With so much continuing to be made of a housing recovery being contingent upon historically low mortgage rates and a cheap Fed funny money monetary policy, I thought it would be worth revisiting the ongoing relationship between existing home sales and mortgage rates that continues to defy some of the most seasoned economists' logic, including NAR's own Lawrence Yun.
Here is a comparison between NAR's seasonally adjusted existing home sales and Freddie Mac's 30-year fixed rate mortgage survey over the past several months, this data reveals that record low mortgage rates have had no meaningful impact on demand. You can call it the law of diminishing returns, price inelasticity, beating a dead horse, whatever, this is a concept that I have wrote about on more than one occasion.
Sep 2008: 5.10 million sales / 6.04%
Oct 2008: 4.94 million sales / 6.20%
Nov 2008: 4.54 million sales / 6.09%
Dec 2008: 4.74 million sales / 5.29%
Jan 2009: 4.49 million sales / 5.05%
Feb 2009: 4.71 million sales / 5.13%
Mar 2009: 4.55 million sales / 5.00%
Apr 2009: 4.66 million sales / 4.81%
May 2009: 4.72 million sales / 4.86%
Jun 2009: 4.89 million sales / 5.42%
This data continues to reveal that due to underwriting constraints and an abnormally high homeownership rate, home sales are not being driven by historically lower rates as many had hoped for.
Instead home sales are being driven by falling property values. This is why that according to the NAR, home sales during the 1Q were up year over year in only six states, AZ, NV, CA, FL, MN, and VA.
The reason that the Fed's failed monetary policy is a concern for housing is that while home sales are inelastic when mortgage rates are between 4.5% and 6%, the housing market will certainly feel the negative impact when mortgage rates move higher into 7,8, or 9% in 2010, 2011, and 2012 when the Fed will be forced to contract the money supply to compensate for the $1.25 trillion they have invested in mortgage backed securities.
The result will be that just when we think we are pulling ourselves out of this housing depression, mortgage rates will surge higher complicating a recovery.