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It is the Change in Monthly Payment that Matters

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It is the Change in Monthly Payment that Matters

CalculatedRisk by Bill McBride
Apr 1, 2022
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It is the Change in Monthly Payment that Matters

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Yesterday I pointed that we shouldn’t compare the current situation to the housing bubble and bust, but instead we should look to the 1978 to 1982 period for lessons.

See: Housing: Don't Compare the Current Housing Boom to the Bubble and Bust

In that post, I argued it wasn’t the level of mortgage rates that impacted housing, but the change in rates (this was a shortcut).

More precisely, it is the change in monthly payments that impacts housing. Monthly payments include principal, interest, taxes, insurance (PITI), and sometimes HOA fees (Homeowners Association). We could also include maintenance, utilities and other costs.

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 21% year-over-year for a fixed amount (this doesn’t take into account the change in house prices).

So, this is less of an increase than in 1979.

And here is a graph comparing the change in P&I payments, and the change in new home sales (Note: for new home sales, I used a 3-month centered average to smooth the graph).

This is a noisy, but generally when interest rates are rising (red), new home sales are usually falling (blue). And when interest rates are falling, new home sales are rising.

The housing bust / financial crisis saw home sales fall with declining interest since there were so many distressed sales.

We do not know how high mortgage rates will rise, or how quickly inflation will fall. But comparing to the 1978 to 1982 period is more appropriate than comparing to the housing bubble period.

Len Kiefer, Deputy Chief Economist at Freddie Mac, tweeted about the increase in payments this morning.

Twitter avatar for @lenkiefer
📈 Len Kiefer 📊 @lenkiefer
Some mortgage calculations Last time we had a 12-month increase of US 30-year fixed mortgage rates of at least 1.5% was Jan 2000 rates had gone 6.74% to 8.25% vs March 2022: 3.11% to 4.67% fixing loan size at $300,000
Image
4:50 PM ∙ Apr 1, 2022
23Likes7Retweets
Twitter avatar for @lenkiefer
📈 Len Kiefer 📊 @lenkiefer
adjusting the mortgage loan size into January 2000 dollars the % increase in monthly payments is about 21% now vs 16% in 2000 or about $1,000 bigger increase in the monthly payment in year 2022 $
Image
4:50 PM ∙ Apr 1, 2022
Twitter avatar for @lenkiefer
📈 Len Kiefer 📊 @lenkiefer
borrowers who dislike interest are not going to like the fact that 1st year interest payments have gone up over 50%
4:51 PM ∙ Apr 1, 2022

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It is the Change in Monthly Payment that Matters

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