It’s Already Happening

Quietly, without much attention from the press, interest rates on 30-year mortgages have risen sharply over the past several months.

The average rate on a 30-year mortgage has jumped from 5.38% in mid-March to 6.34% today. The rate was lowest in June of last year, when a 30-year mortgage could have been had for 5.21%. Some analysts are expecting the 30-year mortgage rate to hit 7% by mid-next year.

Let’s put these higher rates into perspective on how they affect consumers.

On a loan of $250,000, the monthly payment on a 30-year mortgage taken out in March would have been $1,400. Under current rates, that same mortgage would now run $1,553 per month. And if the 30-year mortgage rate hits 7% by mid-2005, that monthly mortgage payment would be $1,663.

Here’s another way to look at it: A monthly payment of $1,400 on a 30-year mortgage would have carried a $250,000 home loan this past March. A year from now, from what analysts and the futures markets are telling us, that same payment would only carry a mortgage of $210,000.

Now, let’s talk about the “shooters”–those homeowners carrying $500,000 mortgages. Just this past March, their mortgage payment (still on a 30-year amortization) would have been $2,800. A year from now, that mortgage could run $3,326 per month–$6,300 more a year. That’s if we believe what economists and the futures markets are telling us… and that’s not guaranteed.

If inflation, and in particular the price of oil, continues to rise– interest rates will surprise on the upside. Maybe that’s what the pathetic performance of the big-cap Dow stocks is signaling.

Bottom line is that interest rates on a 30-year mortgage will be up 30% by this time next year from what they were in March, at the least. They are already up 18% from just 90 days ago.

It’s already happening. In the price charts, I can see the effects of higher rates hitting real estate stocks and REITs. As the New York Times put it so eloquently this weekend, “As Mortgage Rates Rise, Dreams Are Downsized.” To this, I add, “And So Does the Demand for Luxury Homes.”