Skip to content

Skyrocketing Cost of Homeownership

It is funny how some of the most important market events get little attention.  Since the beginning of November when interest rates started to move, the 30 year mortgage rate has skyrocketed about 1%.  This is not an insignificant market event at all:

There goes affordability...or housing prices

One of the biggest reasons that Bernanke been aggressive with quantitative easing is to target lower long term interest rates and specifically lower mortgage rates.  Lower mortgage rates make homes more affordable and keep housing prices from dropping further.  If we look at mortgage rates and loan amounts, we can see that monthly payments move aggressively with the level of interest rates:

All else equal, a 6% mortgage on $200k is the same as a 4% mortgage on $250k

This tells us that a $250,000 mortgage at 4% is similar in monthly payment to a $200,000 mortgage at 6%.  This implies that at that loan level, every 1% in interest rates corresponds to $25,000 in buying power.  All else being equal, a move from 4% to 6% on mortgage rates would reduce a $250,000 house in value to $200,000.  This ignores taxes, down-payment, demand, and supply but it definitely puts the importance into perspective.

I just wonder how long it will take for these higher mortgage rates to feed back into the housing market demand/supply equation./

Be Sociable, Share!

Posted in Economics, Markets, Media.

Tagged with , , , , , , .

One Response

Stay in touch with the conversation, subscribe to the RSS feed for comments on this post.

  1. Wet Willie says

    Appreciate your blog. A couple questions in regard to the post: First, there are whispers that QE3 (or 2.5, or 4, or whatever) will focus on monetizing MBSs to combat this very problem. If we assume that QE is effective in raising the price of the targeted asset class (dubious assumption), and we assume that the purchase of MBS would raise the price (i.e. lower mortgage rates) then wouldn’t the move in rates be capped by the risk-free rate (i.e. 30-yr treasury)? Can’t spreads only compress so much? Therefore, if QE2 has been ineffective in lowering treasury rates, isn’t it presumptuous of Bernank to think he can lower mortgage rates by targeting the MBS market? Stated another way: once you lose control of the treasury market…you are screwed (right?). The next question becomes: has BB lost control of the treasury market, and, if so, what “event(s)” would bring it back under his control (e.g. market selloff, etc.). On an unrelated note, VIX contango is pretty steep currently. As an options expert, how would you propose a retail trader take advantage of this dynamic? Thanks again for the blog.

Some HTML is OK

or, reply to this post via trackback.

Get Adobe Flash player
Copyright © 2009-2013 SurlyTrader DISCLAIMER The commentary on this blog is not meant to be taken as an investment advice. The author is not a registered investment adviser. There is no substitute for your own due diligence. Please be aware that investing is inherently a risky business and if you chose to follow any of the advice on this site, then you are accepting the risks associated with that investment. The Author may have also taken positions in the stocks or investments that are being discussed and the author may change his position at any time without warning.

Yellow Pages for USA and Canada SurlyTrader - Blogged