Will Higher Mortgage Rates Impact The Housing Market?

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Back in 2013, when housing was reported by some to be in Nirvana, a number of housing analysts said that higher rates would not dampen housing demand because overall payments would not increase that much, higher rates would mean the economy was doing better so people would have more money to spend on mortgages and sideline buyers would rush into the market (the sideline buyer line being one of my personal favorite marketing gimmicks).

I, on the other hand, in May of 2013, before the Taper started, warned  that higher rates would impact demand.

https://loganmohtashami.com/2013/05/07/housing-mammoth-stuck-in-tar-has-bigger-problems-to-worry-about/

When rates did rise due to the Taper spike on the 10 year yield, mortgage rates rose from 3.5% to 4.5%.  Following this, purchase applications fell and continued to fall into 2014 to an all-time low, when adjusted to population.

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Ahead of election results 30-year fixed down year-over-year, but 10-year Treasury yields up ~0.3 pp since Tuesday.

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From Calculated Risk ( My circle and arrow added)
http://www.calculatedriskblog.com/2016/11/mba-mortgage-applications-decrease-in_9.html

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Additionally, new home sales had the biggest miss on sales estimates that I have ever seen in a up cycle. Some “experts” were expecting 20%-30% growth in this sector but instead watched sales dip below 2% growth compared year over year, even though we were working from the lowest base in any economic cycle, post WWII.   To be fair I was looking for 8% growth and we didn’t see that either. Existing home sales went from 5,090,000 to 4,900,000 and new homes sales grew at 2% but “growth” was only because the previous year was so not so a high bar to beat.   Today, new home sales are higher than the levels we saw in 2014 higher and are working to be at cycle highs in 2016. The question remains: will higher rates impact new home sales and if so by how much?

I have stayed true to my 10 year channel of 1.60% to 3.% for many years now. This recent rise on the 10 year is event driven but inflation is picking up.

One of the biggest Technical developments this week concerns the Breakout in 10, 30 yr Treasuries above 3 year Trend

mark-10s

We had a bigger move in the 10’  last year when we saw 1.64% – 2.50% with inflation picking up on the Core Consumer Price Index. However, since Brexit we have had a double test of the lows on the 10 year,  in the low 1.30’s.

However, always caution yourself on short terms events, especially when they’re 3 standard deviation moves.  The 1.60% – 3% channel sticks.  The only reason we go lower than 1.60% has to be some European event like what saw in 2012 with  the Spain default fear trade and Brexit this year. Unless Personal Consumption Expenditures inflation and Core Consumer Price Index inflation takes off, I can’t see the 10 year breaking well above over 3% anytime soon. When the dollar gets stronger our imports become cheaper ( Oil) but service inflation always rises.

From Doug Short
https://www.advisorperspectives.com/dshort/updates/2016/10/31/two-measures-of-inflation-and-fed-policy

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A 3% 10 year equals a 4.5% mortgage rate  could be in play if we do test the higher band of that range. However, I 100% disagree with Alan Greenspan thesis that the 10 year goes to 5% soon. You would need to see a lot inflation for that to happen and our younger demographics can create some of that, but not yet. We have to be mindful there is still trillions of dollars in negative rates around the world and for the 10 year to get to 5% that has to change as well. Older demographics are deflationary and that doesn’t change with just a Donald Trump presidency.

We are still a few years away from the stronger demographic patch that will bolster housing demand, but keep in mind, that for now, mortgage demand is low.  Don’t believe the hype that housing is strong.  Housing hasn’t been strong in this cycle, and that means that the possibility of an existing home sales crash is unlikely.  Even when rates hit 4.5%, we only lost 200K in sales, some perspective is needed. You can make a thesis that the rate of growth will be challenged but a housing collapse not so much.

The real risk is on the new home sale side because these sales are more mortgage rate sensitive because they are more dependent on mortgage demand. Not to mention new homes are much more expensive than existing homes. However, since we are working from a level of  580K new home sales for 2017,  the downside is limited.  This level of sales is more typical of what we were see in a recession, not  in the 8th year of a cycle when mortgage rates have below 5% since early 2011.  So keep an eye out at that 4.25% – 4.5% level on mortgage rates level and see if it does impact any activity this time around. With the economic cycle older, better demographics and more footing that we had in 2013, the housing market should act better than mid to low 400K in new home sales.

Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data  daily on his own facebook page https://www.facebook.com/Logan.Mohtashami