Bubble watch: Mortgage rates are soaring despite promises of mild uptick

“Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.

Buzz: Despite promises of a smooth increase in home financing costs from the Federal Reserve — a prediction reinforced by so-called industry “experts” — we’ve just witnessed one of the largest hits to a house shopper’s buying power in history.

Source: My trusty spreadsheet’s analyzed Freddie Mac’s weekly report on average 30-year mortgage rates with a history going back a half-century. That history includes the insane double-digit rates of the early 1980s.

The Trend

Remember how cheap mortgage rates boosted home “affordability” in the pandemic era?

Last week, that all-but ended. The average mortgage rate rose to 3.45% from 3.22% — a 0.23-percentage-point jump in seven days. That’s the highest rate since March 2020, just as the pandemic was icing the economy and the central bankers at the Fed began their bailout of the housing market.

But look at what just one week’s rate increase did to a house hunter’s buying power.

Imagine you can afford a $2,500 monthly mortgage payment. Two weeks ago, that would be a $576,619 loan. Last week, that amount came down to $560,214 or a 2.85% cut in buying power.

Sound small? Nope! It’s actually the 23rd largest percentage drop since 1971, bigger than 99% of all one-week periods to date.

House shoppers will have to borrow less or dig deeper into their household budgets for mortgage payments. And sellers (and industry cheerleaders) should note this change.

The Dissection

Over the past year, the Fed assured financial markets (and anybody with a life tied to market gyrations, such as homebuyers) that plenty of warning would be provided before they acted to increase the rates they control. Between cutting key rates and acquiring $1 trillion in home loans, the Fed had an active role in pushing mortgage rates to historic lows in the pandemic era. The Freddie Mac average hit 2.66% at the start of 2021. 

Well, it seems that mortgage markets aren’t waiting for the Fed to act. Too many people fear rising inflation — recently we’ve seen the biggest jump in the Consumer Price Index since early 1980 — will quickly push all interest rates higher,

And it’s not just one week of rising rates. Over three weeks, an upsurge has bumped mortgage rates up 0.4 percentage points from 2.95%. The $2,500-a-month mortgage payment way back 21 days ago got a borrower $589,198 — nearly $29,000 more than last week. So buying power is down 4.9% just since the last weeks of 2021. That’s the No. 35 largest drop since 1971, or bigger than 99% of all three-week periods.

And using a long-term view over the past 52 weeks, rates are up 0.66 points from 2.79%. That means house hunters have 8% less to spend. Saying it’s the 451st largest drop in a 12-month period in the past half-century isn’t that impressive. Bit it’s bigger than 83% of all year-long periods.

Another view

For all you young kids out there — or those with failing financial memories — let me remind you of early 1980 when the Fed began squashing the economy with soaring rates to cool another rough patch of inflation.

Let’s ponder the house hunter’s worst week in the last 50 years, in terms of buyer power: In the seven days ending March 14, 1980, buying power was cut 8.6% as the average mortgage rate went to 15.4% from 14%.

Worst year? The 12 months ending April 4 and April 11 of 1980 when rates surged to 16.35% from 10.48%, cutting buying power by 33%. No typos, I said 16.35% rates and one-third less money loaned!

How bubbly?

On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … FOUR BUBBLES!

Yes, roughly speaking, a quarter-point rate bump on a mortgage to 3.5% doesn’t sound so bad. And, yes, on the historical scale 3.45% is still a relative bargain.

Yet a large part of the arguments for 2022 homebuying was that inflation would moderate and mortgage rates would rise deliberately and modestly. And, remember, inflation is usually the byproduct of too much spending — an economic positive, in an odd way.

But what we’ve gotten in early 2022 is a huge reminder that while the Fed is a financial market powerhouse, it does not have absolute say in what interest rates do.

With mortgages rates, the mindset of bond traders is a big factor. If they don’t want mortgage-backed bonds — or can find better deals in other fixed-income niches — home-loan rates will likely rise.

Also, there’s also how much a lender wants to make on a loan. If they’re focused on their mortgage-making volume, borrowers benefit from price competition. If profit margins are more the key, rate bargains can become scarce.

OK, so perhaps the past three weeks were just a hiccup, an overly anxious reaction of mortgage forces to bad cost-of-living news. But when was the last time the national inflation rate — 7% in December — was above mortgage rates? (And inflation has topped mortgage rates since April.)

Oh, yes, that same 1980.

PS: California home prices rose 15% in 1980 and 9% the next year before falling 5% in 1982. But if you factor in that era’s sky-high, cost-of-living surges, 1980 was actually a 1.5% price gain as inflation ran 13.5%; homes fell 1.5% in value in 1981 after 10.5% inflation and fell another 11% in 1982 as inflation “dipped” to 6%.

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at [email protected]