Ouch! Higher Mortgage Rates Exacerbate Housing Slump

Posted by: Peter Coy on June 16, 2007

Freddie Mac says that the average rate for 30-year fixed mortgages was 6.74% on June 14. That’s up from 6.15% on May 10. Fred’s chief economist, Frank Nothaft, said (in a press release):

“Higher mortgage rates may weigh on the housing market’s gradual recovery. While demand appears to have stabilized, inventories of new homes remain high, putting downward pressure on construction and home prices.”

That’s putting it mildly. A jump of more than half a percent in 30-year fixed rates has drastically worsened the economics of homebuying for a while lot of families since last month.

Reader Comments

Nick

June 16, 2007 4:14 PM

My conclusion may be naive but goes something like this. I am no financial expert but it seems the Federal Reserve is trying to push the real estate industry, i.e. mortgage, and every other market segment that depends or works with real estate, to become healthier.

If higher rates, then less demand, less demand equals less people working in real estate (we already have a glut, remember?), and less people in real estate means a better handle on the industry.

In other words, less people working in real estate, slightly higher rates, less buyers being able to buy and prices come down while serious buyers look for real professionals. It makes sense in this light.

rich

June 16, 2007 4:52 PM

You are exactly right about that, Peter. But there is another problem. Too much focus is on home buying/selling and foreclosures. Not enough focus is on people who have adjustable rate mortgages, are determined to pay them off over time, love their homes and want to keep them, and aren't earning a lot more money year after year. These are true middle-class Americans. They would switch into a fixed rate mortgage if the numbers worked out. But the numbers of refinance are starting not to work out.

So, what do true middle-class Americans do? They pay 40-50% of their incomes for housing, year after year. They become "mortgage slaves." That means we won't be sending so much of our country's money to China. Which is really a good thing, when you think about it.

JanB

June 17, 2007 11:06 AM

Whoever thinks we aren't headed for absolute disaster over the next 1-2 years is either working for the NAR, seriously delusional or BOTH!!--(They do go hand in hand nicely)

Anyone who takes the time to educate themselves will realize that This is the scariest "perfect storm" of elements ever to hit the housing market, and the house of cards will have no choice but to be reduced to rubble. Now that Summer is here, prices will start their next leg down and the pain has just BEGUN for those in trouble. 1 Trillion in ARMS will reset this year and next....

SAAWEEET BAYBEEE JESUS----

Wes

June 18, 2007 9:58 PM

"So, what do true middle-class Americans do? They pay 40-50% of their incomes for housing, year after year. They become "mortgage slaves." That means we won't be sending so much of our country's money to China. Which is really a good thing, when you think about it. "

Last time I checked, there was no one holding a gun to the heads of middle-income American's, forcing them to spend until paralysis, buy the biggest homes they can get, etc.

I love it how the industry is 'stabilizing'. We haven't even seen anything yet, and if the past is any guide, a 10 year run up is not corrected in the span of 18 months. We are seeing what appears to be the beginning of a dead-cat bounce, but really is just a level before the plunge.

Even the Titanic bobbed on the surface after shedding the bow, eventually to sink.

dan

June 19, 2007 4:31 AM

rich,

80% of treasury bonds are owned by foreign holdings (stated by pimco). Now make that leap to the mortgage backed industry.

We are mortgage slaves to the world.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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