A couple of weeks ago I wrote a post titled, It's NOT about housing affordability.  The basis of the post was that according to the NAR's housing affordability index, affordability in November of 2008 was the highest on record since 1973 when they began tracking the indicator.  The NAR measures the relationship between the median existing single family home value, the median family income, and mortgage rates.

Housing affordability is one of those catch phrases that has been said for a long enough period of time that the assumption is that it must still be true, otherwise, why would everybody still be talking and writing about it?

For the past couple of years, housing critics claimed that once housing became more affordable and home values declined, that more people would go out and buy a home for the first time.  Well, based on the aggregate existing home sales data, nothing could be further from the truth.  Nationally, home sales are at the lowest pace since 1997 with only 4.74 million seasonally adjusted home sales as of December of 2008.  This despite the fact that the latest affordability index published by the NAR today shows that housing affordability in December is now the highest on record since 1973 at 158.8.  This is up nearly 11% from the affordability index in November when it was 143.2.   

It's no longer about housing affordability, it's about the access to credit and consumer confidence.  There are those who can't get credit, and there is nothing the government can or should do to facilitate this.  And there are others that don't want to buy a home because the perception is that they are going to lose money.  Making homes more affordable is not going to help either of these people.

And yet despite this data, Washington still continues to debate spending tens, possibly hundreds of billions of dollars, plunging mortgage rates to 4%.  

There is a concept known as the law of diminishing returns.  According to Wikipedia, what this law states is that, "in a production system with fixed and variable inputs (say factory size and labor), beyond some point, each additional unit of variable input yields less and less output. Conversely, producing one more unit of output costs more and more in variable inputs."

In terms of housing affordability, we have reached that point where each additional home sale which is a direct result of the government's effort to increase affordability, is going to cost more and more money.

You don't need to look very far back to see that lower mortgage rates are not going to stimulate significant demand for real estate.  For instance, as recently as October of 2008, when mortgage rates were 6.2% (source: Freddie Mac) the seasonally adjusted rate of home sales was 4.91 million according to NAR.  In December of 2008, after mortgage rates plunged nearly a full percentage point from October to 5.29%, the seasonally adjusted rate of home sales was down to 4.74 million.  

In other words despite mortgage rates falling nearly a full percentage point from October to December, home sales dropped -3.5%.

And on a side note, exactly whom are we making housing more affordable for?  Nearly 68% of Americans currently own a home, more than at any point in our history with the exception of the sub prime era in 2004 and 2005.  There simply are not the millions of qualified first time home buyers that have the credit and capital to buy a home in this market.  I understand that millions of Americans who are not under water on their mortgages will benefit from lower rates and that could have a positive stimulative effect on the economy by creating more disposable income for them, but it is not going to have a significant impact on demand for real estate, and that is what the housing market and banking system desperately needs.