Something has to give. And that’s going to be the price.
By Wolf Richter for WOLF STREET.
The average 30-year fixed mortgage rate climbed to 6.18% today from 5.85% on Friday, according to the daily index for Daily Mortgage News. Besides the magnitude of the spike, it was also the highest mortgage rate since daily data collection began in April 2009. It was lightning fast, with mortgage rates nearly doubling since the start of the year (chart via Mortgage News Daily):
Mortgage rates follow the 10-year Treasury yield, but there is a gap between them, and the gap varies. The 10-year Treasury yield jumped 28 basis points today to 3.43% at the close, a huge move and the highest since April 2011:
Back then, before QE and the interest rate crackdown, 6% mortgages were considered low, I mean super low, and I thought I got a good deal on my 15-year mortgage in 1989 at 8%! There are people here who remember the 15% mortgage rates. We didn’t even see 6% 30-year mortgages until 2002.
Freddie Mac’s data dates back to the early 1970s (although the June 9 release lags today’s daily measurement by about a week). This shows how quickly mortgage rates have rebounded from historic lows, and how relatively low they still are:
So let’s see. Greenspan’s Fed floated the idea of cutting interest rates after the dotcom meltdown to create a housing bubble to take over from the imploded stock market bubble. It worked, and we had a housing bubble, which the Fed responded by raising interest rates again over 5%, which worked and imploded the housing bubble, which triggered the mortgage crisis, which pulled a rug under the most -leveraged banks, on which the Fed rolled out its new dual-weapon QE and 0% interest rate policy, which worked, and it has inflated all asset prices, bailed out bondholders and bank shareholders, and soon it triggered the next real estate bubble, but much more magnificent than before, etc. etc
You know the chorus. But this time we have a new trick: raging consumer price inflation the likes of which we haven’t seen in 40 years, and all bets are off. Rampant inflation is doing a lot of long-term damage to the economy, currency, businesses and people, and it’s time to get tough.
Well, not really a crackdown, just a slow increase in short-term policy rates from almost 0% to still very low levels, and finally the end of QE, and the slow start of QT.
So it’s not really a crackdown, but seeing how massively the markets reacted to this little political action shows how overinflated all assets have become, thanks to 12 years of QE and interest rate crackdowns – 12 years of policy mistakes by the Fed – and how hard it will be to unravel all this madness and return to some normalcy. But inflation is now raging and all bets on a Fed put are off.
After 12 years of printing money and suppressing interest rates, house prices have soared to the point that higher mortgage rates are having a very different impact than they did then.
Each time mortgage rates rise slightly at current prices, they drive a new layer of potential buyers out of the market. And the volume of transactions decreases, the houses begin to sit on the market and the inventories pile up. So it can’t happen here, they say, but it’s already happening, even in May, before the current mortgage rate spike, when stocks jumped amid price cuts and falling sales, as there is a way for sellers to make a deal: cut the price enough for future buyers to pay the mortgage.
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