The housing market, wrecked by ultralow mortgage rates, will stay wrecked for longer.
By Wolf Richter for WOLF STREET.
Mortgages with rates below 4% – primarily products of the period of maximum interest rate repression by the Fed in 2020-2022 – have tightened their grip on homeowners, as they face mortgage rates over 7% currently.
Mortgages with rates below 3% edged down by just 10 basis points to a share of 19.2% of all mortgages outstanding in Q2. It took a whole year to trim the share by just 1 percentage point, from 20.2% in Q2 last year (red in the chart below). So that process has essentially stalled.
The share of 3% to 3.99% mortgages edged down by just 20 basis points in Q2, to a share of 29.9% (blue), according to data by the Federal Housing Finance Agency.
All types of mortgages are included, from 30-year fixed-rate mortgages, via 15-year fixed-rate mortgages, to Adjustable-Rate Mortgages.
These ultra-low-rate mortgages have become a huge gift from the Fed. Homeowners might not move, when they would otherwise move, because they don’t want to replace that 3% mortgage with an over-7% mortgage, and so sales of existing homes have plunged by about 25% from pre-pandemic times and have remained at those levels for four years.
From early 2020 through Q1 2022, the Fed had purchased trillions of dollars of mortgage-backed securities and Treasury securities with newly created money, and it cut its policy rates to near-0% and kept them there, all of it to impose all-out interest rate repression on the economy.
This act pushed mortgage rates to historic lows, which created enormous demand for homes, which caused home prices to explode by about 50% in two years, and more in many markets. It caused other asset prices to explode as well, and it caused inflation to explode, eventually to over 8%, the worst inflation in 40 years, while mortgage rates were at 3% — so negative “real” mortgage rates. It triggered a tsunami of refinancing into these low-rate mortgages. And now, very understandably, homeowners are clinging to their low-interest-rate mortgages for dear life and have thereby put the housing market on ice.
Life happens nevertheless – a job in a new city, death, divorce, more kids, nightmare neighbors, the need for a house without stairs, that sort of thing – and people sold their homes and paid off those mortgages since early 2022. But that process has come to a near-halt now, ensuring that the housing market will remain frozen.
Those mortgages are still attractive and worth clinging to, compared to today’s 7%-plus mortgages.
The share of 5.0% to 5.99% mortgages increased to 12.0% of all mortgages outstanding in Q2, the highest since Q1 2020 (blue in the chart below).
In Q2, there were still regular 15-year mortgages offered in this range, and some people chose them if they could afford the higher payment, because they would save a lot of interest over the life of the mortgage.
But in recent weeks – which will show up in the Q3 data – regular 15-year mortgages moved into the 6%-plus category as mortgage rates have surged across the board.
The share of 6%-plus mortgages rose to 22.5% of all mortgages outstanding, the highest since Q2 2015, up from a share of 7.3% in Q2 2022 (red in the chart). The bulk of mortgages originated currently fall into this category.
Adjustable-Rate Mortgages remained unchanged at a share of 4.3% of all mortgages outstanding, down from over 10% at the beginning of the FHFA data in 2013.
Some ARMs had rates below 3% even before 2020, and were included in the below-3% mortgages, which is one of the reasons the share of below-3% mortgages was above 0% even before 2020.
Homeowners with ARMs that were originated when rates were ultra-low experienced payment shock when their mortgage rates adjusted to the higher current rates. But the share of ARMs outstanding is very low, and don’t affect enough people to pose a systemic issue.
And home prices have soared in many markets since 2020, so if a borrower with an ARM gets payment shock and cannot make the payment, they can often sell the home, pay off the mortgage with the proceeds, and walk away with cash to re-figure things out.
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A $1,000, 30-year, 3% bond will drop to $550ish when rates rise to 7%. Can we apply similar math to the “value” of a million-dollar house bought with a 30-year, 3% mortgage that is now on the market in a 7% interest-rate environment?