March Madness: Mortgage Rates, Bidding Wars, Strong USD

I’ve been part of a March Madness pool with my college roommate and friends for about 30 years, pulling out a win every 5 years on average.  However my win count was clearly skewed higher early on.  As soon as we started having kids my frequency of wins began to drop.  Eventually most of our kids joined and they moved from just playing for fun, to literally crushing us to total humiliation as we adults found it increasingly harder to invest in the TV-time to get educated.  Watching a full game unfold always gave me a better feeling for how teams match up than reading a few sentences or hearing a sound bite on a team’s performance.

After being immersed in the topic of the eventuality of rising mortgage rates for the past several years, we now have a firmer grasp of the future as the Federal Reserve removed the word “patient” from their guidance.  On Monday I was interviewed by Tom Keene and my good friend Barry Ritholtz on Bloomberg Radio over the potential impact to housing  (Bloomberg Brief is a paid subscription newsletter. You can take free trial at

The fear of rising mortgage rates has been firmly embedded in the housing market discourse.  There has been way too much hand-wringing over their inevitable increase and we should have been more concerned about other economic issues and their potential impact to housing.

Mortgage volume has been falling for nearly a decade while mortgage rates have been declining so the challenge to housing has not been mortgage rates themselves.  Unemployment, wages and access to credit have always been the key determinant of the direction of the market.  Employment has improved recently but wage stagnation and tight credit more or less remain.  Tight credit conditions (i.e. high credit scores, the lack of exceptions made and tighter ratios) exist because banks remain afraid of their own shadow – if you disagree then you are only speaking with the sales side and not the underwriting side of banking.

A decade ago I was much more concerned about mortgage rate trends and their impact on housing than I am now.  In a macro sense it is hard to imagine throngs of borrowers dropping out of the market with a quarter or half point rise over the next year when economic conditions are improving – more people are employed and the economic outlook seems to be better.

A slow rise in mortgage rates are a good thing in total, because they indicate that the economy is strengthening perhaps offsetting the reduced affordability that would result.

And the sudden strengthening of the U.S. dollar should temper rate gains by slowing economic improvement at home as the cost of U.S. exports get pricier to others.

In reality we need real wage growth and need to see household formation to kick in to see a strong housing market going forward.  Low mortgage rates are just a gimmick that has had it’s turn. There has been a recent and very slight uptick of both household formation and wages so perhaps housing conditions will eventually benefit.

I’m starting to sound like an economist.

And about those Bidding Wars…

Manhattan Co-op/Condo Sales chart [click to expand]

A by-product of tight credit has been the return of bidding wars.  I addressed this in my recent Bloomberg View column.  Although no one tracks “bidding wars” per se, I used sales that sell at or above the list price as a proxy…33% of existing sales in the U.S. met that criteria in 2014, their highest market share since 2006, before the financial crisis hit.  In Manhattan the number of bidding wars is closer to 50%…

Speaking of bids…good luck in the March Madness tournament…err…housing market this spring.

Jonathan Miller, CRP, CRE President/CEO Miller Samuel Inc. Real Estate Appraisers & Consultants

ps Please feel free to share.  If you get tired of all the charts, real estate commentary and articles presented in each weekly note, just opt out.  I always appreciate feedback soplease email me.

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