Morning Report: mortgage rates, incomes, and affordability

Vital Statistics:

S&P futures4,7875.2
Oil (WTI)76.270.38
10 year government bond yield 1.46%
30 year fixed rate mortgage 3.35%

Stocks are higher this morning as the S&P 500 hits records into the end of the year. Bonds and MBS are up small.

Home prices rose 17.5% YOY in October, according to the FHFA House Price Index. “House price levels continue to rise but the rapid pace is curtailing through October,” said Will Doerner, Ph.D., Supervisory Economist in FHFA’s Division of Research and Statistics. “The large market appreciations seen this spring peaked in July and have been cooling this fall with annual trends slowing over the last four consecutive months.”

Separately, the Case-Shiller Home Price Index showed prices increasing by 18.5% YOY.

The rise in home prices and rates does raise big questions regarding affordability. Home price appreciation aside, the expected increase in mortgage rates will negatively affect affordability. That said, affordability is a function of incomes too, and wages are rising at a decent clip.

The consensus for mortgage rates next year is that they are expected to be around 3.7% or so (an increase of 40 bps). Wage inflation is running at a 5% clip. Interestingly, if you calculate the debt-to-income ratio for the median home price / median income at 3.3%, you get .282 (I am ignoring downpayment, fees, etc – just rough math). If you increase the median income by 5% and increase the mortgage rate to 3.7%, you get a DTI of .282. So wage growth is pretty much offsetting the effect of rising mortgage rates.

Theoretically, this means that home price appreciation should slow given that rising prices throw a wrench in that calculation. And that is probably driving the forecasts that home price appreciation will slow to almost nothing next year. The one thing I would say is that while individuals are subject to DTI requirements, big institutional money is not, and given the paltry yield alternatives out there they will continue to have an appetite for single family rentals.

The other issue is simply the stark supply and demand imbalance, driven by years of gun-shy homebuilders. COVID-19 driven shortages might keep the builders from meeting demand in the short term, however homebuilding will eventually catch up. In the commodities markets, there is a saying: the cure for high prices is high prices. Eventually greed will win out over fear for the builders and supply will increase.

10 Responses

  1. Smart play.

    That’ll show ‘em.


  2. This should be good. The Democrats took the wrong lesson from McAuliffe’s loss:

    “The Democrats’ Education Lunacies Will Bring Back Trump

    Terry McAuliffe lost the Virginia governor’s race by saying, “I don’t think parents should be telling schools what to teach.” If that was no gaffe, Democrats have a lot more significant losing ahead

    Matt Taibbi

    In the wake of McAuliffe’s loss, the “I don’t think parents should be telling schools what to teach” line was universally tabbed a “gaffe” by media. I described it in the recent “Loudoun County: A Culture War in Four Acts” series in TK as the political equivalent of using a toe to shoot your face off with a shotgun, but this was actually behind the news cycle. Yahoo! said the “gaffe precipitated the Democrat’s slide in the polls,” while the Daily Beast’s blunter headline was, “Terry McAuliffe’s White-Guy Confidence Just Fucked the Dems.”

    However, much like the Hillary Clinton quote about “deplorables,” conventional wisdom after the “gaffe” soon hardened around the idea that what McAuliffe said wasn’t wrong at all. In fact, people like Hannah-Jones are now doubling down and applying to education the same formula that Democrats brought with disastrous results to a whole range of other issues in the Trump years, telling voters that they should get over themselves and learn to defer to “experts” and “expertise.”


    • I think we now have a critical amount of elites who have spent little-to-no time ever being anything but elites. There’s few by-your-bootstraps types and a lot of upper-middle-class folks who became elite think that their upper-middle-class upbringing for a few years means they have the experience of the lower classes … but none of them have any real sense of how they come off the people not in their elitist circles.


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