Inflation fuels mortgage rate spike from 6% to 7% in Feb. What can you afford?
On February 14, I asked Will hotter early-2023 inflation push mortgage rates back up to 7%? (link below), and now we have the answer: Yes. Today’s worst case rates are about 7% after the Fed’s preferred inflation measure came in hotter than expected this morning. Here’s what’s up.
INFLATION FUELS 7% MORTGAGE RATES
– On February 14, Consumer Price Index (CPI) inflation was released, and that’s the “headline” number most people understand or at least see a lot.
– That day, annual Core CPI — which excludes volatile food and energy prices, and is what the Fed focuses on for rate policy — came in a 5.6%, which was actually down 10 basis points, but the market considered it to be stubbornly high.
– This plus a scorching jobs report on February 3 caused rates to spike from 6% on February 2 to around 6.75% by February 14.
– Then the Fed’s preferred inflation measure — the Personal Consumption Expenditures index — came out today, and the annual Core PCE number was was up 10 basis points to 4.7%.
– More glaring for bond investors who control rates was the monthly Core PCE rising 20 basis points to 0.6%.
– I’ve highlighted these changes in the table above.
– This is a lot for a single month, especially when investors were thinking inflation was moderating.
– The reaction is mortgage bonds sell off, and rates rise when bond prices fall in a selloff.
– If the current selloff holds, 30-year fixed mortgage rates will end up at 7%.
HOME AFFORDABILITY WITH 7% MORTGAGE RATES
– So we’ve answered our mid-February question: Yes, inflation has pushed mortgage rates back up to 7%
– Now it’s time for a new question: what homes can you afford with 7% mortgage rates?
– Let’s answer using the latest home price data.
– Median existing home prices are now down $54,800 from June peak of $413,800 to $359,000, per NAR.
– This is relevant price data because existing home sales comprise 87% of all sales (new home sales are the rest).
– Monthly all-in cost on a $359,000 home purchase with 5% down and today’s worst case 7.125% rate would be $2993 (mortgage payment, insurance, taxes, mortgage insurance).
– If you had no other monthly debt, you’d need to make $83k* per year to qualify for this.
– If you had $600 in credit card, auto, and other monthly debt, you’d need to make $100k* per year to qualify.
– This is still reasonably affordable, especially if there are two household incomes qualifying.
– This inflation and rate spike sucks, but as you can see from the math, it doesn’t shut the market down.
– And the trick is that home prices will start rising again when rates fall.
– And they will gradually fall during 2023 as the Fed keeps doing its thankless job of raising short term rates to lower inflation.
– So keep your head in the game, and reach out if you have questions.
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Reference:
– Home prices affordable at $359k after sales fall 12th straight month
– Will hotter early-2023 inflation push mortgage rates back up to 7%?
– Table above from BEA’s January 2023 PCE report
– * To arrive at these qualifying income numbers, I’m using 43% deb-to-income ratio that Federal regs allow for all mortgages of this size in America.