The sudden and the rest of the Eurozone countries has become the worst ‘nightmare’ for millions of families that have variable-rate mortgages. The average rate on these loans has already exceeded 2%, . Well, this dizzying rise is not even remotely close to what is happening in the US, where the Federal Reserve began to tighten its policy much earlier and the average interest on mortgages has already exceeded 6%, levels that are not They had been watching since 2008, in the midst of the bursting of the real estate bubble.
The central banks of advanced countries are immersed, which aims to control inflation. To return inflation to the 2% zone, the ECB, the Fed or the Bank of England raise the price of money (interest rates), which in turn makes mortgages more expensive (reduces the granting of real estate loans), eroding the purchasing power of families and, therefore, cooling demand, which is the ultimate objective of the central bank to control inflation and expectations.
The change is being drastic. It has gone from cold (zero rates or even below) to hot in a short space of time. Mortgage interest rates in the US have doubled since 2020, when the covid crisis forced the Fed to leave the price of official money (federal funds) at 0%. Then, the average rate on new mortgages fell below 3%.
Now, the recent increase leaves this rate above 6%, shooting up the monthly cost of mortgages indexed at this rate by several hundred dollars. Some indicators are already American, which can be a serious warning for Europeans (when you see your neighbor’s beard cut, put yours to soak, the saying goes).
Highs since 2008
This week’s data confirms that the dynamic continues to worsen in the US real estate market. Each figure that is known leaves more telegraphed a fall in this market. This Wednesday it was published that the average 30-year mortgage interest rate prepared by the Mortgage Bankers Association (MBA) exceeded 6% in the last week to an unprecedented 6.01% since 2008. Already in the penultimate week of June climbed to 5.98%. To get an idea, this guy was at the beginning of the year at 3%.
Another similar metric, known on Thursday, reflects this trend. According to data from Freddie Mac, one of the two big US mortgage brokers, the average rate on a 30-year loan soared to 6.02% from 5.89% the previous week. The last time rates topped 6% was in November 2008, according to company data. The results from the MBA and Freddie Mac have lagged behind other mortgage surveys that already showed rates above 6%. Mortgage News Daily this week reported an average rate of 6.3% for 30-year fixed loans, up from 6.12% the previous week.
Rising mortgage rates are one of the most pronounced effects of raising the cost of borrowing for consumers and businesses. It has already caused a sea change in the housing market by adding hundreds of dollars or more to the cost of a potential buyer’s monthly mortgage payment, reining in what was a white-hot market a short time ago. Higher rates are forcing some would-be buyers to keep renting.
This week’s data has come along with , which has boosted expectations of a further hike in interest rates by the Federal Reserve. “Mortgage rates continued to rise this week along with inflation figures, which were higher than expected,” said Sam Khater, chief economist at Freddie Mac, in the release with the data.
Khater warns that “the increase in rates will continue to curb demand and put downward pressure on house prices.” “For real estate markets, rising borrowing costs are further cooling housing demand and deepening the affordability crisis,” agrees George Ratiu, director of economic research at Realtor.com. From Freddie Mac, however, they trust that, as the inventory continues to be insufficient, the decreases in prices will not be so pronounced.
Home prices continue to show big gains from a year ago, and in July the median sales price of an existing home continued to exceed $400,000. But existing home sales fell for six straight months through July, and the pace of price growth has slowed.
In the Wall Street Journal they present an example of what the average American buyer faces right now. A borrower buying a $500,000 home with a 20% down payment and a 2.86% rate could expect to pay about $200,000 in interest over 30 years on his $400,000 loan. If the interest rate is 6.02%, he could pay $465,000 in interest, according to Bankrate.com’s mortgage calculator.
Why does housing matter so much in the CPI?
In the case of the US (not Europe), housing accounts for almost 30% of the CPI between rents and imputed rents (the rent that is imputed to households that own a home for its use). Housing is key for the general CPI, but even more so for the core one, the indicator that worries the Federal Reserve the most.
Raising the cost of mortgages through the interest rates managed by the Fed is intended to discourage the purchase of housing, which should put downward pressure on the price of real estate. This, in turn, should have a downward impact on rents, although this transmission takes time to occur, according to experts. What’s more, at first, the lower home sales can translate into an increase in rental demand and, therefore, in their price, as explained by Pimco. But in the medium and long term, the fall in house prices tends to prevail and lead to cheaper rents, they assure from the bond manager.
The change is beginning to be noticed in the demand for mortgages. From Oxford Economics they explain that “mortgage applications fell 1.2% last week due to a decrease in refinancing applications. Purchase applications rose, although the data may be influenced by seasonal noise due to the Holiday from work”.
Purchase requests were up 0.2%, but after adjusting for Labor Day, purchase requests were down 11.8%, and the four-week moving average for purchase requests was remained at -0.7%, according to experts from Oxford Economics. These experts say that the increase in rates is influencing the affordability of buying homes at a time when prices have only just begun to fall.
In Europe, both the Euribor and are still far from those rates. However, the interbank index is already at a maximum not seen since 2009 after reaching 2.23% intraday this Friday.
Óscar Elvira, director of the Master’s in Banking and Finance at the Barcelona School of Management, explains that “given the risk of persistent inflationary pressures, the European Central Bank (ECB) has decided to continue raising official interest rates… although, if there is no change in the trend of the Euribor until the end of the year, the situation could become more complicated and the cost of 4 million variable mortgages that Spanish families are currently paying would rise.
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