Past housing cycles were heavily influenced by changes in mortgage rates. The cycles, both up and down, were generally also abrupt. However, not this time around. The historically low mortgage rates have not turbocharged home sales. At best, there has been a slight recovery and only in the most recent few months.
A simple graph of existing home sales and mortgage rates is shown below. Note the inverse relationship. Home sales fell off the cliff in the early 1980s as mortgage rates skyrocketed to 18 percent. At that time, the Federal Reserve — led by Paul Volcker — was determined to kill high runaway inflation. As inflation slid soon after, mortgage rates also began to fall. Up to 2002, the falling rates in turn pushed up home sales, with some years witnessing a surge in sales. Imagine the delight for those REALTORS® who entered the profession at the bottom of the market in 1982. Existing homes sale jumped 35 percent in 1983 and then rose at better than 10 percent a year in 1985 and 1986. After trending sideways from the late 1980s to the mid-1990s because rates stopped falling and because of economic recession, sales then returned to their upward trajectory from 1995 to 2002 as mortgage rates fell further. Sales rose further to a bubble level from 2003 to 2005 as underwriting standards went away.
Today’s situation is out of the ordinary, as shown below. Rates have fallen for most of the period from 2006-2011, yet home sales have refused to climb, other than the time period associated with impending homebuyer tax credit deadlines and in the past few months. It has taken much longer for the housing market to sober up after the heavy hangover from bubble sales activity. Not only were the underwriting standards tightened, the pendulum swung too far the other way — thereby greatly limiting the number of people who could take advantage of the historic low mortgage rates.
Partly based on this anomaly of excessively tight underwriting standards, the sales growth projection is only expected to be about 5 percent in 2012 and in 2013. But do not be surprised if there is a double-digit sales increase, as history has shown such a growth rate is possible after a period of depressed conditions.