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Has the Fed Already Pricked the Housing Bubble?

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The Federal Reserve has raised rates once – a mere 25 basis points (with another hike on the table today). So, it’s just getting started, but has it already popped the housing bubble? It sure looks that way. The question is how long will it take for the air to really start coming out.

As mortgage rates push up, mortgage applications continue to fall. As of last week, applications were down 17%, and at the lowest level since May 2020 when the economy was shut down for COVID, according to last week’s Mortgage Bankers Association’s weekly Purchase Index. The index has dropped 30% from peak demand in late 2020 and early 2021.

Meanwhile, pending home sales in February dropped 4% and another 1.2% in March. It was the fifth consecutive month of sagging home sales.

The average interest rate for 30-year fixed-rate mortgages conforming to Fannie Mae and Freddie Mac limits with 20% down jumped to 5.37% last week, the highest since August 2009. In December 2020, mortgage rates were below 3%.

Between surging mortgage rates and inflated housing prices, more and more buyers are being squeezed out of the market. The MBA report projected continued falling home sales in the months ahead.

The drop in purchase applications was evident across all loan types. Prospective home buyers have pulled back this spring, as they continue to face limited options of homes for sale along with higher costs from increasing mortgage rates and prices. The recent decrease in purchase applications is an indication of potential weakness in home sales in the coming months.”

WolfStreet broke down some numbers to show just how much housing costs have skyrocketed in the last year.

The mortgage on a home purchased a year ago at the median price (per National Association of Realtors) of $326,300, and financed with 20% down over 30 years, at the average rate at the time of 3.17%, came with a payment of 1,320 per month. The mortgage on a home purchased today at the median price of $375,300, and financed with 20% down, at 5.37% comes with a payment of $1,990.”

In other words, buying the same house today will cost you $670 per month more than it did if you bought it last year. That represents a 50% jump in mortgage payments for the same home. This is another example of how CPI understates actual increases in prices.

The Federal Reserve blew up this housing bubble when it artificially suppressed interest rates and bought billions of dollars in mortgage-backed securities. Now the central bank has pricked the bubble by allowing rates to rise ever-so-slightly.

What the Fed giveth, the Fed taketh away.

Looking at the chart, you can see that mortgage rates began to fall in late 2018 as the economy tanked and the Federal Reserve ended its post-2008 rate hike cycle. Rates continued to fall as the Fed pivoted back to quantitative easing and then dropped through the floor with the rate cuts and QE infinity in response to the coronavirus. The big spike in mortgage rates started as the Fed began talking up monetary tightening to tackle raging inflation.

A housing market bust will reverberate through the economy as rising housing prices squeeze Americans already struggling to make ends meet with CPI well over 8%.

Rising mortgage rates also shut off a potential source of cash for millions of Americans. When rates drop, people often refinance their mortgages. But as Peter Schiff pointed out in a recent podcast, rising rates have already squeezed virtually everybody out of the refi market.

There’s nobody who can now refinance their mortgage into a lower rate because everybody’s got a better rate than what they can get now. And that refi lifeline has been a major lifeline for the economy because it’s given households a source of income.”

Refinancing not only provides a lump sum of cash to spend but also lowers mortgage payments, taking some strain off the monthly budget.

There was a wave of refinancing in 2019 after the Fed’s monetary U-turn started pushing mortgage rates lower. But over the last several months, the refi market has collapsed. Mortgage refinances have dropped 70% from a year ago and 80% from the peak in March 2020. That means we no longer have mortgage refinancing to support consumer spending.

The impact of rising rates and falling home sales are already rippling through the mortgage industry. Last week, Wells Fargo, one of the largest mortgage lenders in the US, announced layoffs. Other lenders have trimmed staff as well, including Softbank-backed mortgage “tech” startup Better.com, PennyMac Financial Services, Movement Mortgage and Winnpointe Corp.

As WolfStreet put it, “that boom is over.”

And the Fed has just now begun to push up interest rates, way too little and way too late, but it is finally plodding forward in order to deal with this rampant four-decade high inflation, after 13 years of rampant money-printing – an inflation of the magnitude the majority of Americans has never seen before.”

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