Mortgage volume is crushed by high interest rates: what it means for future home sales and consumption expenses

The boom is over. And there are broader effects.

By Wolf Richter for WOLF STREET.

High mortgage rates multiply the effect of exploding house prices on mortgage payments, and it has taken layers upon layers of home buyers out of the market over the past four months. And we can see that.

Mortgage applications to buy homes fell further this week, down 17% from a year ago, reaching their lowest level since May 2020, according to the Mortgage Bankers Association’s weekly buying index today. The index is down over 30% from peak demand at the end of 2020 and the beginning of 2021, which was then followed by the historical price increases last year.

“The reduction in purchase applications was evident across all loan types,”[ads1]; the MBA report states. – Potential home buyers have retired this spring, as they still face limited options for homes for sale along with higher costs from rising mortgage rates and prices. The recent decline in purchase applications is an indication of potential weakness in home sales in the coming months. “

The culprit in the volume dive: The toxic mix of exploding house prices and high mortgage rates. The average interest rate on 30-year fixed-rate loans by 20% down and in line with Fannie Mae and Freddie Mac limits, jumped to 5.37%, the highest since August 2009, according to the Mortgage Bankers Association’s weekly target today.

What this means for home buyers, in dollars.

The mortgage on a home bought a year ago at the median price (per National Association of Realtors) of $ 326,300, and financed with 20% down over 30 years, with the average interest rate at the time 3.17%, came with a payment of 1320 per month.

The mortgage on a home bought today at the median price of $ 375,300, and financed with 20% down, at 5.37% comes with a payment of $ 1,990.

So today’s buyer, who is already prone to rampant inflation in everything else, has to come up with an extra $ 670 a month – representing a 50% jump in mortgage payments – to buy same House.

Now think of this with homes in the more expensive areas of the country where the median price, after the ridiculous peaks of the last two years, is $ 500,000 or $ 1 million or more. Home buyers are facing massively higher mortgage payments in these markets.

The combination of high house prices and higher mortgage rates has the effect that layers and layers of buyers leave the market. And we are beginning to see this in the decline in mortgage applications.

The Fed has caused this ridiculous housing bubble with its interest rate repression, including massive purchases of mortgage-backed securities and government securities.

And the Fed is now trying to undo some of that by pushing up long-term interest rates. It is the Fed’s way – too little, too late – to try to curb the housing bubble and the risk that the housing bubble, which has been used for the booklet, poses to the financial system.

What it means for consumption.

When mortgage rates fall, homeowners tend to refinance higher-rate mortgages with lower-rate mortgages, either to lower their monthly payment, or withdraw money from their home, or both.

The wave of refis that started in early 2019, when the Fed made its infamous U-turn and mortgage rates fell, became a tsunami that started in March 2020, when mortgage rates plummeted to record lows over the next few months. Homeowners lowered their monthly payments, using the extra money left behind by the lower payments. Other homeowners took out cash via cash-out refis and spent that money on cars and boats, and they paid down their credit cards to make room for future expenses, and this money was recycled in various ways and increased the economy. And some of it was also plowed into stocks and crypto.

This effect ended months ago. Applications for mortgage refinancing have now collapsed by 70% from a year ago, and by 85% from March 2020. Refis no longer supports consumption expenses, shares and crypto.

What it means for the mortgage industry.

Mortgage bankers know that they are in a very cyclical business. Faced with rising mortgage rates, and collapsing demand for refis, and lower demand for purchase loans, the mortgage industry has begun to lay off people.

Add Wells Fargo, one of the largest mortgage lenders in the United States, to the growing list of mortgage lenders who reportedly started the layoffs late last year and so far this year, including the well-known Softbank-backed mortgage “tech” startup Better.com , but also PennyMac Financial Services, Movement Mortgage, Winnpointe Corp. and others.

Wells Fargo confirmed the dismissals last Friday, and a statement blamed the “cyclical changes in the broader mortgage environment”, but did not reveal in which places in the vast mortgage empire it would trim mortgage bankers, and how many.

So that boom is over. And the Fed has just now begun to push up interest rates, far too little and far too late, but it is finally throwing itself forward to deal with this violent four-decade-high inflation, after 13 years of violent money printing – an inflation of the order of the majority of Americans never have seen before.

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