Low mortgage rates are thought to lead to higher sales numbers due to the economic theory of supply and demand. However, this relationship between mortgage rates and home sales numbers is not always as strong as some economists might think. This is made evident in a study by Christopher Mayer and R. Glenn Hubbard of the Columbia Business School whose findings indicate a more diverse set of influences on home sales.
In light of the above findings, the correlation between mortgage rates and home sales numbers involves understanding additional variables that can influence home sales. Examples of these factors include Federal Reserve Bank 'quantitative easing' policy, the business cycle of the mortgage industry, economic conditions and federal regulations. Despite all the additional variables that influence mortgage rates and home selling, the connection between mortgage rates and home sales is relatively strong when averaged out historically.
• Quantitative easing
Quantitative easing is a policy practiced by the U.S. Federal Reserve Bank when economic conditions warrant an increase in financial liquidity i.e. availability of funds for banks from the Federal Reserve. When the Federal Reserve Bank lowers its Federal Funds Rate, the affect tends to directly correlate with mortgage rates as the availability of money increases. Another program the Federal Reserve Bank implements is Permanent Open Market Operations (POMO). This program eases the financial strain on financial institutions that are connected to the mortgage industry via purchase of mortgage backed securities
• Statistical significance
The correlation between mortgage rates and home sales numbers is only valid when statistically significant. Moreover, quantitative easing only works under normal market conditions, and not necessarily when the economy is struggling in an exceptional recession, is in a secular trend, or during a housing market down cycle. For example, in an October 2006 document by James D. Hamilton, Economist at the University of California, San Diego, it is claimed the drops in the Fed funds rate leads to changes in mortgage rates that create increased home sales, albeit over time. However, two years later, throughout 2008, home sales declined despite historically low mortgage rates.
• Historical economic trends
The relationship between mortgage rates and home sales numbers is also evident in the economic history of the United States. Historically, when demand for mortgages drop, an indirect correlation also exits between mortgage rates and treasury yields as these financial instruments also decline during times of economic contraction. This pattern is evident in graphs of historical mortgage rates and 10 treasury yields plotted over a timeline. Moreover, the trendline reveals more often that not, that mortgage rates lower when 10 year treasury yields also decline indicating another relationship between government debt and mortgage rates. This is evident in this graph of Federal Reserve data presented by Mortgage and Refinancing Info.
• The U.S. housing market
After the severe decline in U.S. housing market valuation(s) in 2007, the prices of homes plummeted and a financial crisis ensued. As a result of the financial crisis, lenders saw a drop in demand for home loans which caused a corresponding drop in mortgage rates. When graphed, a clear pattern between home sales and mortgage rates emerges suggesting a drop in one may also lead to a decline in the other rather than a rise in home sales due to lower costs. In other words, lower mortgage rates may also have a non-inverse relationship with home sales when a housing market is in a strong enough downward cycle.
• Mortgage regulation
Mortgage regulation also impacts the correlation between mortgage rates and home sales numbers. Following the housing market bubble burst between 2007-2008, the financial services industry gained increased government scrutiny regarding lending practices. A result of this was tighter lending rules requiring larger down-payments, higher consumer credibility and consumer protection rules. One such example being the Dodd-Frank Wall Street and Reform and Consumer Protection Act of 2010. A potential financially adverse side affect of all these rules is an inhibition in the rate of lending despite their perceived benefit to the economy and consumers.
CC BY 2.0 Attribution "Tasja"
In light of the above findings, the correlation between mortgage rates and home sales numbers involves understanding additional variables that can influence home sales. Examples of these factors include Federal Reserve Bank 'quantitative easing' policy, the business cycle of the mortgage industry, economic conditions and federal regulations. Despite all the additional variables that influence mortgage rates and home selling, the connection between mortgage rates and home sales is relatively strong when averaged out historically.
• Quantitative easing
Quantitative easing is a policy practiced by the U.S. Federal Reserve Bank when economic conditions warrant an increase in financial liquidity i.e. availability of funds for banks from the Federal Reserve. When the Federal Reserve Bank lowers its Federal Funds Rate, the affect tends to directly correlate with mortgage rates as the availability of money increases. Another program the Federal Reserve Bank implements is Permanent Open Market Operations (POMO). This program eases the financial strain on financial institutions that are connected to the mortgage industry via purchase of mortgage backed securities
• Statistical significance
The correlation between mortgage rates and home sales numbers is only valid when statistically significant. Moreover, quantitative easing only works under normal market conditions, and not necessarily when the economy is struggling in an exceptional recession, is in a secular trend, or during a housing market down cycle. For example, in an October 2006 document by James D. Hamilton, Economist at the University of California, San Diego, it is claimed the drops in the Fed funds rate leads to changes in mortgage rates that create increased home sales, albeit over time. However, two years later, throughout 2008, home sales declined despite historically low mortgage rates.
• Historical economic trends
The relationship between mortgage rates and home sales numbers is also evident in the economic history of the United States. Historically, when demand for mortgages drop, an indirect correlation also exits between mortgage rates and treasury yields as these financial instruments also decline during times of economic contraction. This pattern is evident in graphs of historical mortgage rates and 10 treasury yields plotted over a timeline. Moreover, the trendline reveals more often that not, that mortgage rates lower when 10 year treasury yields also decline indicating another relationship between government debt and mortgage rates. This is evident in this graph of Federal Reserve data presented by Mortgage and Refinancing Info.
• The U.S. housing market
After the severe decline in U.S. housing market valuation(s) in 2007, the prices of homes plummeted and a financial crisis ensued. As a result of the financial crisis, lenders saw a drop in demand for home loans which caused a corresponding drop in mortgage rates. When graphed, a clear pattern between home sales and mortgage rates emerges suggesting a drop in one may also lead to a decline in the other rather than a rise in home sales due to lower costs. In other words, lower mortgage rates may also have a non-inverse relationship with home sales when a housing market is in a strong enough downward cycle.
• Mortgage regulation
Mortgage regulation also impacts the correlation between mortgage rates and home sales numbers. Following the housing market bubble burst between 2007-2008, the financial services industry gained increased government scrutiny regarding lending practices. A result of this was tighter lending rules requiring larger down-payments, higher consumer credibility and consumer protection rules. One such example being the Dodd-Frank Wall Street and Reform and Consumer Protection Act of 2010. A potential financially adverse side affect of all these rules is an inhibition in the rate of lending despite their perceived benefit to the economy and consumers.
Sources:
1. http://bit.ly/bNMs3p (Federal Reserve Bank of Dallas)
2. http://bit.ly/d5NRSR (Hubbard, Columbia Business School)
3. http://bit.ly/bAjrMx (Bloomberg)
4. http://bit.ly/boXnJX (Hamilton UCSD)
5. http://bit.ly/cLrJH (Truth about mortgages)
:.
0 comments:
Post a Comment