Mortgage, Winnpointe Corp and others.

Wells Fargo confirmed Last Friday’s layoffs and statement blamed ‘cyclical changes in the broader mortgage lending environment’ but did not reveal the locations of the mortgage empire’s estrangement that would reduce mortgage bankers and their numbers .

So this boom is over. The Fed has now started raising interest rates, too little and too late, but it is finally lagging behind to deal with this four-decade-old inflation, after 13 years of rampant money printing – inflation of a magnitude the majority of Americans never saw before.

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