BankToons · Video
Mortgage Rates Hit 7.5% Are Home Prices About to Fall?
Mortgage rates just jumped to about 7.5%, and long-term government bonds now pay more than they have in over 20 years. We walk through why rates are climbing, how a bond's price and its yield move like a seesaw, and what the math says about home prices.
The short version: when rates rise this fast, sales fall before prices. There are over 50% more sellers than buyers, the biggest gap on record. To get back to the monthly payment buyers had earlier this year, home prices would need to fall about 14%, or roughly $62,000 on a typical home. And a safe government bond now pays more than owning a rental home.
It is not 2008: most owners have a lot of equity and locked in low rates, so the market is not crashing. It is stuck, and it stays stuck until rates or prices come down.
Full transcript
0:00 Why mortgage rates just hit 7.5%
Mortgage rates just jumped to about seven and a half percent. Long-term government bonds are paying more than they have in over twenty years. Lending money to the government now pays more than owning a rental home. First, here is why rates are climbing. Then we will walk through what the math says about home prices.
0:19 What is a Treasury bond?
It starts with Treasury bonds. When the United States needs to borrow money, it sells Treasury bonds. A bond is a loan. You lend the government money, it pays you interest, and at the end it pays you back in full. People treat it as the safest loan in the world. Banks, pension funds and retirees all buy them.
0:38 Why bond prices and yields move in opposite directions
Lately, bond prices have been falling. A bond's price and its yield move in opposite directions. The yield is the return you get for the price you pay. Picture a bond that costs one hundred dollars and pays five dollars a year. If lots of people want it, buyers might push the price up to one hundred twenty five dollars. That same five dollars is now only a four percent return. If few people want it, the price might drop to eighty dollars. Now the same five dollars is a six point two five percent return. So when a headline says yields are spiking, it means people are selling government bonds. The price keeps falling until the return is high enough to bring buyers back. That is a warning sign. The government is the safest borrower there is. When it has to pay more, everyone else has to pay more too. A stock or a house now has to beat a return that comes with no risk at all.
1:30 Why are interest rates rising? Inflation, oil and debt
So why do lenders want more? Three things are hitting the bond market at the same time. The first is inflation. Inflation means prices rising across the economy. It has stayed above two and a half percent for sixty five months in a row. The Federal Reserve is the country's central bank. Its main tool against rising prices is higher interest rates. The second is oil. Oil is back above one hundred dollars a barrel. Bank of America has warned it could reach one hundred fifty. Talks to reopen the Strait of Hormuz have broken down again. That is a narrow stretch of sea that much of the world's oil passes through. Expensive oil pushes prices up everywhere, and that keeps rates high. The third is debt. The government spends about two trillion dollars a year more than it takes in. It covers the gap by selling more bonds. So it needs more lenders at the exact moment lenders want a higher return.
2:25 Is the housing market crashing? Sales fall first
Now the housing market. When mortgage rates rise this fast, prices do not fall first. Sales do. Mortgage applications have dropped to their lowest level since the early nineteen nineties. Redfin, a real estate company, found over fifty percent more sellers than buyers. That is the biggest gap in its records. In Nashville, Miami, Houston, Orlando and Las Vegas, there are more than two sellers for every buyer.
2:52 Are home prices falling after inflation?
Builders are cutting too. Thirty eight percent of home builders cut their prices in September. The average price of a brand new home is down eight point eight percent from a year ago. Across the whole country, the typical home price is still up two point one percent from a year ago. Most owners would rather not sell than sell at a loss. But prices in general rose three point four percent over that same year. So after inflation, homes are already worth a little less. It is just happening quietly.
3:22 How much would home prices need to fall?
Then comes the hard part. Take a buyer's monthly payment from earlier this year. To get that same payment at current rates, home prices would need to fall about fourteen percent. On a typical home, that is about sixty two thousand dollars.
3:36 How higher rates hit the national debt
Higher rates do not stop at housing. They reach four other places. First, the national debt. The United States just passed forty trillion dollars in debt, less than five months after crossing thirty nine trillion. In the first eleven months of its budget year, the government paid over one trillion dollars in interest. That is more than it spent on Medicare, and more than it spent on the military. It works out to just over three billion dollars a day. Much of that debt was borrowed years ago at low rates. As it comes due, it is replaced with new debt at current rates. Every one percent rise adds about three hundred twenty billion dollars a year in interest. To pay it, the government borrows more, and rates climb again.
4:20 Why bond funds in retirement accounts are down
Second, retirement accounts. For decades, retirees were told bonds are the safe part of their savings. Funds that hold long-term government bonds recently closed at their lowest price ever. They are down more than half from their twenty twenty peak. That is the seesaw from earlier. Yields went up, so prices went down.
4:39 Bonds vs stocks: the S&P 500
Third, stocks. The S&P five hundred is five hundred of the biggest American companies. For every one hundred dollars invested in them, they are expected to earn about five dollars and twenty cents. A government bond pays about five dollars and twenty cents too, and that is guaranteed.
4:56 Bonds vs rental property: which pays more?
Fourth, rental homes. Say a landlord has five hundred thousand dollars. In government bonds, that earns about twenty six thousand dollars a year, with no work. In a rental home, it earns about twenty four thousand. And that comes with tenants, repairs, insurance and property taxes. If rates stay this high, the rental math only works if prices fall.
5:19 What happens next for mortgage rates?
So what happens next? There are two paths. In the better one, the Strait of Hormuz reopens and oil falls. Inflation cools, the Federal Reserve does not need to raise rates, and things slowly settle down. In the worse one, oil stays above one hundred dollars and the conflict grows. The Federal Reserve raises rates again, and mortgage rates reach eight percent. That would hit homes, stocks and retirement savings all at once.
5:47 Is this 2008 all over again?
It helps to compare this with two thousand eight. Back then, many people had loans they could not afford. When prices fell, they were forced to sell. This time, most owners have a lot of equity. Equity is the part of the home you own outright. Many also locked in low mortgage rates years ago. So most owners can simply stay put. The homes that do go up for sale sit longer, and buyers get more room to negotiate.
6:12 Where the housing market stands
So here is where it stands. Mortgage rates are about seven and a half percent. Sellers outnumber buyers by the widest gap on record. A safe government bond now pays more than a rental home. And prices would need to fall about fourteen percent to bring payments back to where they were this year. The housing market is not crashing. It is stuck. And it stays stuck until one of two things comes down: rates, or prices.