Morning Report: mortgage rates, incomes and affordability

Vital Statistics:

S&P futures4,7875.2
Oil (WTI)76.270.38
10 year government bond yield 1.46%
30 year fixed rate mortgage 3.35%

Stocks are higher this morning as the S&P 500 hits records into the end of the year. Bonds and MBS are up small.

Home prices rose 17.5% YOY in October, according to the FHFA House Price Index. “House price levels continue to rise but the rapid pace is curtailing through October,” said Will Doerner, Ph.D., Supervisory Economist in FHFA’s Division of Research and Statistics. “The large market appreciations seen this spring peaked in July and have been cooling this fall with annual trends slowing over the last four consecutive months.”

Separately, the Case-Shiller Home Price Index showed prices increasing by 18.5% YOY.

The rise in home prices and rates does raise big questions regarding affordability. Home price appreciation aside, the expected increase in mortgage rates will negatively affect affordability. That said, affordability is a function of incomes too, and wages are rising at a decent clip.

The consensus for mortgage rates next year is that they are expected to be around 3.7% or so (an increase of 40 bps). Wage inflation is running at a 5% clip. Interestingly, if you calculate the debt-to-income ratio for the median home price / median income at 3.3%, you get .282 (I am ignoring downpayment, fees, etc – just rough math). If you increase the median income by 5% and increase the mortgage rate to 3.7%, you get a DTI of .282. So wage growth is pretty much offsetting the effect of rising mortgage rates.

Theoretically, this means that home price appreciation should slow given that rising prices throw a wrench in that calculation. And that is probably driving the forecasts that home price appreciation will slow to almost nothing next year. The one thing I would say is that while individuals are subject to DTI requirements, big institutional money is not, and given the paltry yield alternatives out there they will continue to have an appetite for single family rentals.

The other issue is simply the stark supply and demand imbalance, driven by years of gun-shy homebuilders. COVID-19 driven shortages might keep the builders from meeting demand in the short term, however homebuilding will eventually catch up. In the commodities markets, there is a saying: the cure for high prices is high prices. Eventually greed will win out over fear for the builders and supply will increase.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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