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If Houses Traded Like Bonds

Posted By Global Macro Monitor On September 7, 2013 @ 5:00 pm In Fixed Income/Interest Rates,Real Estate | Comments Disabled

As the 10-year Treasury yield [1] 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 [2] 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 [3] have been hit hard over the past few months.

In the past, innovation and financially engineered mortgage products such as option ARMS [4] 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 [5] it chart and table are not observable)

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2013/09/if-houses-traded-like-bonds/

URLs in this post:

[1] 10-year Treasury yield: http://finance.yahoo.com/q/bc?s=%5ETNX+Basic+Chart&t=5d

[2] cash buyers: http://www.startribune.com/housing/221857471.html

[3] homebuilder stocks: http://finance.yahoo.com/q/bc?s=XHB&t=6m&l=on&z=l&q=l&c=

[4] option ARMS: http://mortgage-x.com/library/option_arm.asp

[5] here: http://macromon.wordpress.com/2013/09/05/if-houses-traded-like-bonds/

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