Wednesday, May 18, 2022

Bubble Watch: Mortgage Rates Rise Despite Promises Of Small Rise

Bubble Watch explores trends that may indicate upcoming economic and/or housing problems.

Hum: Despite the Federal Reserve’s promises of a smooth increase in the cost of home financing—a prediction backed up by so-called industry “experts”—we have just witnessed one of the largest blows to home buyer purchasing power in history.

A source: An analysis of my trusted spreadsheet of Freddie Mac’s weekly report on average 30-year mortgage rates with a half-century history. This story includes the crazy double-digit bets of the early 1980s.


Remember how low mortgage rates make housing more “affordable” in the era of the pandemic?

It almost ended last week. The average mortgage rate rose to 3.45% from 3.22%, a jump of 0.23 percentage points in seven days. This is the highest since March 2020, when the pandemic froze the economy and central banks at the Fed began bailing out the housing market.

But look what just a weekly gain has done to the house hunter’s purchasing power.

Imagine being able to afford a $2,500 monthly mortgage payment. Two weeks ago you were lent $576,619 for this check. It dropped to $560,214 last week. Or a decrease in purchasing power by 2.85%.

Sounds petty? Nope! This is the 23rd largest percentage drop since 1971, exceeding 99% of all weekly periods.

Homebuyers will have to borrow less or delve into their household budgets to pay for housing. And merchants (and industry leaders) need to pay attention to this change.


Over the past year, the Fed has assured financial markets (and anyone involved in market fluctuations in life, such as homebuyers) that plenty of warning will be given before they act to raise the rates they control. Between key rate cuts and $1 trillion in home loans, the Fed has played an active role in pushing home mortgages to historic lows in the pandemic era, with the Freddie Mac average hitting 0.266% in early 2021.

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Well, it looks like at least the mortgage markets aren’t waiting for the Fed to act. Too many fear that rising inflation – the biggest jump in the consumer price index since the early 1980s – will quickly raise all interest rates.

It’s not just one week. In three weeks, this surge increased mortgage rates by 0.4 percentage points from 2.95%. Mortgage payment of $2,500 per month the way back 21 days ago, the borrower received $589,198, almost $29,000 more than last week. Thus, purchasing power has declined by 4.9% since the last weeks of 2021 alone, the 35th largest drop since 1971, or more than 99% of all three-week periods.

And please look at the long term. Over the past 52 weeks, the indicators rose by 0.66 points from 2.79%. This means that house hunters can spend 8% less. To say that this is the 451st biggest drop in a 12-month period in the last half century is not that impressive. Slightly more than 83% of all annual periods.

Another point of view

For all of you little kids — or those with poor financial memories — let me remind you of the early 1980s, when the Fed began to crack down on the economy with high rates to cool off another hard period of inflation.

Think of the worst house hunter week in 50 years in terms of purchasing power: In the seven days ending March 14, 1980, purchasing power fell 8.6% and the average mortgage rate rose from 14% to 15.4% .

Worst year? In the 12 months ended April 4 and 11, 1980, rates rose from 10.48% to 16.35%, reducing purchasing power by 33%. No typos, I said 16.35% interest rate and a third less money to borrow!

How bubbly?

On a scale from zero bubbles (no bubbles here) to five bubbles (five warnings)… FOUR BUBBLES!

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Yes, roughly speaking, raising the mortgage rate from a quarter of a point to three and a half percent does not sound so bad. And, yes, on a historical scale, 3.45% is still a relative favorable rate.

However, much of the argument for a decent 2022 for homeownership was that inflation would slow and mortgage rates would rise in a deliberate and modest manner. And remember, inflation is usually a by-product of spending too much—a positive economic effect, oddly enough.

But what we received in early 2022 is a huge reminder that while the Fed is the powerhouse of the financial market, it does not have absolute say in what interest rates do.

With mortgage rates, the mindset of bond traders is an important factor. If they don’t need mortgage-backed bonds or can find better deals in other fixed income niches, mortgage rates are likely to rise.

Also, there is how much the lender wants to make on the loan. If they focus on mortgage lending volumes, borrowers benefit from price competition. If profit margin is more important, then betting transactions may become scarce.

Okay, maybe the last three weeks have been just hiccups – an overly worrisome reaction from mortgage forces to bad news about the cost of living. But when was the last time the country’s inflation rate – 7% in December – was higher than mortgage rates? (And inflation has topped mortgage rates since April.)

Oh yes, that same 1980.

PS: California house prices rose 15% that year and 9% the following year before falling 5% in 1982. %; houses fell in price by 1.5% in 1981 after 10.5% inflation; and fell another 11% in 1982 when inflation “dropped” to 6%.

Jonathan Lansner is a business writer for the Southern California newsgroup. He can be contacted at

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