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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  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)
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:
 10-year Treasury yield: http://finance.yahoo.com/q/bc?s=%5ETNX+Basic+Chart&t=5d
 cash buyers: http://www.startribune.com/housing/221857471.html
 homebuilder stocks: http://finance.yahoo.com/q/bc?s=XHB&t=6m&l=on&z=l&q=l&c=
 option ARMS: http://mortgage-x.com/library/option_arm.asp
 here: http://macromon.wordpress.com/2013/09/05/if-houses-traded-like-bonds/
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