Is 4% the “magic number” for mortgage rates to bite the housing market (and stocks)?

The magic number in 2018 was around 4.8%. In 2006, it was around 6%. But with today’s super inflated house prices? Here are the signs.

By Wolf Richter for WOLF STREET.

According to the Mortgage Bankers Association today. The average rate for FHA-backed 30-year fixed-rate mortgages rose to 4.09%.

So where is the magic number beyond which this overinflated real estate market begins to feel the pressure of rising mortgage rates?

But mortgage rates remain ridiculously low, in the face of CPI inflation which has climbed to 7.5% and always fueled by continued interest rate repression and QE from the Fed – making it the most reckless Fed ever.

The “magic number” in 2018.

In the fall of 2018, as mortgage rates headed towards 5%, the housing market began to falter and stocks crashed. The magic number at the time seems to have been around 4.8%, and when mortgage rates rose above in September, things started to go wild.

After the S&P 500 fell about 20% on Dec. 24, 2018, and with the housing market weakening, Fed Chairman Powell caved under Trump’s daily hammer blows and now sadly does. famous U-Turn.

However, at the time, at the start of 2019, inflation was below the Fed’s target, as measured by its “core PCE,” at 1.6%, and that provided Powell with a fig leaf.

Today, inflation is the worst in 40 years and is skyrocketing, and core PCE inflation is 2.5 times the Fed’s objective. It is now inflation that hammers Powell on a daily basis – he who had ridiculed himself by calling “temporary” this monster that he had unleashed when everyone already knew that it would soar.

Where is the magic number this time beyond which the real estate market begins to feel the pressure?

Mortgage applications to buy a home fell sharply for three straight weeks, coinciding with soaring mortgage rates, and in the week ended Feb. 18 hit lows briefly embraced in August 2021 and then during lockdown, to enter the lower end of the range in 2019. The MBA Purchase Mortgage Applications Index is now down 28% from pandemic highs in January 2021 (data via

The “magic number” in 2006.

Not shown on chart: At the height of Housing Bubble 1, in January 2005, the MBA’s purchase mortgage index peaked at 500 – double the current level – before crashing.

At that time, the Fed was in the middle of its rate hike cycle, pushing the federal funds rate from 1.0% in June 2004 to eventually 5.25% in July 2006, pushing the fixed mortgage rate 30-year average at 6.4%, at which time the housing market began to collapse very slowly.

The Nasdaq began to decline in the summer of 2007, and little by little it all came crashing down globally, punctuated by Lehman’s bankruptcy in September 2008.

Higher mortgage rates, when house prices are already exorbitant, are very difficult for housing markets. And higher interest rates in general are hard on stocks.

So where was the magic number back then? Of course, 6.4% for the 30-year fixed mortgage rate, at these housing bubble 1 prices, was beyond the magic number.

Refi mortgage applications plunge.

Rising mortgage rates mean households are putting mortgage refinancing on the back burner. This is happening despite the historic boom in house prices that comes with much of the equity in real estate that could be withdrawn via cash rebates.

The MBA Refinance Mortgage Demand Index has now plunged to the lowest level since June 2019 and is down 74% from pandemic highs – and mortgage rates have just started to rise and are still ridiculously low , given that CPI inflation jumped to 7.5% (data via

The magic number now.

First-time home buyers, faced with these higher mortgage rates and sky-high prices, have already pulled out of this ridiculously Fed-inflated market as investors and cash buyers crowd the market.

In January, first-time buyers fell to just 27% of total home purchases, down from 30% in December and down from 34% for all of 2021, according to the National Association of Realtors.

Going forward, “some moderate-income buyers who barely qualified for a mortgage when interest rates were lower will no longer be able to afford a mortgage,” the NAR said.

With every increase in house prices and every increase in mortgage rates, more and more potential buyers are taken off the table. At first no one notices, but then the layers start to pile up, and at some point repeat buyers – like first-time buyers – start to thin out. And that’s what we see now.

At first, cash buyers and investors may be able to make up the difference. And that’s what happened during housing bubble 1, which was partly driven by investors, who then became the heart of the mortgage crisis when they walked away from multiple properties at once.

Individual investors or second home buyers piled into the market, accounting for 22% of home purchases in January, down from 17% in December and 15% in January last year, according to the NAR.

Cash purchases jumped to 27% of home purchases in January, from 23% in December and 19% in January 2021, according to the NAR.

But in January, mortgage rates were still in the 3.5% to 3.7% range, well below the 4% line. And already, visible layers of first-time buyers have begun to be driven out of the market which has been artificially inflated by the Fed’s reckless monetary policies, and which now faces rising but still artificially low mortgage rates.

So it looks like the magic number for the average 30-year fixed mortgage rate is a little north of 4%, a level at which layers of potential buyers, like first-time buyers, are disappearing from the market. It is already happening.

For now, like last time, over-enthusiastic investors are making up the difference, but if we’ve learned anything from the debacle 15 years ago, it’s that that investor enthusiasm will also fade in these ridiculously overinflated markets when interest rates rise. in the face of soaring house prices like in America’s most splendid real estate bubbles:

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