Will 5% Mortgage Rates Cushion the Housing Market?

After reaching 6.28% on June 14th, 30-year mortgage rates have decreased to 5.05% as of yesterday according to Mortgagenewsdaily.com. The 10-year Treasury yield has risen this morning, so it is likely mortgage rates will increase some today.

Note: 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 is a graph from Mortgagenewsdaily.com that shows the 30-year mortgage rate since 2010. Although mortgage rates have fallen sharply over the last 6 weeks, rates are still much higher than earlier this year.

The housing market really started to slow in April and hit the brakes in June when rates jumped to above 6%. Rates around 5% will help at the margin, but it is the increase in monthly payments compared to earlier this year that is impacting the housing market.

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 30% year-over-year for a fixed amount (this doesn’t take into account the change in house prices).

This is less than the 35% year-over-year increase in June, but still up sharply.

If we include the increase in house prices, payments are up more than 50% year-over-year on the same home.

The bottom-line is the recent decline in mortgage rates will help at the margin, but the housing market will remain under pressure with mortgage rates at 5% (fewer sales, slowing house price growth).