Rising mortgage rates swing housing sentiment
Just as America's homeowners were finally coming up for air, they are suddenly turning more negative on the housing market. Fewer people think now is a good time to buy or to sell a house, according to a monthly survey in June from Fannie Mae.
Those numbers had just hit a survey high in May, thanks to rising home prices and record low mortgage rates. Now mortgage rates have soared well over a full percentage point in the past two months, and 57 percent of respondents to the survey expect them to go even higher. That's the highest level in the survey's three-year history.
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"The spike in mortgage rate expectations this month seems to have had an impact on a number of the survey's indicators and may increase housing activity in the near term by driving urgency to buy," said Doug Duncan, chief economist at Fannie Mae. "Consumers may recognize that today's still favorable mortgage rates and homeownership affordability levels will recede over time. Given rising home- and rental-price expectations and improving personal financial attitudes, more prospective homebuyers may be deciding that now is the time to get off the fence."
That could be why pending home sales, that is, signed contracts to buy existing homes, rose dramatically in May to the highest level in over six years, according to the National Association of Realtors. Potential buyers don't want to suddenly be priced out of the market by both rising prices and rising rates.
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Mortgage rates are up 45 percent in just the past six weeks. Analyst Mark Hanson called this a "credit event unlike any pure rate spike in recent housing market history." He pointed to a long period of government-induced complacency in the mortgage markets, because rates were so low and there was very little volatility. In other words, there was no risk.
That scenario has now been turned on its head, and the surge in home prices could also be turned around.
"Prices have to be lowered, more cash must be put into the transaction in the form of a down payment or to buy down the interest rate in order to qualify for the same house price," said Hanson. "Buyers must switch to a lower-rate, higher-leverage ARM (adjustable rate) loan, which is much tougher to qualify for through the Fannie, Freddie and FHA systems, meaning much greater denials/fall-out; or the deal must simply be canceled."
Hanson is particularly concerned about cancellations among the home builders.
Buyers of new construction often sign contracts for homes that will not be delivered for three to nine months, and therefore the buyers do not lock in mortgage rates at the time of purchase. A buyer who signed a deal the first week in May without a mortgage is now facing a far higher potential monthly payment, perhaps an unaffordable one.
The hangover effect could be much like the drop in home sales after the expiration of the home buyer tax credit. Prices dropped as well. This, as millions more borrowers were finally coming out from underwater on their loans, thanks to increased home equity. The number of borrowers owing more on their mortgages than their homes are currently worth fell by 47 percent in the first three months of this year from a year ago, according to Lender Processing Services. Some 7.2 million mortgages are still underwater, but that's down from a high of 17 million in 2011.
Increased home equity has helped to push mortgage delinquencies down. They dropped 15 percent in May from Jan. 1, the biggest drop in 11 years, according to LPS. If home price gains stall or if prices turn lower, that trend will reverse. Rising home equity has allowed more borrowers to sell homes they don't want or can't afford.
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While home sales may surge in the short term on fears of rising rates and falling affordability, the longer term may be a different story. One telling sign from the Fannie Mae survey, 56 percent of respondents expect rents to rise. That's up 8 percentage points in one month to a survey high.
Questions? Comments? RealtyCheck@cnbc.com.