Existing Home Sales Indifferent To Rising Mortgage Rates

Real Estate Broker/Owner

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.


Comments (5)

Jerry Murphy, CRS, SRES
Long Realty West Valley - Anthem, AZ
Anthem, Phoenix, and Scottsdale AZ Real Estate

The real problem is unemployment. When people don't have jobs and money it doesn't matter how cheap a home is or how low interest rates are.  They are not going to buy.  As soon as the economy picks up, people start working and having money in their pockets again we will see a housing recovery.  I don't worry too much about the interest rates rising to 7,8, or 9% so much though.  Interest rates were that high back in the 80's and most of the 90's and homes still sold.  Why? Because homes were more affordable and people had jobs. Employment is ALWAYS the key.  Thanks for the post and best of luck to you Mark.

Jul 30, 2009 01:56 AM
Dave Wierzbicki
RE/Act Real Estate Coaching System - Reading, PA
RE/Act Real Estate Coaching System

I think you're on to something Mark

but the rates better move up slower than that

or unemployment will come from everywhere

The current Administration doesn't want things much worse than they are now

in a mid term election year

Jul 30, 2009 02:11 AM
Tim Monciref - Austin, TX
Over 2,000 homes sold…..

My market is mainly dependent on stock market ($400k to $2mm) as they are more concerned about what is in their back pocket than what their house payments are going to be.  You can see my activity by taking a look at the DOW over the past 15 years.  It has gone pretty much hand in hand.

Jul 30, 2009 03:55 AM
Mark MacKenzie
Phoenix, AZ

Jerry:  I agree that unemployment is a factor.  My concern though about interest rates is not that a 7,8, or 9 percent mortgage rate is historically high, it isn't.  But compared to 5% it is.  When it comes to mortgage rates, it is the context that is relevant.  As rates move up, many "move-up" buyers will be reluctant to purchase another home and "leave" their 5% mortgage rate. 

What this means is that an organic housing market is still years away.

Dave:  Good points.  Rates will hinge on the government's efforts to sell debt and control inflation.  I have a feeling we are going to have problems with both.

Tim:  There is certainly a wealth effect that is going to impact housing decisions moving forward. 

Jul 31, 2009 02:42 AM
Eric Murrietta
Homeowners Financial Group USA, LLC - Scottsdale, AZ

Very interesting!

I think that when it comes to purchasing a home, when viewed as an entire process, mortgage rates do have very little to do with someone's desire to purchase.  What it does affect is the amount of purchasing abitlity they have and what they believe they can realistically afford.  (that is for FTHB and the like, not the truly wealthy).

Though the lower rates haven't impacted sales of homes directly, it has more than likely, in at the very least a minor way, given some people the ability to afford a home in general or more home.

I do agree with your assessment on the "move-up" buyers in the future may be more reluctant to buy a new home if rates are in the 8%-10% range. 

Jul 31, 2009 10:56 AM