The Beginning Of The End
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Soaring Mortgage Rates Are Going To Make It Far More Difficult To Buy Or Sell A House

Home For SaleDid you actually think that mortgage rates were going to stay at all-time lows forever?  Federal Reserve Chairman Ben Bernanke was able to grossly distort the market for a while by buying up massive amounts of government bonds and mortgage-backed securities, but there was no way in the world that the market was going to stay that distorted forever.  It simply does not make sense to give American families 30 year mortgages at a fixed interest rate of less than four percent when the real rate of inflation is somewhere around eight to ten percent and the mortgage delinquency rate in the United States is 9.72 percent.  If we actually did have "free markets" and they were behaving rationally, mortgage rates would be far, far higher.  Well, now that the Fed has indicated that they are going to be starting to "taper" QE at some point, bond yields have skyrocketed and this is rapidly pushing up mortgage rates.  According to Freddie Mac, we just witnessed the largest weekly increase in mortgage rates in 26 years.  Sadly, this is only just the beginning.  Unless the Federal Reserve intervenes, mortgage rates are going to continue to try to revert to normal.

When mortgage rates go up, so do monthly payments.  All of a sudden, families that could afford the monthly payments on a $300,000 mortgage are no longer able to do so.  This is why when mortgage rates rise, it tends to push housing prices down.

If rates continue to go up, it is going to become increasingly difficult to sell your house.  Less people will be able to afford the monthly payments as rates rise.  Many families will have to end up reducing their selling prices.

And right now we are watching rates rise at a rate that we have not seen since the 1980s.  According to Freddie Mac, the average rate of interest on a 30 year fixed-rate mortgage jumped by more than half a percentage point just last week...

The average 30-year fixed-rate mortgage rose from 3.93 percent last week to 4.46 percent this week; the highest it has been since the week of July 28, 2011. This represents the largest weekly increase for the 30-year fixed since the week ended April 17, 1987.

A year ago, the 30 year rate was sitting at 3.66 percent.

The monthly payment on a $300,000 mortgage at that rate would be $1374.07.

Currently, the 30 year rate is sitting at 4.46 percent.

The monthly payment on a $300,000 mortgage at that rate would be $1512.93.

If the 30 year rate rises to 7 percent, the monthly payment on a $300,000 mortgage would be $1995.91.

Does 7 percent sound crazy to you?

It shouldn't.

As the chart posted below demonstrates, a 7 percent mortgage was considered "normal" a decade ago...

30 Year Mortgage Rate

As you can see, mortgage rates have nowhere to go but up.

And as they go up, they are going to absolutely crush any semblance of a "housing recovery".

Meanwhile, Americans continue to get poorer.

This week we learned that real per capita disposable income plunged at an annualized rate of 9.21 percent in the first quarter of 2013.

That is absolutely astounding.  We haven't seen anything like that since the darkest days of the last recession.

If Americans do not have money to spend, that is going to hurt every industry - including housing.

And already we are seeing pain in the housing market.  For example, the number of mortgage applications has fallen by 29 percent over the last eight weeks.

And rising rates are also causing a lot of families to turn to adjustable rate mortgages.

Remember those?

They played a major role in the last housing crash, and according to CNBC they are now making a comeback...

After hovering around record lows for the past few years, mortgage rates are rising dramatically. That has consumers not only shopping more but also considering adjustable rate mortgages, which offer lower rates and lower monthly payments.

These ARMs, many requiring interest payments only, were popular during the latest housing boom but quickly fell out of favor when safer, fixed-rate loan rates fell to record lows.

So what does all of this mean?

It means that the tiny little "mini-bubble" that we have seen in housing this year is rapidly coming to an end.

It also means that it is going to become far more difficult to buy or sell a house.  Monthly payments are going to go up substantially, and many homeowners are going to find that they are not going to be able to sell their homes for what they had anticipated.

If you are already in the process of buying a house, hopefully you locked in a really good rate while you could.  Those record low mortgage rates sure were nice, and we will probably never see them again.

Now we are headed for a very painful "adjustment" thanks to Ben Bernanke and the Federal Reserve.  They should never have distorted the housing market so much, and now we are all going to suffer the consequences.

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  • Tim

    I’m inclined to think the Federal Reserve will try to push rates back down (by continuing QE) because of the implications that higher interest rates have for the cost to service the federal debt. Higher interest expense = higher budget deficits. But that’s just how I see it. But perhaps this is a situation where the genie is out of the bottle? I don’t know.

  • Ralfine

    You seem to see fault everywhere. When the prices were low, it wasn’t right, when the prices are rising, it isn’t right either.

    • Shmeggle Marxist

      you seem to find fault with those who find fault. that is a fault, the fault is all yours, lolololol

      • markthetruth

        The real fault is to have faults and not amend them.

        the end…

    • Tim

      I see fault with the whole system of fractional reserve banking. Why? When a person borrows to buy a home, the bank effectively creates the money to lend to the borrower. And the property being purchased with the borrowed money becomes the collateral. If the borrower defaults, the bank takes the collateral. And the bank earns interest on the money that it created as long as the borrower makes the payments on the loan. Hey, what a system!

      • Guest

        I’ve always found the idea of banks needless. Why have an institution that takes the money from you and others in your community, then uses your own money and your neighbors’ money to lend back to you at interest?? Why not create an institution that does the same, but interest free?

        • Bad_Mr_Frosty

          Honest banks and credit unions are important in capitalist economies. Without them you couldn’t buy a house, a car, or start a business unless you had the cash up front. Fractional reserve banking and banks “too big to fail” are a joke and only do damage to an economy.

        • Ralfine

          Oh, right now it is interest free. You don’t get anything for your deposits, but you have to pay a fee for everything.

      • Ralfine

        That’s why I bought my house with cash. And I took out a loan later for modernising the house. The loan could be covered approximately with my savings only that I got double the interest for my savings than I had to pay interest for the loan.

        It’s always good to have a lot of cash if you plan to buy a home some time in the future.

        It is always bad to get a loan if you can’t afford to pay for something in the first place.

    • markthetruth

      optimum Blood pressure is 120/80 for a Human body, too Low is no good and Too high is Dangerous . The same with economics there are Means

      the end…

      • rentslave

        After a workout and shower last week,my pressure was 83/59.I’m still here paying my rent.

        • Tim

          That’s low! Better keep an eye on that.

        • markthetruth

          your almost dead.
          or your machine is broke.

          the end…

        • JF

          My BP tends to be low but that is not good. Back when I was around 90/60 my doctor wondered what was holding me up. Of course, I had dizzy spells now and then as well – result of the low BP. Upped my salt intake slightly and the dizzy spells were gone.

    • Ayn Rand

      They are right on this one Ralfine. Anything the fractional reserve banking system does is idiocy and leads to the common person getting screwed over.

  • snoopy the economist

    Interest rates will not be allowed to go up more than 1% from these lows. If they do then the USSA will default on the $17T debt – we currently pay 2.9% interest which is ~ $500B /yr. Every 1% increase in rates is another $170B /yr (more every yr since debt only increases).
    So why worry about mortgage rates when the real concern is gubmint default?

    • Gene Baugh BBA

      The market has been pushing up long term rates for over a year now QE and all.

    • Gkjohn

      Realtors and Bankers have been telling us ,that over 16,000 Russian immigrants have bought houses in Plymouth Mn and paying the listing price with US Saving and Treasury Bonds

    • cannuck21

      Very good point. Yet I suspect that the crooks who manage the administration will do everything to hold onto power. You think that we have seen lies and misinformation now…..lets just wait. More wars, more restrictions to come

    • john mcginnis

      Interest rates will not be allowed to go up more than 1% from these lows. — snoopy the economist

      Snoopy needs to compare last months tbill rate with the current rate. Its already 1%+ already. When it becomes obvious to even Ma Frickert that the govt can’t pay back the loans the rates will go thru the roof and the govt will still pay 20-30%. they have to, 40% of current expenditures come from loans.

  • markthetruth

    Well, now that millions of Illegal immigrants will collect welfare and get free housing , they can keep the bubble going that we have to pay for.

    ” This country is becoming a Cesspool !!! ”

    the end…

    • Gene Baugh BBA

      Hold on it hasn’t passed the House yet.

      And, deportations are running at a record pace under Obama.

      And, if those immigrants want citizenship they are going to have to pay taxes like the rest of us.

      • Adrian

        They do. Hopefully the NYT link I provided will be cleared soon, and you will see that illegals pay far more into Medicare than they receive.

    • Crony

      Already is a cesspool.

  • Shmeggle Marxist

    gary2 = gayveteran = jew haters society of obama fellationism

  • Gkjohn

    Here’s the DEAL. US Treasury owes China , CIC. Chinese Investment Corporation is purchasing houses across the States and buying them with the US Treasury Junk Bonds we sold them. China then sends its people here on Foreign national work visa,s. they live here in corporate houses and work for corporations they ,pay no Taxes ,no social security ,no state taxes..the money they earn goes back to the mother land. It’s called Double Down for china. We Pay both ways.

  • Optimist

    Anything under %6 historically is great. So we jumped from 3.5 to 4 on a 30 year. I paid 4.5 and am thrilled.

    • defaultplayer

      I don’t understand all the excitement over a less than 1% move when historically it has made such moves all the time.

      • Optimist

        It’s michaels job to scare the crap out of people.

  • Hope

    Why anyone wants to be a slave to debt payments is beyond me. I’d love to buy a home, but most homes are just way to expensive and I’m not going to pretend like I can reasonably afford to pay upwards of $1500 a month. I’m saving up, but I probably will end up renting for years and years.

    • rentslave

      Don’t wait too long.i’ve been paying rent for 45 years now.

    • Ralfine

      I still rent for myself. But I bought a house for my parents and paid in cash. Just about 50,000 euro for house and land, an hour from the city centre of the capital.

      With 80sqm it’s probably very small for American standards. But it survived WWII, and extremely cold winters and all the years since.

      I had the windows changed, and the heating system, and put on insulation to reduce heating costs by 80%. Now it’s good enough to last another 80 years.

      My niece or my nephew will inherit it, or their kids.

      My boyfriend got some money, too. So he bought some rice paddies for his brother to get something to eat. And we pay college for their kids.

      Globalisation works many ways.

      • cherylmeril

        Sounds like you’re writing from another country.

    • cherylmeril

      I do a lot of loan signings and people get great deals in San Francisco. I see mortgage rates near my rent payments often times. You’re just making excuses for yourself.

      • Cheap Houses

        RE in California are sold to immigrants and minorities who work for cash under the table or bring corrupt money from Asia over. But, in the regular American RE markets in most states, regular 3 bed room houses are about 120,000. Regular America in most states can be not fooled as in California or Arizona.

    • Flossie

      Hope — There’s no problem at all with what you’re doing. I’m in my mid-50s and I’ve been renting all my adult life. No mortgage, no property tax (and here in Chicago the taxrates are sky-high and climbing fast), no problem moving on if I need to. Meanwhile, I’m saving very aggressively. I’ll be paying cash for a home (my “forever home” as they say about shelter pets) in the next couple of years, and I’ll own it free and clear.

    • Tony

      Hope – What is the idfference if you pay rent or a mortgage? You still have a monthly payment you have to make or you will be out on the street. You are either paying down debt and then at the end of the day you have something to live in after it is paid off. or you are paying someone else forever to borrow their property. Frankly I don;t care what anyone does regarding this but either way you are beholden to someone else.

  • rentslave

    Good!The subsidization of real estate since buck privates came home in 1946 has led to gigantic distortions in the marketplace,turned our cities into hellholes,and enabled our enemies to attack on 9/11 as a result of our insatiable demand for oil.

  • Adrian

    I’ve always found the idea of banks needless. Why have an institution that takes the money from you and others in your community, then uses your own money and your neighbors’ money to lend back to you at interest?? Why not create an institution that does the same, but interest free?

    • Eric

      It’s called a Credit Union. Join one.

  • GSOB

    Can’t sell your house, can’t by a house.

    Time to hunker down.

  • Ralfine

    In the UK, many got an “interest only mortgage”. So, effectively they rented a house from the bank.

    I prefer to rent cheap, just large enough not to trip over each other when going to bed, having a bath, or cooking a meal.

    With own property, I’m a bit old fashioned. A property isn’t a property if the land itself isn’t owned.

    And a house is made of stone, with a solid foundation, providing protection against the elements. A place to hunker down, cuddle and sleep well when the snow is 2 meter deep, the storm is howling, and the nights 25 below zero.

    And until I had a place where I’d like to settle down, I rented a place, moved closest to the work place to save commuting costs, and let the cash accumulate.

  • Doin’ it Right

    I bought a house on the cusp of the housing bubble burst….right at the point where house prices were falling, but credit was still available for people to take out loans. I got my historic colonial house for $80,000 less than it was listed as, mainly because the owners had two mortgages they couldn’t afford.
    My mortgage rate is fixed at 6%, which means I’m paying for my mortgage the same amount of cash I would be paying to rent. I thought about re-financing, but decided against it; with so many unscrupulous banks out there, I figured I would stick it out with the bank I had…they’ve done right by me.
    So now I have a nice home that I can afford, nice property that has several gardens, my own well for water, and a reasonable mortgage that isn’t draining me.
    It all comes down to buying what you need (and not more), and buying what you can afford. If I have my way, I’ll live here until the day I die. This isn’t an investment property to flip. It’s what a house should be: a home.

    • MarkLO

      Doin’ it—– why are you paying twice as much interest a year when you could refinance to a much lower rate? First of all, your own bank should be able to do a refi. If you bought before May 2009 they should be able to do a HARP refi with no appraisal. Unless you love your bank so much you like giving them hundreds of extra dollars a month.

    • edward

      Yes but you have to have a job first. Then you need to have a job that pay enough to live on.The state of America is hard to find a job and with Washington fools set to flood America with millions of Mexican to make wages fall lower.Companies selling out America by hiring non Americans .As in my area I saw after tornado roofing all done by Mexican who cannot not even speak English when I tried to talk to them.. Those roofing job use to be high paying Americans jobs.Who can buy a home ? Fewer and fewer Americans .Myself 54 years old been out of work 1/1/2,all my saving gone .I have been living on credit card to pay bill s.The street is getting closer and closer .

  • edward

    mini bubble ??

  • Dave Webb

    The rate of interest on a mortgage is low. But no one discusses a loan that for 40,000 dollars pays back to the bank a $120,000 over the length of a loan. That people average 7 years in a house on a 30-year mortgage.before selling it until now when the prospective customers working is so low.
    Loans on a house are like no other loan in the world. All the interest on house loans is paid up front in the monthly payment at 95% interest/5% principal. Which eventually becomes 50% interest/50% principal very late in the length of the loan. The only way to defeat this is to double the principal payment every month so that the loan ends in about 20 years. It is almost impossible to pay off a house. The deck is stacked against you both by real estate taxes and the fact that houses wear out and things like roofs, AC, furnaces, and other maintenance become necessary to keep the house insured.
    Insurance is required by the bank.
    Many people are in homes they can no longer afford to own. So they walk away and leave the bank stuck. Or is it?
    The bank is required on a foreclosure to get at least 2/3rds of the balance of the loan from a new owner. The government covers the rest.
    If you have 5 or 10% down, the loan is approximately for 90% of the value of the house.
    67% of 90% value means the house is a real bargain for someone. That is if the taxes are paid. If the bank cannot keep up the taxes, the government forecloses and the bank looses the house.
    Someone can then buy the house for pennies on the dollar by paying the taxes. If no one does anything, in two years the property is yours.
    This is detailed in financial books elsewhere.
    The problem is too many foreclosures and the banks do not have the capital to wait around for new prospective owners. SO they go under.
    And that in a few paragraphs is why they are all in a lot of trouble right now. We could conceivably have a massive bankruptcy of major financial institutions and it could happen world wide at any time. They are all attempting to float their way out of this and it is not working!
    Thanks, Michael, for a good article.

  • markthetruth

    If you believe that article then there are martians on mars.

    Illegals work off the books and are paid in cash they do not contribute to anything and don’t even pay taxes. and live 6,8 together. and send the money home , and spend the rest on beer and lottery tickets.

    the end…

    • Adrian

      It seems you engage in mass generalizations frequently. Some are paid under the table, and one reason for that is to avoid paying minimum wage. Did you actually read the article? If so, you can see how their study was conducted. Seems you are shutting your eyes to the facts.

  • Ayn Rand

    I AM against illegal immigrants, however, I think it should be made easier for legal immigrants to become citizens. I have an Egyptian uncle who has a family, pays taxes, and works HARD for a living. He has yet to become a citizen.
    However, I don’t like this Immigration Bill. Estimated costs long term are massive and will put us deeper in debt.

    • Crony

      Do not bother arguing with these idiots, Ayn. They are what they are…..stupid food.

  • Crony

    They are witch doctors. They believe that if they chant a song and dance around the fire, economic laws will follow in step.

    What nonsense. Manure. Crapola.

  • yhwhzson

    …Now we are headed for a very painful “adjustment” thanks to Ben Bernanke
    and the Federal Reserve. They should never have distorted the housing
    market so much, and now we are all going to suffer the consequences…

    But this was the money masters’ plans all along. This is just as much a controlled demolition of of the financial system as was the controlled demolition of the World Trade Towers which was symbolic of the controlled demolition of U.S. world trade powers.

    Interesting to note that on 9/11/2001 as the Twin Towers, the symbols of U.S. dominance were being purposely torn down (signifying the destruction of U.S. dominance over world trade) on 9/17/2001, just six days later China was accepted in principle into the WTO (World Trade Organization).

    In the words of Leroy Jethro Gibbs on the show NCIS ” I don’t believe in coincidences”.

  • landlady

    Our family has been in appraisal business for over 25 years…always it slows way down before the market seizes up and that is what we are seeing now. instead of 10-20 a week, we are down to 2-5. And this is all 4-5 individuals in separate companies. We saw this in 2006, 2007 before the SHTF and now we are seeing it again. Just saying…..

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