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Thursday, March 31, 2005

Mortgage Rates Continue Climb

by Calculated Risk on 3/31/2005 11:07:00 PM

According to the FreddieMac weekly survey, 30 year fixed rate mortgages averaged 6.04% last week with 0.7 points. Also:

"Five-Year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.43 percent this week, with an average 0.7 points, up from 5.35 last week. There is no annual historical information for last year since Freddie Mac only began tracking this mortgage rate at the start of this year.

One-year Treasury-indexed adjustable-rate mortgages (ARMs) averaged 4.33 percent this week, with an average 0.8 point, up from last week when it averaged 4.24 percent. At this time last year, the one-year ARM averaged 3.46 percent."
I would like to point out some quotes from this article "Higher rates dampen home ownership dreams in Bay Area" (hat tip to Ben at thehousingbubble for pointing this out):
In the first two months of 2005, 82 percent of people who bought homes in the nine Bay Area counties and Santa Cruz County got adjustable-rate mortgages, according to DataQuick Information Systems. But buyers who chose a one-year adjustable last year could be facing payment shocks when their loans adjust for the first time this year, [Greg McBride, a senior financial analyst at Bankrate.com] said.

Last spring, a buyer with a $450,000 loan at 3.47 percent had a monthly payment of $2,013.17. This year, with the increase capped at a typical two percentage points, the rate would be 5.47 percent, and the monthly payment would be $2,531.76.

"And you're not done," McBride said, "because this time next year it's likely to adjust again."
First, it is important to note that 82% of buyers in the Bay Area used ARMs! So this is a relevant calculation.

Next, we could do a similar calculation with the current rate. An ARM based on the one year treasury is 4.33% (the one year last week was yielding 3.4%). If someone took out a $450,000 loan this week, their monthly payment would be: $2234.86. If the loan increased the maximum, their payments next year would be $2794.18. Ouch!

But there is another interesting calculation. I've seen several analysts arguing that home prices are fundamentally correct assuming buyers only consider their monthly payment when purchasing a house (as opposed to other fundamentals, like replacement cost or buy vs. rent). If we assume $50K down and a $450K loan, a house that was worth $500K last year should only be worth $455K this year - a 9% price decline.

Of course prices of homes in the Bay Area have increased 12% (according to OFHEO) in the San Francisco, San Mateo, and Redwood area last year. Based on this "payment" approach to value, if homes were fairly valued last year, they are now overvalued by about 20%.