Déjà Vu‎: Mortgage Interest Rates Panic

OMG INTEREST RATES R SOARING! TIME TO PANIC!!!

Looks like it’s that time again… Recent headlines have described an increase in mortgage interest rates from 3.35% to 4.0% with hyperbole like “Mortgage Rates Soar,” and “Soaring U.S. Mortgage Rates.”

If this sounds familiar it’s because we heard the same nonsense when rates moved from 5.0% to 5.3% in 2010. These types of articles often include a graphic like the one at right, with the x and y axes manipulated to make the latest gyrations in interest rates look like a very big deal that will most likely destroy the housing market.

I’ve pointed this out numerous times in the past, but it is worth repeating: Rates are still crazy low.

Rates could increase four percentage points and still be historically low. Here’s the appropriate historical context to keep in mind when you read these hysterical stories about rates “soaring” or “hitting a one-year high.”

Weekly Conventional Mortgage Rates Since 1971

The latest increase barely registers as a blip when the chart is appropriately scaled.

As long as interest rates are still below 6%, I doubt we’ll have anything resembling a “normal” housing market. I for one take increasing interest rates to be a good sign. It’s an indication that the market is able to sustain itself without artificial manipulation via ridiculously low rates.

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

40 comments:

  1. 1
    wreckingbull says:

    The reason we see this Déjà Vu, all over again, is that the Rising Rates Panic® is a favorite FUD technique of real estate salespeople.

    Hurry up and buy, people, before rates rise and real estate becomes unaffordable for the masses. The last rocket ship off the planet of dirty renterdom has ignited its main engines.

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  2. 2
    Erik says:

    I always buy based on affordability. I got the negative amortization loan on my previous place and ended up walking away scott free. I got my new place is really cheap and I have a 30 year loan even though I could afford a 15 year loan. I don’t think things are gonna get much more affordable in the future, but who knows.Now really isn’t a bad time to buy based on affordability. It may be a bad time if someone is looking to profit or pay off their mortgage.

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  3. 3
    AndySeattle says:

    What the hell is profit? We’re talking about real estate, right?

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  4. 4
    wreckingbull says:

    Contrary to Erik’s statement, today’s 15 year fixed rates make it a fantastic time to buy if you are hoping to pay off a mortgage. For me, a 15-year was only $250 more per month than a 30-year. I believe the difference was 150 basis points.

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  5. 5
    Erik says:

    RE: wreckingbull @ 4
    I wasn’t saying that a 15 year mortgage isn’t a better deal, i’m just saying that if someone is focused on cash flow, now isn’t a bad time. Your statement isn’t contrary. I think I hurt your feelings previously, so you are on the attack. You are an emotional person. I bet you give all my comments a thumbs down too cause you are emotional and hurt. I work with engineers all day everyday and they are not emotional people in general, so I didn’t take your feelings into account previously. It would probably be smart of me to recognize that in real estate, there are a lot of emotional people like you.
    A 15 year isn’t much more for me either, but I still don’t get one cause I want a good cash flow.

    AndySeattle – Yes, we are talking about real estate. If someone were to wait until prices dropped and interest rates increased, they could perhaps buy low and later sell high. If someone is interested in profiting in that respect, now isn’t a good time to buy in my opinion. If they just want low payments, now may be a pretty good time for them to buy.

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  6. 6
    wreckingbull says:

    RE: Erik @ 5 – Dude, enough with the drama, as it just makes you look daft. I was simply stating that today’s 15 year fixed rate gives buyers who wish to pay off their mortgage an opportunity they probably never had before. You stated just the opposite, so I wished to clarify the facts for the dear readers of this space.

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  7. 7
    Erik says:

    RE: wreckingbull @ 6
    My point is that there are 2 schools of thought:
    School 1: Minimize payments to maximize cash flow
    School 2: Minimize debt to maximize profit.

    Not looking to daft you. I’m not really interested in selling services to anyone here because real estate isn’t my job. I am someone that finds it really interesting. So if I look foolish and learn something, I would call that a success.

    I am on the first school of thought and I would guess you are on the second school of thought. Both have merit in my opinion. It just seems like a lot of people are saying it’s a terrible time to buy. I don’t think it is if you are in school 1.

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  8. 8
    David Losh says:

    Mortgage interest rates are a side show to the broader economy.

    This time is different than in the past of the GI Bill, and the boys coming home from Viet Nam. We won’t, and aren’t getting any residual economic benefit from ten years of a draining war effort that gave us nothing.

    The Fed has been trying to prop up the economy with low interest rates that have choked commerce, and discouraged savers.

    So you saved a down payment for a house, bought at an inflated price, and are now paying for that debt with “affordable” payments that include interest you will need to pay for a longer period as the price of housing goes down.

    The price of property isn’t going down because of the mortgage interest rates, it’s going down as more people flee the trap of excessive mortgage debt.

    Investors will move on, they will sell, and as they sell they will sell for less to get out of that asset, and into something more profitable.

    Just because John Homeowner is paying off his mortgage doesn’t make housing a great investment any more.

    Renters have paid for crappy housing units near Green Lake because they didn’t have a choice. It’s the same for Ballard, and Fremont. If it were me though, I’d rent an apartment there, or an APodment in the University District, rather than a rooming house.

    I think housing is changing to a more corporate idea of what is the most profitable way to invest. I don’t see housing tracts, or town houses being as profitable as in city apartments, or apartment complexes.

    I think renters are figuring out that they can invest wisely elsewhere, and buy into Real Estate market places that might be more profitable for them.

    It’s a new investment world out there, and housing just doesn’t seem to fit into that portfolio.

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  9. 9
    Erik says:

    RE: wreckingbull @ 1
    How are you getting so many thumbs up for your comments? Something fishy is going on here. I feel like the comments must not be read. That’s why I said you have a goon squad before. Like there are a bunch of people that give you a thumbs up no matter how bad your comments are. Anyone that opposes you gets massive thumbs down. Somethings up.

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  10. 10
    Matthew says:

    It will be interesting to see if the FED is really going to begin tapering off their MBS purchases or not. The appreciation from 2011 to now can be attributed almost exclusively to the drop of rates from 5% to below 3.5%.

    If we see rates rise to 5% or so, it will certainly provide a strong headwind to price appreciation if not price decreases in some of the very hot markets.

    I think a move from 3.35 to 4.1 is more substantial than previous moves (like the 5.0 to 5.3 listed above). The move to sub 4% rates has been solely due to Fed intervention. Eventually once the Fed exits the MBS markets there is going to be a greater risk in that asset class and rates are going to go up. Run the numbers on the monthly payments at 5-6% as opposed to 3.35% and you will see the pressure that will be put in housing prices. That is one reason why I’m not certain the Fed is really going to exit MBS purchases at the end of the summer.

    It will be an interesting 4-5 months for sure.

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  11. 11
    sam says:

    Hi Tim,

    Can you write an analysis piece on what may cause the inventory in the seattle market (King and other counties) to go up?

    (1) More sellers wanting to sell. I have been noticing that the prices on east side homes are more than they were in 2006
    (2) Impact of shadow inventory
    (3) Investors trying to sell their rental properties
    (4) any other reasons

    An analysis on why the inventory may not increase any time soon would be welcome too.

    Thanks

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  12. 12
    sam says:

    RE: Matthew @ 10

    Hi Matthew,

    Its going to be interesting to see what they will leak at the next meeting. IIRC, the Fed is not going to touch interest rates until the unemployment gets to less than 6.5%. The premise I guess is that more people will be able to buy homes even if interest rates raise (larger pool of buyers due to high employment rates)

    The FED needs to stop buying MBS for the bubble/frothy cities. I don’t know whether they can do this, but if there is a way not to buy them they should, we will avoid another upcoming bust here. Has anyone in the administration taking a cynical view of the boom and making sure that we are not repeating the same mistakes?

    Glenn Kelman CEO of Redfin is saying that we have more people trying to buy homes with 3-5% down payments. If such loans are being made (even though cash purchases have gone up) we will see some sort of bust when the rates go up.

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  13. 13
    Jonness says:

    By Erik @ 9:

    RE: wreckingbull @ 1
    How are you getting so many thumbs up for your comments? Something fishy is going on here.

    You come off like an amateur musician who wants to be a rock star but doesn’t want to pay the dues in life it takes to get there. If you want thumbs up for your comments, first you gotta pay your dues. One way to speed up the process is to stop trying to compete with those with more experience than you and instead learn from them all that you can. Once you absorb as many ideas and opinions as needed to see the big picture, then write your debut masterpiece.

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  14. 14
    whatsmyname says:

    RE: Jonness @ 13
    “Pay your dues” for thumbs up?

    I thought thumbs up meant “I like what you said”, and
    thumbs down meant “I don’t like what you said, but I haven’t got a compelling refutation”.

    my bad

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  15. 15
    Erik says:

    RE: Jonness @ 13
    I have been reading this blog for years. I don’t give people credit when they have been here a longtime. I don’t play the whole seniority thing that I have been told here before. Just cause you are old, it doesn’t make you smart. I can give you tons of examples of old people that are dumb.

    I love getting good practical advice from Ray Pepper. He’s been in the game a longtime and it shows. The stuff he says makes sense when I follow up on it. Corndogs’ analytical skills are superb. He can take something I say and show my the error in my logic. Losh has a lot of ideas, but I can tell he’s always thinking ahead at the next step. The Tim is seldom wrong. Ardell has a lifetime of experience and she knows something about everything.

    Wreckingbull and a few others on here parrot the information we are given by Tim and all of a sudden everyone is cheering. The stuff wreckingbull says isn’t well thought out in my opinion. He tells me things like you are telling me about respecting people because of their position or whatever…. I obviously don’t do that and it doesn’t make sense to me to do that. I don’t care who you are, if your reasoning doesn’t make sense, I will call you out on it. Wreckingbull and his goons don’t make sense because they never give explanations or reasoning. All he said in his first post is that real estate agents use rising interest rates as a reason to make people buy before they are ready. Duh! Tim basically says that all the time including this post. He added nothing as always. He reads the post and parrots the same thing. Then his group of goons applaud him for repeating the original post.

    If you or him have something great to share, please do because I’d love to further my knowledge. When I make comments and you disagree, please tell me why I’m wrong… I will listen. It seems like wreckingbull and the goon squad are all repeating the same stuff and not giving any reasoning behind it. Just thumbs down with no explanation. Please explain why you don’t like my comments. I would like to know why I am wrong, so I can reevaluate.

    In an environment such as this one where people are sharing knowledge and insites, members are only as good as their posts. I read all of the posts and I have for years and I can tell you exactly who I respect and who I don’t based on that. I don’t give people street credit for being old.

    Here we go again… I already see one thumbs down from wreckingbull and the goon squad. I’m pretty sure they won’t give me any intelligent reasoning, but we’ll see….

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  16. 16
    Eastsider says:

    RE: Erik @ 15

    My 2 cents – I’m glad that you have reached your limit. 5 out of 15 comments?!

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  17. 17
    Mike says:

    RE: sam @ 12 – where are more people trying to buy with 3.5% down, and where is it working? I think that is a key indicator for local sub markets.

    As the market recovers and people climb back up the credit ladder, I expect to see more marginal buyers coming back in. I don’t expect they’ll be making competitive offers in high demand areas just yet. If that happens its time to sell!!!

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  18. 18
    Mike says:

    RE: Erik @ 15 – the real oddity with Ardell is she has a lot of knowledge but can’t seem to apply it. Also she’s not well versed on seattle, not lately anyway. Good example of why you need to pick a local agent.

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  19. 19
    sam says:

    RE: Mike @ 17

    Read this article by Glen on Forbes

    http://www.forbes.com/sites/morganbrennan/2013/04/12/where-u-s-real-estate-might-be-getting-bubbly/

    the title says the market might be getting bubbly, but the article seem to conclude or for the most part say that we are fine.

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  20. 20
    Jonness says:

    RE: Erik @ 15 – I’m a musician, thus the previous analogy.

    Yeah, I know the whole respect your elders because they’re old thing. Meanwhile 90% of people die without ever having thought a single original thought. That’s not what I’m getting at.

    Attacking wreckingbull and his supposed goon squad is not increasing your ability to invest, and it’s not earning you any fans. Thus, it’s a waste of your time. That time could be better spent studying and learning your craft.

    There are no short cuts. One must get his hands dirty in order to become a good mechanic. When someone brings their car into your shop for repairs, your self worth is based on how well you fix their car. You can go on for hours about how stupid the mechanic down the street is, but when your customer drives off in a car that doesn’t run right, your work has spoken for you.

    Interestingly, as both a music and computer science mentor, I often found I learned things from those I was attempting to teach. Everyone has a unique perspective. Much of what they think might not be new to you or of perceived value, but if you sift through the sand, you often find a few gems that are worthy of putting into your tool chest.

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  21. 21
    3rd Generation says:

    @ 20. Jonness

    Well said. I salute you.

    Too Bad the take-aways will go waaay over the heads that could most use it.

    Some people just deserve to be (and are) poor, Spiritually, Physically and Emotionally.

    Calling them names, would be complimentary.

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  22. 22

    All Things Depend on Individual Preference Too

    Lower home prices aren’t bad if you plan to buy, but haven’t yet….

    Same with interest rates, if you recently planned on living on your 401K for a long time….higher interest rates make you smile :-)

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  23. 23
    wreckingbull says:

    If I were a hypothetical engineer-turned-flipper who claims to view problems analytically, and a commenter here at SB caused me to have unavoidable temper tantrums every day, I’d write a ten line GreaseMonkey script to filter out said commenter. Problem solved.

    Here, I’ll even help this hypothetical commenter get started:

    http://wiki.greasespot.net/Greasemonkey_Manual

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  24. 24
    David Losh says:

    RE: sam @ 19

    That is a funny article about Real Estate. We should all get out tin foil hats, suspend reality, and look at these low prices for housing units as the reason we have such low inventory.

    It must be that banking conspiracy that is keeping these low prices on housing units, my good buddy Glenn Kelman is telling us so.

    Get out there buyers, and snap up these great bargains!

    Forbes would know better, but I have a feeling the conspiracy theory I’m looking at is a struggling Real Estate industry attempting to catch a pig to put lip stick on.

    The Real Estate market place is slipping out of control. Prices have spiked for no reason what so ever, but let’s sweep that under the carpet, and focus on the future of forever increasing Real Estate pricing.

    What I believe is that we have some under performing stock prices. Most large fund investors have made significant cash reserves in the Real Estate run up. They have arbitraged the assets, and are now sitting on cash that is tied up, maybe with a rental return, but they aren’t land lords, never will be.

    Real Estate paying a big return is tied to manufacturing, or farming, for those who can work other commodity prices, but housing seems to be a stretch of investment opportunity.

    Real Estate is an investment, isn’t it? That’s what all of this analysis is for, right? You have guys like Erik, or Ray talking about making big money by keeping our powder dry. Does anyone really buy into that any more? The second question is why?

    I just think that housing has become a business much greater than the individual home owner, and that they may be left holding the bag here, once again.

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  25. 25
    Kilen says:

    By Jonness @ 20:

    RE: Erik @ 15 Meanwhile 90% of people die without ever having thought a single original thought. That’s not what I’m getting at.

    Citation needed.

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  26. 26
    ARDELL says:

    RE: Kilen @ 25

    If Jonness would concede that he is one of the 90%, I’d let him slide on the citation.

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  27. 27
    JG says:

    Anyone have advice?: Roughly a month out from closing. Lender really pushing us to lock in a rate. Given the volatility in rates lately my inclination is to let it float for a few weeks and see if we come back down. I’ll be happy regardless, just want to make the smartest decision possible.

    – Will the Fed backtrack from their previous statements next week?
    – Is my lender just caught up in the hype?

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  28. 28

    RE: Erik @ 5 – If you’re honestly wondering why you’re getting thumbs downs, it’s not a goon squad or a conspiracy. It’s the personal attacks. Disagreements are fine. Stick to the issues. When you single out an individual poster and try to convince others how wortless that poster is, it undermines your credibility and makes you look immature. Stick to the issues. When you post opinions about Wreckingbull, or Ray, or Ardell, or Losh, it’s not backed up by facts and looks rather random. If you want respect, show some respect. I’ve been attacked here before. It’s not any fun. I usually don’t respond, but if I do I stick to the issues and don’t try to convince others how lame the person who attacked me is. You’re obviously a bright guy. But if you’re here to learn, you’re coming off as pretty judgemental.

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  29. 29
    Scotsman says:

    RE: JG @ 27 – I too think the recent burp up is temporary. The fundamentals of the economy haven’t really changed that much. An ever smaller percentage of the population is employed, the feds are still running huge deficits, etc. The chart at the top of the page tells the story- the long term trend for rates will continue to be down if only because the reality is that we can’t afford higher rates. If Japan can make it to zero so can we. And just because the fed decides to possibly end one strategy doesn’t mean there aren’t others waiting in the wings. We’ve already had wage and price controls once in my lifetime, why not mandated interest rates?

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  30. 30
    ARDELL says:

    RE: Mike @ 18

    I have a partner, Kim Harris, who most people know as the founder of Easy Street Records in Seattle and on The Eastside. Also the founder and original manager of Queensryche. He’s been in Seattle since he came home from Nam in 69 and has been in real estate since 89 in Seattle primarily until he established Sound Realty in Kirkland in 2004..

    I will never know Seattle as well as he does, so I don’t try, because he is always with me in everything I do. I don’t mention him as he is much more private than I am, and he doesn’t talk online.

    In other words…you are correct. :)

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  31. 31
    Macro Investor says:

    By Erik @ 5:

    RE: wreckingbull @ 4
    I think I hurt your feelings previously, so you are on the attack. You are an emotional person. I bet you give all my comments a thumbs down too cause you are emotional and hurt. I work with engineers all day everyday and they are not emotional people in general, so I didn’t take your feelings into account previously. It would probably be smart of me to recognize that in real estate, there are a lot of emotional people like you.

    Eric, nothing personal – but what you wrote here sounds like a cry baby whining. Maybe that’s the reason for the down votes.

    Your comment #2 is hard to understand. Maybe you just needed to proof read and be more clear. But as it stands it seems like a random haystack of thoughts.

    PS – I didn’t down vote you. I generally only do that when I really dislike someone and I want to give them the message to just go away. There used to be a really arrogant lawyer who got a lot of down votes for that reason.

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  32. 32
    David Losh says:

    RE: ARDELL @ 30

    I knew I knew who that Kim Harris guy was. A friend of mine from childhood worked at Easy Street for years, and bought records.

    For years we, people who knew my friend, told him that tapes, and then CDs, were the future of music, but he kept buying vinyl. He has thousands of records, thousands, in a private collection.

    Who knew vinyl records would make a come back?

    My point is that in the world of investment strategy there are millions of choices, Real Estate is just one of them.

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  33. 33
    Carl says:

    I don’t know if it is time to panic, but when rates move up nearly 20% (from 3.35 to 4) in a month, that is cause at least for attention. I guess it is all in how you present the data.

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  34. 34
    wreckingbull says:

    RE: ARDELL @ 30 – Ardell, I appreciate that comment. One of the hard lessons I learned in my past real estate transactions is that it takes a very long time to learn the nuances of a neighborhood (i.e. years) I ended up living for a long time in a neighborhood that did not really fit me too well. I never see myself moving to the Kirkland area, but if I did, I’d seriously consider your assistance and expertise.

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  35. 35
    ARDELL says:

    RE: wreckingbull @ 34

    Thank you. I feel obligated to turn this topic back to interest rates. I’ll try. :)

    I have a client who just closed on a jumbo at 3.375%, and while he is thrilled to tears I doubt anyone thought that low point would be sustainable given the recent run up in home prices. In fact it would be a bit ridiculous for anyone to even think that keeping rates down to that level would be a good thing long term.

    Rates have been under 4% from November 2011 to recently. My best guess is the strategy to level up, but have the end result be good vs bad news, is to let them rise more and then back down a little bit to 4% give or take without dipping below 3.875%.

    As soon as we heard the news that Bernanke and Company were committed to low rates, even though housing prices and sales had improved dramatically, who among us did not immediately think “Liar, liar, pants on fire”?

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  36. 36
    Carl says:

    RE: wreckingbull @ 34 – I remember about 10 years ago I took a job with a company at Carillon Point (after having lived and worked all my life in Seattle). Carillon Point was fantastic – great views, laid back, low stress. But what was funny was that after a couple of years, I yearned for the relative grittiness of downtown Seattle and diversity of Seattle’s neighborhoods. I realized that Carillon Point and Kirkland was pretty homogenous and sterile and it wasn’t for me.

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  37. 37
    nachiket says:

    How would that graph compare if we were to look at mortgage rate/inflation rate ratio. I am not old enough but remember really high inflation rates in 70s and 80s from economics books.

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  38. 38
    Sorin says:

    The Fed has done a good job of keeping rates low to prop prices back up without affecting actual monthly payments. I believe there is a goal to get prices back to slightly above the peak, to bring all the people who want to sell but feel they can’t back into the market. That would return inventory to more sustainable levels. Once that’s accomplished, I see interest rates gradually rising, with the intended effect of slowing home price appreciation, again to a more sustainable rate.

    When I see California price appreciation over 25% a year, I think it’s hard to argue there isn’t some kind of price inflation bubble. We are in another bubble, this time intentionally engineered, and designed for a slow deflation of that bubble rather than a pop. If it actually works out that way, all is well. However, that probability seems remote.

    http://sanfrancisco.cbslocal.com/2013/06/13/california-home-prices-up-for-15th-month-in-a-row/

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  39. 39
    Alexander says:

    The historic interest rate above is nice but would be nice to see the average home price during those time periods as well. I just have a feeling that home prices, in some markets like the northeast, are out of synch as compared to previous time periods.

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  40. 40
    amanda says:

    This small increase means a extra few hundred a month for buyers. That’s still money.

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