The yield on the government’s benchmark note surpassed 5 percent yesterday for the first time in four years. Vikas Bajaj wrote the story that’s on the cover of The New York Times:
“Where you are going to feel the pain the most is on the housing market,” said Brian J. Carlin, a vice president at J. P. Morgan Private Bank.
Mr. Carlin estimated that recent homebuyers with adjustable rate mortgages could experience a jump in interest rates of 3 to 4 percentage points in the next two years, as the typical 3 percent introductory rate is adjusted higher in annual increments. For a family with a $400,000 mortgage, that could translate into an increase of as much as $1,000 in monthly interest payments.
Mortgage delinquencies have already started climbing, although they remain at relatively low levels. In the fourth quarter of last year, 4.7 percent of all home mortgages were delinquent, up from 4.4 percent in the third quarter, according to the Mortgage Bankers Association of America. A delinquent loan is one in which monthly payments are past due for 60 days or more.
Predictably, the Mortgage Bankers Association makes the case that this is not earth-shattering news for mortgages, which are, after all, still low from a historical perspective. (Remember when they went below 8% about five years ago and everyone rushed to refinance?):
The Mortgage Bankers Association estimates that the burden of higher interest costs would fall on about 7 percent to 8 percent of all homeowners. The rest have either paid off their mortgages or face no immediate increase because they took out fixed-rate mortgages or refinanced their earlier loans to mortgages that hold rates steady for 5 to 10 years.
People with investment property financed with adjustable rate mortgages will be forced to make some decisions about financing, which is exactly why my wife and I are selling our vacation home–because the mortgage product is such an unpredictable expense.
Some of the new mortgage products that have given people a lot of buying power will make less sense. At the same time, as there’s talk of stricter government oversight of these mortgages.
The big thing the article doesn’t mention home equity loans and home equity lines of credit, which are very sensitive to interest rates. There are people out there who have been paying around 4% who could be paying 8%. That will force some decisions. Some will rush to pay off their home equity loans and lines of credit. Some will refinance to incorporate their loan or line of credit into their mortgage, because overall mortgage rates are still low.
All these factors will reduce buying power and contribute to the softening of the market.
New York is somewhat insulated, because there is simply a lot of money out there. I see $3 million dollar apartments bought for cash all the time. And there is pent-up demand in New York. There are people sitting on the sidelines waiting for an opportunity to buy. After September 11, there were five or six weeks when people were getting “deals.” But after a few weeks went by, word of the bargains spread, people started looking, and prices quickly shot up beyond what they were before September 11.
It sure seems like there’s limitless demand. And maybe there is.
But you can see some evidence of buyer scarcity in new development projects that came on the market in October and November. Many of them are only about 20% sold, and they’re offering major incentives to brokers. Not long ago those would have been 75% sold by now.