Real Estate Data for the Rest of Us

articles about “Mortgages

Shutdown Hasn’t Hurt October Asking Home Prices So Far

Asking home prices in the first half of October are up 1% versus September. Prices changes are no different in metros more dependent on the federal government, like Washington DC, compared with metros less directly affected by the shutdown.

Jed Kolko, Chief Economist
October 16, 2013

How has the two-week shutdown of the federal government affected home prices? The main sales-price indexes won’t tell us until 2014: homes going under contract in October will close in November (or later), and November sales prices will get reported starting in January. But the Trulia Price Monitor shows how asking prices – a leading indicator of sales prices – are trending almost in real time, adjusting for both the mix of listed homes and for seasonality. This morning we analyzed asking prices between October 1 and October 15.

Finding the Effect of the Shutdown on Asking Home Prices
Nationally, asking home prices are up 1.0% between September and the first half of October, seasonally adjusted. This partial month-over-month increase is roughly in line with the month-over-month increases over the past few months. Before the shutdown started, several factors were already cooling down price gains, including expanding inventory, higher mortgage rates, and declining investor activity. Therefore, comparing how much prices have risen in October to date with previous months can’t, by itself, show whether the shutdown has affected asking prices.

Instead, to tease out the effect of the shutdown on asking home prices, we looked at price trends across individual metros. We compared price changes in metros where the local economy is more dependent on the federal government – like Washington D.C., of course, but other metros around the country as well – with prices changes in metros where the local economy is less dependent on the federal government. (Our measure of dependence on the federal government – and therefore likely impact from the shutdown – is the share of local wages coming from the feds.)

… continue reading

0 comments

When Will the Jump in Mortgage Rates Bite?

Recent history shows that spiking mortgage rates take a big chomp out of refinancing immediately and smaller nibbles out of sales three months later. Longer term, the impact of rising rates is typically offset by stronger economic growth. The overall effect of rising rates may turn out to be more bark than bite.

Jed Kolko, Chief Economist
September 11, 2013

Ever since mortgage rates started their steep climb in early May, we’ve all been on high alert, watching how higher rates will affect the housing market. For a would-be buyer calculating the mortgage payment on their dream home, the effects are obvious: the increase in the 30-year fixed rate from 3.59% in early May to 4.73% at the end of August (according to the Mortgage Bankers’ Association, or MBA) means a 15% increase in the monthly payment on a $200,000 mortgage. That should deter homebuyers and reduce mortgage applications, sales, and prices, right? In theory, yes, but of course the real world is much more complicated. Mortgage rates aren’t rising all on their own: other housing and economic shifts are happening at the same time.

Fortunately, the recent past is a useful guide. The 30-year fixed rate jumped .47 points in May 2013 and .51 points in June 2013, comparing the levels at months’ end (MBA). (Side point: the 30-year fixed reached 4.80 this morning, September 11, .22 points higher than at the end of June, which means July, August, and early September have seen much milder increases compared with the May & June spike.) But this year isn’t the only time when mortgage rates have jumped up: they also climbed at least .4 points in seven other months since 1999. With some simple time-series regressions, we traced out the typical paths of mortgage applications, sales, and prices in the months immediately after a mortgage rate spike. 

The Month-by-Month Impact of a Rate Spike
Our analysis of mortgage rates and other housing data from January 1999 through April 2013 – just before the current spike – shows that mortgage rates hit refinancing applications (MBA) earlier and harder than any other measure of housing market activity. (Not all of the data series are available back to 1999.) Here’s the timeline of what typically happens when rates spike by half a point in a month:

  • The month when rates spike: Refinancing applications typically fall by 45% in the month of a spike, with further falls one and two months after mortgage rates jump, compounding the effect. The drop in refinancing applications this year was roughly 50% cumulatively over two months, which actually looks small compared with similar rate jumps in the recent past.
  • 1-2 months after the spike: Pending home sales and home-purchase mortgage applications typically decline slightly, though the effect isn’t statistically significant. New home sales also decline modestly.
  • 3 months after a spike: New home sales and existing home sales drop. That means that the May mortgage rate spike should show up most strongly in August new home sales and existing home sales, both of which will be reported later this month (on September 25 and September 19, respectively).

Compared with the impact on refinancing, the impact of a rate spike on home-purchase mortgage applications and sales volumes is very small and not always statistically significant.

Housing indicator

Month of biggest mortgage rate impact

Effect in month of biggest impact*

Statistically significant?

Which report will show biggest impact of May 2013 rate spike

Refinance mortgage applications (MBA) Same month as rate spike (plus additional impact 1-2 months after)

-45%

Yes May data (already reported)
Pending home sales (NAR) 1 month after

-1.1%

No June data (already reported)
Home-purchase mortgage applications (MBA) 2 months after

-2.6%

No July data (already reported)
New home sales (Census) 3 months after (plus modest impact 1-2 months after)

-2.4%

Yes August data, to be reported Sept 25
Existing home sales (NAR) 3 months after

-1.7%

Yes August data, to be reported Sept 19
Sales prices (Case-Shiller, FHFA) No short-term impact

N/A

N/A N/A
Note: The “effect in month of biggest impact” equals the month-over-month change in the indicator for a 0.5 point rate spike, relative to when the mortgage rate doesn’t change, in percentage points. 

The Longer-Term Impact of Sustained Rate Increases
Even if the immediate impact of mortgage rate spikes is small – aside from the huge effect on refinancing – shouldn’t sustained rate increases should depress housing activity? Again, recent history tells a more complicated story. Since 1999, mortgage purchase applications and all measures of sales activity – NAR pending home sales, NAR existing home sales, and Census new home sales – have actually been higher when mortgage rates were higher. Sales prices were also the same level or higher (depending on the sales price index) when mortgage rates were higher compared to periods of lower rates. Of all the measures of housing activity, only refinancing applications were lower during periods of higher mortgage rates.

Here’s the missing piece of the puzzle: over the past decade and a half, mortgage rates have been higher when the economy was doing better. Since 1999, the correlation between the monthly unemployment rate – a good, if imperfect, measure of how the economy is doing overall – and the 30-year fixed rate was -0.8, making it a very strong relationship.

Furthermore, every measure of housing activity (except refinancing activity) improved when the overall economy did better. That means that a stronger economy is associated with BOTH higher mortgage rates AND more sales, higher home prices, and more home-purchase mortgage applications. That’s why these measures of housing activity go up when mortgage rates are higher.

If we statistically remove the effect of changes in the overall economy (by including the unemployment rate as a control in a simple statistical regression), then we see exactly what we’d expect: mortgage applications, sales, and home prices are all lower when mortgage rates are higher. In other words: all else equal, higher mortgage rates do depress housing demand.

As Rates Rise, All Else Won’t Be Equal
When it comes to mortgage rates, all else is never equal. Three other factors will complicate or even offset the impact of the recent rise in mortgage rates, even if rates continue to climb: the strengthening economy, expanding inventory, and looser mortgage credit:

  1. A post-recession economic recovery tends to push interest rates higher as demand for credit increases and if investors start to worry more about inflation. Furthermore, the Fed has said it will taper its bond-buying only if the economy seems strong enough to weather it. Both through market forces and the actions of the Fed, rising rates should be accompanied by a strengthening economy.
  2. Inventory has been expanding for the past six months on a seasonally adjusted basis. More for-sale inventory on the market slows price gains: in fact, the Trulia Price Monitor and other price indexes have been slowing down before the May rate spike could have affected prices, pointing to expanding inventory as a likelier explanation for the price slowdown. While rising rates and expanding inventory should both slow down prices, these same two factors should pull sales in opposite directions. All else equal, rising rates should slow sales, but expanding inventory should boost sales – since more homes can be sold if there are more homes for sale. Therefore, even though this month’s sales data should be slowed by sales, it could be lifted by rising inventory.
  3. Mortgage credit, though still tight, shows signs of loosening for two reasons. First, as they face diminishing demand for refinancing, banks might look to expand their home-purchase lending instead. Furthermore, new mortgage rules coming into effect next year will give banks more clarity about which loans are considered risky, hopefully making banks more willing to write mortgages deemed to be safer. The negative impact of rising rates, therefore, could be partially offset by looser mortgage credit.

All told, the housing market and the economy have a lot of moving parts. Aside from the sharp and immediate effect that rising mortgage rates have on refinancing, the impact of rising rates on the housing recovery is hard to pinpoint. This month’s sales reports, covering new and existing home sales from August, should show some decline from the May rate spike, but mortgage rates are just one of many factors affecting the housing recovery.

0 comments

Rising Mortgage Rates Giving Would-Be Homebuyers Jitters

Rising mortgage rates are the top worry for people thinking of buying a home someday, and 56% of Americans say they would be discouraged from homeownership if rates reach 6%. But pay more attention to what consumers do than what they say.

After years of low-and-lower mortgage rates, the 30-year fixed rate shot up from a near-historic-low of 3.35% in early May to 4.46% in late June before settling back to 4.29% last week, according to Freddie Mac. The rate increase was sudden and steep, but not a surprise. Economists and forecasters have been waiting for rates to go up for two reasons: (1) the strengthening economy tends to push up rates, and (2) the Fed is expected to pull back on bond-buying and other measures that have kept rates low, which they reaffirmed in mid-June. By historical standards, rates are still low: remember that mortgage rates hovered around 6% for most of the 2000s, 7-9% in the 1990s, and above 10% in the 1980s. Nonetheless, the recent rate climb has been steep. 

What Consumers Think of Rising Rates
Consumers are anxious about rising mortgage rates. Trulia surveyed more than 2,000 people during June 24-26, after rates rose sharply. We asked what their biggest worry would be if they were to buy a home this year. Among all consumers who plan to buy a home in the future, 41% said their top worry is that mortgage rates would rise before they actually bought. The next biggest worries were that prices would rise before they actually bought (37%) and that they wouldn’t find a home for sale that they like (36%).

How high do mortgage rates have to rise before consumers are discouraged from buying a home? Among consumers who plan to buy a home someday, 13% said that mortgage rates of 4% (which is what the rate had climbed to when the survey was conducted) were already too high for them to consider buying a home. Another 20% said they’d be discouraged from buying a home if rates reach 5%; yet another 22% said they’d be discouraged from buying a home if rates reach 6%. Combining these groups, 56% of consumers who plan to buy a home someday would be discouraged from doing so if rates reach 6%. Among renters who plan to buy a home someday, 62% would be discouraged from doing so if rates reach 6%.

… continue reading

0 comments

Buying Cheaper Than Renting Til Mortgage Rates Hit 10.5%

Nationally, at today’s prices and rents, buying would be cheaper than renting until the 30-year fixed rate reaches 10.5%. San Jose has the lowest mortgage rate “tipping point” at 5.2%, followed by San Francisco and Honolulu.

The recent rise in mortgage rates has made buying a house a little more expensive: the increase in the 30-year fixed rate over the past month from 3.4% to 3.9% (Freddie Mac) raised the monthly payment on a $200,000 mortgage by $56, or 6%. However, because mortgage rates are still near long-term lows, and because prices fell so much after the housing bubble burst and remain low relative to rents even after recent price increases, buying is still much cheaper than renting. That means that the recent jump in rates doesn’t change the rent-versus-buy math much.

Rates are likely to keep rising, but how far must rates rise before buying a home starts to look expensive relative to renting? To answer this, we updated our Rent vs. Buy analysis with the latest asking prices and rents from March, April, and May 2013. Following our standard approach, we calculated the cost of buying and renting for identical sets of properties, including maintenance, insurance, taxes, closing costs, down payment, sales proceeds, and, of course, the monthly mortgage payment on a 30-year fixed-rate loan with 20% down and monthly rent. We assume people will stay in their homes for 7 years, deduct their mortgage interest and property tax payments at the 25% tax bracket, and get modest home price appreciation (see the detailed methodology and example here). Here’s what we found:

Buying remains cheaper than renting so long as mortgage rates are below 10.5%. At 3.9%, the current 30-year fixed rate according to Freddie Mac, buying is 41% cheaper than renting nationally. With a 5% mortgage rate, buying is still 34% cheaper than renting nationally. Mortgage rates would have to rise a huge amount – to 10.5% – to tip the math in favor of renting, which isn’t impossible. Rates were that high throughout the 1980s, but have been consistently below 10.5% since May 1990.

Each local market, of course, has its own mortgage rate “tipping point” when renting becomes cheaper than buying a home. At 3.9%, buying is cheaper than renting in all of the 100 largest metros, which means the tipping point is above 3.9% everywhere. The tipping point is lowest in San Jose, which would tip in favor of renting if rates reach 5.2%. It’s between 5% and 6% in San Francisco and Honolulu, and between 6% and 7% in New York and Orange County, CA.

10 Metros with the Lowest Mortgage-Rate Tipping Point

# U.S. Metro Mortgage rate below which buying is cheaper than renting
1 San Jose, CA

5.2%

2 San Francisco, CA

5.4%

3 Honolulu, HI

5.8%

4 New York, NY-NJ

6.8%

5 Orange County, CA

6.8%

6 Los Angeles, CA

7.5%

7 San Diego, CA

7.5%

8 Ventura County, CA

8.0%

9 Sacramento, CA

8.0%

10 Oakland, CA

8.2%

… continue reading

0 comments

The Second Presidential Debate: Capping Itemized Deductions IS Housing Policy

Housing-related tax deductions, including home mortgage interest and real estate taxes, account for 49% of total itemized deductions. For middle-income tax itemizers, 56% of deductions are housing-related, which means a low cap on itemized deductions would reduce homeownership benefits for the middle class.

Jed Kolko, Chief Economist
October 16, 2012

In the second presidential debate, the candidates did everything they could to avoid talking about housing. In listing what he did over the last four years, Obama didn’t mention any housing accomplishments. And, in listing all the problems that Obama failed to fix, Romney didn’t mention housing, either. Both candidates even avoided the mortgage interest deduction when talking about taxes. Romney suggested capping aggregate deductions at $25,000 without explicitly limiting any particular deduction, and Obama criticized Romney for not specifically calling out which deductions he would limit.

But housing was a part of this debate, even if not by name. Nearly half of the value of itemized deductions is housing-related, and capping deductions at $25,000 would hit many middle-income people. To see what a cap on itemized deductions would mean for housing, we looked at the most recent published IRS data on individual tax returns (2009) to sort out the facts.

First, let’s start by looking at who actually itemizes their tax deductions. The table below shows that only one-third of tax-filers itemize, but this ranges hugely by income. Only 15% of filers with less than $50,000 adjusted gross income (AGI) itemize their deductions, compared with 96% with $200,000 or more AGI. Higher-income filers include a much higher average total of itemized deductions, too. A cap of $17,000 – which is what Romney suggested two weeks ago – is roughly equal to the amount that the typical itemizer with less than $50,000 AGI deducts, so many lower-income itemizers wouldn’t be affected at all by that cap. But even a higher cap of $25,000 would hit many people in the $50,000-$200,000 range and probably most in the $200,000-plus range.

… continue reading

0 comments