As the 10-year Treasury yield approaches 3 percent let’s take a look at the recent spike in mortgage rates and its micro impact on the housing market and average home buyer.

The chart below shows 30-year fixed mortgage rates have increased 122 basis points since early May.  This translates into a 17 percent increase in the monthly payment on a $300K mortgage, for example from $1,313 to $1,538 per month (see Matrix).

Though recent home sales have had a high proportion of cash buyers the monthly mortgage nut does still matter for most buyers and remains one, if not, the biggest constraint on new purchases and housing price appreciation.   For example, the $1,313 monthly payment, which supported a $300K mortgage at 3.30 percent in early May, for example, now only qualifies for a $255K mortgage.

If homes traded like bonds, which are the sum of discounted coupon and principal payments, the spike in interest rates since early May would have resulted in a 15 percent fall home prices.   This surely is one of the reasons why the homebuilder stocks have been hit hard over the past few months.

In the past, innovation and financially engineered mortgage products such as option ARMS have limited the impact rising rates have had the housing market.   Those daze, we think, are over.  Maybe.


Click on matrix to enlarge and for better resolution.

(click here it chart and table are not observable)

Category: Fixed Income/Interest Rates, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “If Houses Traded Like Bonds”

  1. DeDude says:

    I agree. This time around it is not likely that financial innovation will come to the rescue. House prices will likely stall and possibly fall a little in the next 6 months.

  2. rd says:

    I live in NYS with high property taxes, so my refinanced PMIT payments have less than half my monthly payment actually going to the mortgage due to the low interest rates. The higher interest rates will impact buyers in NYS but not nearly so much as buyers in states that have low property tax rates.

    • Iamthe50percent says:

      I agree. Here in Illinois, my new mortgage is at about 70% of value, half goes for taxes. I have no mortgage insurance. The rates are prohibitive at my age.

  3. Frilton Miedman says:

    If you’re of the belief that credit games will no longer supplant demand, then prices either must go down or wages must go up.

  4. Eric says:

    Houses are illiquid and the flow is insignificant relative to the stock. Prices do not respond to every change in market conditions consistently or immediately. That’s a good thing, I think.

    Financial markets are still not functioning properly and so financial innovation in this area is dormant and likely to remain so for a long time.

    • HDsea says:

      The houses already trade like bonds. Mortgage Backed Securities (MBS) would be one example. Home Price Appreciation derivatives (HPA) – another. So if houses would be trading like bonds their prices would drop by about 6-8%