Will higher mortgage rates mean fewer home sales?
Shares of homebuilders take a beating as housing prices rise.
Housing prices rose in March at a 10.9% annual rate, according to data from the Case-Shiller index reported Wednesday.
But shares of homebuilders took it in the neck. Toll Brothers (TOL) plunged 5.22% and D.R. Horton (DHI) was down 4.55% for the day. Lennar (LEN) fell 4.38% and KB Homes (KBH) dropped 2.94%. Only Pulte Group (PHM) managed to score a tiny gain of 0.26%.
So why the drop on good news? Because there was bad news that, for now at least, trumped the good news. In May the average interest rate on a 30-year fixed mortgage backed by the Federal Housing Administration climbed to 3.59% from 3.35%, according to Freddie Mac. The average rate on a 30-year fixed rate mortgage with confirming loan balances increased to 3.9%, the highest rate since May 2012. The average rate on a jumbo loan increased to 4.07%.
The fear, of course, is that higher mortgage rates will translate into fewer home sales.
From the perspective of those fears, the good news is backwards looking and the bad news is forward looking.
And before you offhandedly dismiss those fears, please note the total number of mortgage applications fell by 9% last week from the immediately prior week. Refinance applications fell for a third consecutive week, the Mortgage Bankers Association reported.
If you’re looking for sectors exposed to rising mortgage rates, don’t stop with homebuilders. Financial companies specializing in mortgage-backed securities have also been taking a beating, as rising yields on this paper drive down prices.
For example, a tranche of mortgage-backed securities that traded at $107 at its peak closed Tuesday at $104. That has taken down the stocks of companies such as Annaly Capital Management (NLY) and American Capital Agency (AGNC). Annaly fell 3.47% Wednesday. American Capital Agency dropped a much smaller 0.04% Wednesday, but that’s quite probably because American Capital is already down 20.7% from its April 30 close.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own positions in any company mentioned in this post as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio.
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The majority of the housing boom happened when rates where much higher than what we have today.
During the 1990's rates where around 7%, and from 2000 to 2007 they hovered around 5%.
At those rates, it was still a very good thing to buy a house if one could get a reasonnable price.
At today's rate and today's house prices, real estate is a bargain, provided one can put down a reasonnable downpayment.
I truly do not understand the panic. The difference in mortgage payment for a $200k loan with an interest rate of 3.59% vs 3.35% is $40 per month.... If future home owner cannot save $40 per month from other expenses to pay for the mortgage, they should nolt be looking at getting a mortgage in the first place, skip the latte at starbuck or the soda at lunch or the bag of chips and the money is saved
Fewer home sales not only because of the higher prices and interest rates, buyers don't want to get caught up in another overblown bubble and left hanging. Once burned, twice learned. Our economy and unemployment numbers aren't as honky dory as government tries to portray it.
Buyers are more cautious as prices escalate knowing banks are still holding on to a massive amount of foreclosed homes inflating demand and prices. It's just a matter of time before banks will have to start releasing these homes on the market.
Obviously the figures support the correlation of rates and home sales. Higher the rate the fewer sales.
The reason again obvious people who could have marginally supported paying a given rate are priced out of the real estate market and forced to rent.
Its worth mentioning the All CASH sales and EB5 visas from foreign countries can now buy in with 100k. Problem is many have told me is the corrupt Chinese, Russian and other governments give certain people there the money and loan them the other 900k secretely to come buy up all the real estate for all cash. They dont even need a mortgage.
Cash bids way over listed prices are driving our kids and families out of ever affording a home in many areas.
The EB5 VISA needs to be stopped (look it up in wiki and Bing). Easy path to a greencard is what I have read. Also money laundering by governenments abroad are behind all that cash.
Lastly that the HUGE BUST of the 6 Billion money laundering ring (Spain, Cypruss, Russia and who knows how many others) will stop huge cash flows of dirty money into US real estate.
Its not right we are selling off our entire country on the cheap.
Just my humble opinion.
Doesn't it seem that the MSN folks are a little confused today depending which page you click on ? Higher mortgage rates ? Stocks rise as stimulus fears ease ?
This topic was being batted around yesterday and everyone has some good points. HOWEVER: This time of the year is not typically associated with good home sales. No one in the South wants to close on a home during hurricane season-and try and get a quote for your windstorm Insurance right now- very very high indeed. And I can't even imagine what the folks in Moore Oklahoma and other midwest areas are going trough. Will they rebuild? or will they relocate?
So I'm still going with my first impressions that the stimulus will be streaming right along UNTIL the EU rate gets down to 6.5%-it's at about 7.7% now. The summer time is generally not noted for strong job growth either & jobs will face 'head winds' with the implementation of Obama care in October. So when will 'Uncle Ben' start tapering off the 85 Billion ? Every time we get a little 'whiff' of this, markets react badly-so take advantage of this volatility this summer. As long as it's handled in controlled, orderly way, we'll be just fine.
keeping the housing market on chill, but not freeze, won't kill it. just keep it from overheating. rising rates will also allow funds seeking returns to ease back into less speculative investments. so, it's all good. the sooner there is sustained economic growth or inflation ticks up, either of which will cause a tapering of QE, the better as far as I'm concerned. fed too I would imagine. the equity markets won't tank. they will taper off.
Actually, higher rates work to stabilize home values. The higher the rate, the less likely barely able and shaky buyers get into them. At recent rates... $8/hourly people could afford homes. Those jobs can't sustain a home and it's broad costs. Higher rates take more substance to qualify for. Better quality buyers tend to go the distance. The longer they stay, the more reliable the home prices. Higher rates also require more diligence so mortgages are made to people who actually can afford them, raising up portfolio integrity. We need all of that to recover, so... higher rates are a good thing.
(V_L-- veteran lender... been there, created superb portfolios out of very bad economic periods).
No one wanted to buy when prices were dropping and when loans are not generally available, there are fewer home buyers.
But if the central banks ever allow interest rates to rise, and loans become more available, the opposite will occur to home sales! If there is a belief that mortgage rates will be rising, that fear will help drive more home sales, because the best time to get in will be now not later.
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