Checking in on SKYROCKETING Interest Rates

Good thing we panicked last month about the mind-blowing 0.3-point jump in interest rates.

The era of record-low mortgage rates is over.

The average rate on a 30-year loan has jumped from about 5 percent to more than 5.3 percent in just the past week. As mortgages get more expensive, more would-be homeowners are priced out of the market — a threat to the fragile recovery in the housing market.

“We are seeing some panic among potential buyers who have not found houses yet,” said Craig Strent, co-founder of Apex Home Loans in Bethesda, Md. “They’re saying: Man, I should have found a house three weeks ago or last month when rates are lower.”

I mean, that was totally justified, right?

10 years of Historic Mortgage Rates

Clearly the era of record-low mortgage rates is over. If you didn’t buy a house before early April when interest rates shot up to terrible new heights, you have obviously missed your chance.

Have fun renting… forever.

0.00 avg. rating (0% score) - 0 votes

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. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

26 comments:

  1. 1
    Sniglet says:

    As I’ve been saying for years, I think interest rates are going to stay low for several more years (at least). Unfortunately, that isn’t going to do anyone much good. When credit is hard to come by, salaries are declining, and jobs are scarce, a low interest rate doesn’t help much.

    Just look at Japan. They’ve had ridiculously low interest rates for something like 20 years, yet that hasn’t goosed their economy.

    Of course, it’s important to remember that interest rates ARE rising on some things. Junk bond yields, and the rates for the sovereign debt of dodgy nations (e.g. Greece, Portugal, Spain, etc) are shooting through the roof. I suspect we will continue to see the spreads between high and low quality debt rise astronomically in the next few years.

    Here is the link to a radio show of mine from a month ago where we talked at some length about inflation/deflation.

    http://surkanstance.blogspot.com/2010/03/this-week-on-bear-radio-primer-on.html

  2. 2
    joe dirt says:

    fortunately we had some bad news to keep interest rates low (Greece, oil spill disaster)

  3. 3
    BacktoBasic says:

    People can always Refin. Hey, your saving rate is down to almost zero which means after tax and inflation a negative return.

  4. 4
    ray pepper says:

    ” said Craig Strent, co-founder of Apex Home Loans in Bethesda, Md. “

    God, I love Mortgage Reps!!

    “Billie: We ended up going with Best Mortgage because we’re poor, they gave us the best interest rate”

    Whenever I heard someone got the best rate I laugh. Watch that back-end. Poor Buyers never even knew or will know.

    ” Most mortgage companies spend the majority of their time searching for new business”
    “They are more worried about finding their next deal than serving your real estate financing needs.”
    “Because much of our business comes from repeat clients” Really??

    What about those ads all day long on 97.3 Dori Monson?

    I really wish someone would bring something new to the table. This same rhetoric has not changed in 20 years.

  5. 5
    Sniglet says:

    I find it hysterical to hear people obsess over how great it is to get a low mortgage rate, as if that was the MOST critical factor in buying a home. Frankly, I would much rather pay a high interest rate to get a lower base price. Heck, a rising interest rate is even a comfort, since it indicates that the economy (or at least inflation) are heating up which will cause the home to appreciate.

    The LAST thing buyers should be hoping for is a low interest rate.

  6. 6
    Scotsman says:

    Big strategy shift today as Germany essentially says it isn’t going to play along with all the accounting games and bank manipulations. They are in effect saying that it’s time to take the hit and get real. That means deflation. Oil dropped below $70, the markets are down, all currencies are down against the dollar and the ten year U.S. bond dropped into the 3.35 range, considerably lower than it’s been for a while. Mortgage rates should follow it down with time. Where interest rates go in the longer term is still a difficult call. Dollars flowing into treasuries for security and safety will be satisfying a bond market that really seeks higher rates to balance deficits and higher risk. The euro collapse will buy more time for the U.S., but still does nothing to address structural/solvency deficiencies.

  7. 7
    BacktoBasic says:

    Home owner like low interest cause they always refin or borrow home equity. Cash rich people hate both cause they need to pay higher tax if the interest is high or yield too low to offset the inflation. For sure this flee from euro to dollar will push USD based equity higher and lower yield. Good for US real estate.

  8. 8

    I almost posted something about the rates in the Monday open thread, but my spin would have been a bit different than Tim’s. Mine would have been more pointing out how some were using the rising interest rates as a a secondary reason (secondary to the expiration of the tax credit) that sales volume would be falling at this point in time.

    Getting excited over short term changes in the interest rate is rather silly, unless all three of the following conditions are met: (1) Rates are going down; (2) You’re buying in the next 30 days; and (3) You haven’t locked your rate.

  9. 9
    CCG says:

    By Sniglet @ 1:

    I suspect we will continue to see the spreads between high and low quality debt rise astronomically in the next few years.

    Along with seeing that the difference between low and “high” quality debt is a lot smaller than most think.

  10. 10
    Dave D says:

    Interest rates rising? Missed home buying opportunity?? I don’t think so….

    I’m hoping mortgage interest rates go up sharply. I’m a renter who sold my house back in June 2008. Since then I’ve been sitting on cash biding my time, watching the housing bubble collapse despite everything the government has thrown at it (with my tax dollars, BTW). I expect the housing market will continue to be flat or drop over the next year as interest rates inch upwards and distressed housing is trickled out onto the market. Next year, the effects of all the bank bailout programs will wane just as more distressed owners come to end of their rope, houses for sale will flood the market, interest rates will climb sharply, and housing prices will drop faster than a lead balloon. That is when I will get interested in buying a house. In the meantime, I’m enjoying my waterfront rental in Gig Harbor, at a fraction of current home ownership costs.

  11. 11
    Dave0 says:

    I hope interest rates go up. Then maybe prices will come down enough that it will become possible to pay off a mortgage within a reasonable amount of time. When my parents bought the house I grew up in the early 80’s, the interest rates were so high that it kept prices low enough that they paid off the mortgage in a few years. We lived in that house mortgage-free for decades. I’d take high interest if it drove prices that low.

  12. 12
    Dave0 says:

    I wonder what the chart would look like if you graphed out, from 2000 to present, the price someone could afford to buy with the given interest rate at the time (from the graph above), with payments equal to 28% of the median household income at the time. How closely would that correlate to the median price graph? Tim is this something you could pull together?

  13. 13
    fish says:

    RE: Sniglet @ 1

    Banks are hording cash and tightening credit while Federal Reserve bond debt creation is maxed out to pay for war and debt here at home. The one is done to hide the other.

    So we get deflation when one would normally expect inflation. Add to this a bit of precious metal price manipulation and you have the perfect illusion.

    “To what end?” should be the next question.

  14. 14
    TJ_98370 says:

    By Dave0 @ 11:

    I hope interest rates go up. Then maybe prices will come down enough that it will become possible to pay off a mortgage within a reasonable amount of time. When my parents bought the house I grew up in the early 80’s, the interest rates were so high that it kept prices low enough that they paid off the mortgage in a few years. We lived in that house mortgage-free for decades. I’d take high interest if it drove prices that low.


    I am old enough and was aware enough in my youthful days to know that high interest rates kept housing prices down during much of the ’80’s. Cash was king and will be again!

  15. 15
    David Losh says:

    RE: fish @ 13RE: Sniglet @ 1

    If you listen to the podcast, the other guy makes a good point about human nature. You can’t quantify human nature.

    It’s not so much of what’s going on in the world today, it’s how we react to it. Scotsman mentioned the fear factor of the global economy in the open thread. There’s no way to chart, or graph, human response.

  16. 16
    Scotsman says:

    RE: fish @ 13

    “the perfect illusion”

    The key word here is “illusion.” And in my opinion the question isn’t “to what end”- that seems fairly obvious- but rather for how long? How long does a mirage last in the desert?

  17. 17
    CCG says:

    By TJ_98370 @ 14:

    I am old enough and was aware enough in my youthful days to know that high interest rates kept housing prices down during much of the ’80’s. Cash was king and will be again!

    Assuming cash is still worth anything by the time Gumnut gives up devaluing it in a futile attempt to prevent real price discovery.

  18. 18
    CCG says:

    By David Losh @ 15:

    RE: fish @ 13RE: Sniglet @ 1

    If you listen to the podcast, the other guy makes a good point about human nature. You can’t quantify human nature.

    It’s not so much of what’s going on in the world today, it’s how we react to it. Scotsman mentioned the fear factor of the global economy in the open thread. There’s no way to chart, or graph, human response.

    Exactly, and exactly why modern “economics” is built on a foundation of garbage. People are not unthinking particles and their behavior cannot be described with formulas and graphs.

  19. 19
    CCG says:

    RE: fish @ 13

    As before, so again…

    http://www.mises.org/rothbard/historyofmoney.pdf

    ‘[T]he inflationary policies of Hoover and [Federal Reserve Board Governor Eugene] Meyer proved to be counterproductive. American citizens lost confidence in the banks and demanded cash – Federal Reserve notes – for their deposits (currency in circulation rising by $122 million by the end of July), while foreigners lost confidence in the dollar and demanded gold (the gold stock in the United States falling by $380 million in this period). In addition, the banks, for the first time, did not fully lend out their new reserves, and accumulated excess reserves – these excess reserves rising to 10 percent of total reserves by mid-year. A common explanation claims that business, during a depression, lowered its demand for loans, so that pumping new reserves into the banks was only “pushing on a string.” But this popular view overlooks the fact that banks can always use their excess reserves to buy existing securities; they don’t have to wait for new loan requests. Why didn’t they do so? Because the banks were whipsawed between two forces. On the one hand, bank failures had increased dramatically during the depression. Whereas during the 1920s, in a typical year 700 banks failed, with deposits totaling $170 million, since the depression struck, 17,000 banks had been failing per year, with a total of $1.08 billion in deposits. This increase in bank failures could give any bank pause, especially since all the banks knew in their hearts that, as fractional reserve banks, none of them could withstand determined and massive runs upon them by their depositors. Second, just at a time when bank loans were becoming risky, the cheap-money policy of the Fed had driven down interest returns from bank loans, thus weakening banks’ incentive to bear risk. Hence the piling up of excess reserves. The more that Hoover and the Fed tried to inflate, the more worried the market and the public became about the dollar, the more gold flowed out of the banks, and the more deposits were redeemed for cash.’

  20. 20
    Sniglet says:

    just at a time when bank loans were becoming risky, the cheap-money policy of the Fed had driven down interest returns from bank loans, thus weakening banks’ incentive to bear risk

    This is priceless. By keeping interest rates artificially low the Fed may actually be doing more harm than good.

  21. 21
    Jolt says:

    “Have fun renting… forever.”

    Uuuuumm. No.

    Prices will adjust down to compensate for the higher rates. This will be further helped with increased foreclosures and ending of various guv’mint programs. Time for some real price discovery to happen. Can’t wait!

  22. 22
    WTF says:

    Missed opportunity to buy a house? Enjoy renting forever? that’s a one sided view :).

    It seems to me that higher interest rates may cause values of houses to either decline (because you have fewer buyers), or at best stagnate.

    If you have no desire to sell a house, I guess that’s ok. If you’re selling, you may be seeing fewer offers. If you’re a buyer, you may have the opportunity to have a lower principle to pay off (extra payments per month may pay off).

    Higher interest rates aren’t that bad, especially if it further drives prices down. Missed opportunity? Hardly.

  23. 23
    The Tim says:

    RE: Jolt @ 21 & WTF @ 22 – I guess you’re new here. Those comments in my post were sarcasm.

  24. 24
    CCG says:

    By Jolt @ 21:

    “Have fun rentingâ�¦ forever.”

    Uuuuumm. No.

    Prices will adjust down to compensate for the higher rates. This will be further helped with increased foreclosures and ending of various guv’mint programs. Time for some real price discovery to happen. Can’t wait!

    New motto of the U.S. Gumnut: Death Before Price Discovery.

  25. 25
    WTF says:

    RE: The Tim @ 23

    Sorry Tim, I did miss the scarcasm. I guess 6 years of hearing Lawrence Yun spew his nonsense without criticism really jaded me ;).

  26. 26

    […] Home the Median Income can AffordBy The Tim on May 21, 2010 | Leave a responseA few days ago on my sarcastic interest rates post, Dave0 asked:I wonder what the chart would look like if you graphed out, from 2000 to present, the […]

Leave a Reply

Use your email address to sign up with Gravatar for a custom avatar.
Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Please read the rules before posting a comment.