The following charts were produced in an attempt to draw lessons from the relationship between mortgage rates, housing demand and home prices.  The analysis is not definitive because many of the factors which determine housing prices, the cost of homeownership and demand are external to the variables analyzed. 

Where conclusions are drawn, they are generalizations based not only on the data presented but the entire body of work included within The Affordable Mortgage Depression Framework of Economic Understanding.

1972-1996

• During this 25 year period demand for housing displayed limited correlation with the 30-year mortgage rate; the exception being 1978-1986
• Interest rates spiked from 8.8% to 16.6% and housing demand declined by more than half
• When rates moderated back to 10.2% over the following 5 years demand returned to levels near those which preceded the spike

1983-2007

• Demand does not appear to be driven by mortgage rates
• New home sales were largely static, other than declining during a recession, from 1983 - 1995 despite steadily falling mortgage rates
• Existing home sales seem to respond to a steep decline in mortgage rates from 1983 - 1986
• It is noteworthy that 3 single year spikes in mortgage rates ('87, '94, '99) caused demand to fall year-over-year
• The Housing Bubble and Bust occurred during a period of stable mortgage rates in a range from 7.9% to 5.75%, yet during this period we saw the largest increase and subsequent decrease in the demand for housing in US history

Post Housing Bubble, Mortgage Rate Subsidization

• Mortgage rates were largely static during 2007 and 2008, yet demand collapsed, then plateaued and gapped lower a second time
• The Federal Reserve's $1.25 trillion subsidy was effective in lowering rates but ineffective at spurring demand
• In the 6 months after mortgage rates fell to record lows, demand remained static and well below 2008 levels
• Recent spikes in sales volumes, which peaked in November and April, resulted from Government housing subsidies seperate from interest rates.  The most notable being the $8,000 tax credit

 


Marginal Mortgage Rates Are Higher Today Than During the Housing Bubble

I thought the following data was interesting and relevant.  During the mania portion of the bubble ever-rising prices made it necessary to employ mortgage products which reduced the credit, capital and cash flow burden of homeownership.

The following chart demonstrates the central role of these tools in supporting high and rising home valuations.  Hybrid products employed low introductory rates and terms which reduced credit, capital and cash flow requirements.  Today valuations remain elevated, but many of the innovative products utilized to support elevated prices are no longer available. 









Today, marginal interest rates and the cash flow necessary to service homeownership are much higher than during the Housing Bubble, despite record low fixed mortgage rates.
 
Unscientific Observations

• Housing demand historically has been only loosely correlated to the 30-year fixed mortgage rate
• Spikes in the mortgage rate have triggered reduced demand though
• Post Housing Bubble there has been little correlation between the 30-year fixed rate and demand as other forces are determining both sales volumes and prices
• There is a correlation between hybrid mortgage products, which reduced the requirement of credit, cash flow and capital to access homeownership, and both demand for houses and home prices
• Without these value distorting Affordable Mortgages it is difficult to imagine housing prices stabilizing at current levels