Shelter from the Storm

Housing is a primary driver for wealth here in America.  Many leverage their balance sheets and buy a home, anticipating the value will rise, pushing their net-worth higher.   Take a look at any chart of recent home prices, and it looks like this strategy works.  Yes, there are periods when the values of homes fall (e.g., the Great Financial Crisis), but for the most part they go up.  One might argue that a steady decline in borrowing cost since the 1980s has helped fuel this experience.  Whatever the cause, prices for homes have generally moved from the lower left-hand side of a chart to the upper right corner.

Atlas isn’t going to make some bold call that this pattern is over, but we would like to draw your attention to a recent development which seems unlikely to impact the marketplace positively: mortgage rates.  Each Thursday Atlas observes the average 30-year fixed rate mortgage as published here by the Federal Home Loan Mortgage Corp (aka Freddie Mac) as a proxy for mortgage borrowing costs.  On December 30, they published their final rate for 2021.  It was 3.11 percent.  Less than three months later, they published a 4.42 percent rate yesterday.  While other costs go into monthly payments to own a home, principal and interest payments are two big ones, so we’ll see how they are changing in the current interest rate environment.

Prices vary by region, but according to this article from last month, the average mortgage in America was $1,159.  Using this as a payment proxy, let’s calculate the loan amount which requires this as a principal and interest payment.  The 3.11 percent rate to start the year would have meant the amount borrowed for 30 years was $271,073.  But if we plug in the 4.42 percent rate published yesterday, the same buyer’s loan would drop to $230,902.  While this won’t matter to those who already have fixed-rate mortgages, it could impact those looking for a loan and the amount of money they can afford to borrow.

It seems to be already showing up in data.  We’ll have more to say on home sales next week, but the Census Bureau reported Wednesday that they fell in February and are down on a year-over-year basis, and that followed the decline in existing home sales as reported by the National Association of Realtors.  Additionally, the Mortgage Bankers Association’s Loan Application Index fell 8.1 percent in the week ending March 18^th (down 38.9 percent year-over-year) after weakening 1.2 percent the week before.

The housing segment of the U.S. economy is changing.  Perhaps that change is just a temporary downshift, but it is too early to tell for sure.  Instead, Atlas is simply observing this part of the nation’s output during a time when weakness might be overshadowed by geopolitical turmoil.