Mortgage Rates And a Little Sympathy

The current average rate on a 30-year mortgage is 7.48%.  That number is the highest it’s been since November of 2000.  Think about that for a second; the last time people were signing up for mortgages this high was more than 2 full decades ago and those people, if we assumed they just dutifully paid their mortgage every month, would have made 273 payments out of the total 360.  Most of what they’d be paying today would be principal only because of the amortization schedule associated mortgages.  

With this in mind, we are finally starting to see consumer behaviors around borrowing money change.  Let’s put aside for a second the fact that banks have been beaten up by rapidly changing rates.  Further, let’s also put aside the fact that jumbo loans, for the first time in a long time, are more expensive than their smaller brethren.  Instead, focus on one simple truth: consumers are not unconditionally price elastic.  Using the 1/10 Rule, for every 1% interest rates increase, a buyer’s buying power decreases by approximately 10%. 

With mortgage rates having more than doubled over the last 18 months, consumers are finally pulling back on the reigns.  In many cases, this means that the cap on affordability is getting lower, but even more importantly, these changes have prevented transactions from taking place.  It’s been widely documented that current homeowners are loath to sell when they know the same expenditure gets them less house after leaving their current mortgage behind.  But as importantly, these dynamics are delaying homeownership for millennials… again!!!!

The pandemic forced the hands of many millennials to get out of mom’s basement, but they are still underinvested in single family homes.  Private equity snapped up a bunch of those homes to use them for single family rentals as well, and it’s simply become too big a hurdle for financially responsible young people to go buy homes. 

We are not here to pretend that this will continue in perpetuity.  Prices will come down, and someday maybe rates will too, but until then, the theoretical glut of multifamily buildings that are being delivered over the next several years looks to be the best option for younger generations.  There are clearly issues with financial structure surrounding this asset class that will become more obvious over the next few months, but demand looks pretty strong when the other option is unaffordable. 

Sources: CNBC, The Wall Street Journal