30-Year Mortgage Rates increase to 5.85%

Goldman: "The median monthly payment of a 30-year mortgage is up 56% year-over-year"

In April, I wrote: How High will Mortgage Rates Rise? In that post, I included a simple method for estimating 30-year mortgage rates based on the 10-year Treasury yield.

Housing economist Tom Lawler explained that the relationship is more complicated in Lawler: Mortgage/Treasury Spreads, Part I and Lawler: Mortgage/Treasury Spreads Part II: “Decomposing” the Widening This Year.

Here are some updates to the questions I posed:

1. What are current rates?

2. How high will mortgage rates rise?

3. How do higher mortgage rates impact affordability?

What are current rates?

Mortgagenewsdaily.com reports that as of today, average 30-year fixed mortgage rates are at 5.85% for top tier scenarios. Rates increased today as a result of the inflation report released this morning. Here is a graph from Mortgagenewsdaily.com that shows the 30-year mortgage rate over the last 5 years.

It is the sharp increase in monthly payments - due to sharply higher mortgage rates - that is impacting the housing market.

The Mortgage Bankers Association’s (MBA) reported this week that as of June 3rd:

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 5.40 percent from 5.33 percent, with points increasing to 0.60 from 0.51 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

And Freddie Mac reported this week:

Freddie Mac … released the results of its Primary Mortgage Market Survey® (PMMS®), showing that the 30-year fixed-rate mortgage (FRM) averaged 5.23 percent.

“After little movement the last few weeks, mortgage rates rose again on the back of increased economic activity and incoming inflation data,” said Sam Khater, Freddie Mac’s Chief Economist. “The housing market is incredibly rate-sensitive, so as mortgage rates increase suddenly, demand again is pulling back. The material decline in purchase activity, combined with the rising supply of homes for sale, will cause a deceleration in price growth to more normal levels, providing some relief for buyers still interested in purchasing a home.”

All of these measures move together over time (and the Freddie Mac PMMS is used for historical data), however when rates are moving quickly - like today -mortgagenewdaily.com is the most up-to-date.

How high will mortgage rates rise?

Goldman Sachs economists wrote yesterday:

In our view, the broad-based strength in core inflation tips the balance for the Fed to continue its 50bp-per-meeting pace of tightening through September. We continue to expect a terminal rate of 3.0-3.25%, which will now be reached in 1Q2023 under our forecast.

Based on the simple relationship between the 10-year Treasury yield and the 30-year mortgage rate, the 30-year mortgage rate will peak around the current level, although there is some variability in the relationship. The simple method suggests might see rates as high as the low 6% range.

However, as Lawler noted, the relationship is more complicated than the simple method of comparing to the 10-year Treasury yield, and it also depends on future inflation and the terminal Fed Funds rate. So, 30-year mortgage rates could move even higher.

How do higher mortgage rates impact affordability?

Based on today’s mortgage rates, affordability has declined significantly, see: Worst Housing Affordability" since 1991 excluding Bubble. However, it is important to understand that if mortgage rates double - say from 2.75% to 5.5%, monthly payments do not double - but they do increase significantly.

The following graph shows the year-over-year change in principal & interest (P&I) assuming a fixed loan amount since 1977. Currently P&I is up about 35% year-over-year for a fixed amount (this doesn’t take into account the change in house prices).

Add in the 20% increase in house prices over the last year, and the payment for purchasing the same home is up about 55% year-over-year.

Yesterday, Sam Ro tweeted some analysis from Goldman Sachs on the median monthly payment. This analysis was before the sharp jump in rates today.

"The median monthly payment of a 30-year mortgage is up 56% year-over-year"

Sam Ro 📈 @SamRo

"The median monthly payment of a 30-year mortgage is up 56% year-over-year" - Goldman

In summary:

1. Current 30-year mortgage rates are around 5.85%.

2. Mortgage rates are probably close to the peak for this cycle (depending on inflation) but might rise to the low 6% range.

3. Mortgage payments - for buying the same home - are up over 50% year-over-year.