It has been an extraordinary few days with the Bank of Japan intervening to support the Yen and then the pressure switching to create something of a sterling crisis. But if we step back we see that the cause of all of this will also plough its way through housing markets.Let me start by showing the wrecking ball.
Bonds remained under pressure in Australia and Japan, while the benchmark 10-year Treasury yield held near 3.9% – a level last seen in 2010. ( Gulf News)
They nearly miss the main player but they get there at the end and a US ten-year yield of 3.9% is impacting all around the world. Remember it got as low as 0.5% as central banks surged into bond markets with their hands full of QE money looking to pay as much as they could for bonds, and hence as low a yield as possible. The central planners thought they were being very clever and a new version of the Masters (and Mistresses) of the financial universe.
Now as they rush to try and fix another mistake which came from their claim that inflation will be transitory we see that not only are we seeing a rise in interest-rates and yields we are seeing a surge. So they are holding ever larger losses on their balance sheet which they will argue does not matter as they can just create money. But the issue of interest does matter because when it was in their favour they sent it to the national treasuries and basked in the reflected praise. Going to be more uncomfortable as treasuries have to pay them money and add to the rising debt costs.Awkward.
Mortgage Rates
Now we can switch from the surge in bond yields which have been driven by the central bankers Here is Mortgage Daily News from yesterday.
The most recent historical high water market for we officially declared it to be boring last Tuesday. Now, less than a week later, 14-year highs would be more exciting than boring. As of mid-day today, we’re officially at 20 year highs.
So as Glenn Frey would say the heat is on. How much?
In fact, the shock hitting the U.S. housing market continues to grow: On Monday, the average 30-year fixed mortgage rate jumped to 6.87%. That marks both the highest mortgage rate since 2002 and the biggest 12-month jump (see chart below) since 1981. ( Fortune )
If we stay with Fortune we can compare with earlier this year.
The red-hot housing market would quickly shift in the face of spiked mortgage rates, which had jumped from 3.2% in January to over 4% by late March.
So we have had nearly 3 further jumps since then if we continue their imagery. The consequences of those moves are shown below.
Higher mortgage rates lead to some borrowers—who must meet lenders’ strict debt-to-ratios—losing their mortgage eligibility. It also prices some buyers out of the market altogether. A borrower in January who took out a $500,000 mortgage at a 3.2% rate would be on the hook for a $2,162 monthly principal and interest payment over the course of the 30-year loan. At a 6.8% rate, that monthly payment would be $3,260.
Let me analyse this via this statement from Fortune.
The housing correction is the U.S. housing market—which had been based on 3% mortgage rates—working towards equilibrium.
Firstly we have not seen any sort of equilibrium in financial matters for years as the central planners took charge. But we can use it to see there has been a shift from mortgage rates around 3% to ones around 7%. That is going to heavily affect what new buyers can pay. First time buyers will be affected heavily and those trading up less so because they will have some equity less so. But the simple fact is that they will be able to pay less for a house.
There is another factor which is bad for house prices and it comes from something else that higher interest-rates are doing.
Atlanta Federal Reserve Pres. Raphael Bostic tells @margbrennan that with the economy in its current state, “there will likely be some job losses.” But, he adds, “it’s going to be smaller than what we’ve seen in other situations and that’s what I’m banking on.” ( Face the Nation on CBS )
Unfortunately Mr.Bostic is not very good at predicting the future. Here he is from March 2021.
On balance, I don’t think it is clear that a surge in underlying inflation is imminent. The latest official readings substantiate that. For February, only one of the nine readings in our dashboard came in above the Fed’s target range. I watch for the trajectory of inflation, and I’m not sure the path bothers me.
So if he continues with this level of accuracy we could see quite a few job losses which would also be bad for the housing market as some would not be able to keep up their mortgage payments.
Fortune look back to 2008.
Unlike the 2008 housing crash, this time around we don’t have a housing supply glut nor a subprime crisis.
Whereas things do not have to be the same. We do have much higher mortgage rates and may well see job losses. Then we also have what we might call the “X-factor”, which is that the financial system is highly stressed and sharp moves like we have seen in bond yields and mortgage rates might catch someone out.
According to the Financial Times the times they are a-changing.
As they prepared for their wedding this year, New Yorkers Alexa Feneque and Silvio Tellez kept their list of desired gifts brief. Forgoing the usual hand towels and salt shakers, they asked their guests for just one thing. “We are working so hard to save for our first home and any contribution towards that will always be sincerely appreciated,” they wrote on their online wedding list, or registry as is it known in the US. The request netted the couple roughly $30,000,
The UK
The issue has heated up in the UK over the past few days as bond yields have been on rather a tear since the Mini-Budget. So fixed-rate mortgages were going to get more expensive before this happened.
Some of the UK’s biggest mortgage lenders, including Virgin Money and Skipton Building Society, have stopped offering new home loans in response to the market volatility triggered by the government’s mini-Budget.
Halifax, part of Lloyds Banking Group, the biggest lender in the UK, is also withdrawing a range of new home loans, it told brokers. ( FT)
Thus the situation was exacerbated as the opportunity to grab a deal at the previous interest-rates not only faded but ended in some cases. It does at least tell us those who were acting without hedging their mortgage offers.
We will now see a range of much higher mortgage rates.
“The huge rise in gilt yields means lenders have to reprice mortgages very significantly. I expect by next week there will be very few mortgage deals available with rates under 5 per cent. Any lender who hasn’t pulled out yet is almost certainly going to on Tuesday.”
I think we know what temporary means these days…
Halifax said that from Wednesday, it would withdraw its range of mortgage products with fees, which have cheaper rates. While the lender said that the measure was temporary, there was no timeline given for when it would be reversed.
Comment
There has been something of an unintentional move here by central banks. For over a decade they have regaled us with tales of Wealth Effects which has essentially boiled down to higher house prices ( and hoping we spend the gains). So the music was Elvis Costello style.
Pump it up, when you don’t really need it
Pump it up, until you can feel it
But now via their refusal to see the rise in inflation in 2021 they have found themselves stamping on the interest-rate button and thus hitting new buyers in the solar plexus. Si house prices will be singing along with Status Quo.
Get down deeper and downDown down deeper and downDown down deeper and downGet down deeper and down
The catch is that once this begins I expect the central bankers to panic so how long will it last? Also remember that whilst the central bankers are now on speed the response to them is much slower due to the spread of fixed-rate mortgages which in the UK are now 84% of the total.