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February
22
2023

How The Fed Messes With People's Lives (A Mortgage-Rate Perspective)
Mike Shedlock

A four-month decline in mortgage yields may be over. Let's discuss what this means to the home buyer and how the Fed has messed with people's lives over time.

Mortgage rates courtesy of Mortgage News Daily.

Mortgage Rate Notes

• Two years ago, the average mortgage rate was 2.83 percent. 

• On October 20, 2022, mortgage rates hit 7.37 percent, the recent high. 

• On February 2, 2023, the mortgage rate dipped to 5.99 percent, the lowest rate since September. 

• As of Friday, February 17, rates are back up to 6.80 percent. 

It is not likely many captured the bottom, but there was ample time to refinance around 3.0 percent. 

Let's compare monthly payments at 3.0 percent to payments at 6.50 percent on a home costing $500,000 with 20 percent down.

Cost of Mortgage, $400,000 Loan at 3.0 Percent

Cost of Mortgage, $400,000 Loan at 6.5 Percent

The above charts are courtesy of the Mortgage News Daily Mortgage Calculator

Monthly Payments and Annual Payments 

• At 3.0 Percent: $1,966 ($23,592 annually)

• At 6.5 Percent: $2,808 ($33,696 annually)

Although home prices have peaked, it's actually much worse because that same house cost much more in 2023 than in early 2021.

Case-Shiller Home Price Index

Case-Shiller home price data via St. Louis Fed, chart by Mish

National Home Price Index Recent vs 2021

• November 2022: 466.4

• February 2021: 375.5

Case-Shiller is both stale and lagging. Let's assume the index now is actually 425.5 (a rise of 50 points, or 13.32 percent from February 2021)

That means a home that cost $500,000 today would have cost about $433,000 in early 2021. Let's update the comparison at a 3.0 percent interest rate with 20 percent down.

At 20 percent down the mortgage would have been $346,000. 

Cost of Mortgage, $346,000 Loan at 3.0 Percent

Monthly Payments and Annual Payments, Same House, Now vs Early 2021

• At 3.0 Percent: $1,740 ($20,880 annually)

• At 6.5 Percent: $2,808 ($33,696 annually)

In addition, the 2021 buyer would have another $13,400 in their pocket due to a smaller down payment. 

How the Fed Messes With People's Lives 

1. The Fed's decade's-long QE programs artificially lowered mortgage rates. This made huge winners out of anyone who already had a house and could refinance at a much lower rate.
   
   
2. Anyone who did refinance then had plenty extra money to spend and they still do. This is an aspect of inflation that has not been discussed.
   
   
3. The cheap money pushed up home prices and the Fed has had minimal luck popping the obvious bubble. Prices are falling, but nowhere near as fast as they rose.
   
   
4. This totally screws new buyers who on the same house now has a monthly mortgage payment of $2,808 vs $1,740 a mere two years ago.
   
   
5. That home was no bargain two years ago as noted by my Case-Shiller chart, but at least it was "affordable" inaccurately assuming bubbles make things affordable. 

Now the Fed has an inflation mess it does not quite know what to do with. 

Fifty Percent Say They Are Worse Off Than a Year Ago

Gallup poll data, chart by Mish

As a result of Fed tinkering, fiscal stimulus, and Biden's super-inflationary policies, it's no wonder Fifty Percent Say They Are Worse Off Than a Year Ago

But still, Biden won't stop.

Biden Begs for More Inflation and Tax Hikes

On February 7, I noted Biden Gives a Well-Delivered SOTU Speech Begging for More Inflation and Tax Hikes

President Biden delivered his State of the Union speech far better than I expected. The problem was content, not delivery.

I counted 25 inflationary ideas in his SOTU speech. It's just a start. 

Most of those ideas will never get through the House, but don't discount Biden's ability to wreak havoc with inflationary executive orders, sanctions, and tariffs.

Expect more nonsense like this: Al Gore and John Kerry Aim to Hijack the World Bank for Climate Agenda.

Powell has his work cut out for him. Much is his own doing, but Biden sure isn't helping matters.

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management.

Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

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