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Forget Rates: Why Housing Prices Suggest the Recovery Will Gain Strength


Our review of the data shows that prices, which are on the rise, are key to keeping the market thriving.


Intuitively, it might seem that increased 30-year mortgage rates would indeed slow down the housing market because less people would qualify for costly mortgages, and fewer people would want to take out expensive mortgages to begin with. Historically, however, specifically in the past decade, mortgage rates actually had little to do with fluctuations in the housing market.

Statistically speaking, in periods of both increasing and decreasing rates, home sales and mortgage rates have shown little correlation. In a compilation of existing home sales data (85% of the housing market) since 2000 in comparison to 30-year mortgage rates since the same year, we find that the coefficient of correlation did not exceed 128 in any of the three periods of interest rate changes (2000-2002, 2003-2006, and 2007-2012; see chart below).

In layman's terms, a correlation coefficient near zero indicates that the two sets of data are not closely related -- neither one changes in response to the other. And since existing home sales make up 85% of all home sales, a low correlation between mortgage rates and existing home sales is a strong indicator of mortgage rates' relationship with the housing market as a whole. This leads me to believe that rising mortgage rates, to this point, should have little to no impact on the current housing market.

Instead of looking at 30-year mortgage rates, let's look at home prices (represented by the Case-Shiller Composite-20 Index) versus home sales. Movement in the Case-Shiller Index since 2000 has shown remarkable similarity to movement in the number of existing home sales since 2000. Looking at their respective graphs from mid-2000 to mid-2013, it's easy to see a very similar pattern: Both show a steady increase until peaking around December 2005, followed by a decline and a leveling off. Furthermore, the correlation coefficient of existing home sales to home prices from 2000-2002 was a solid .719, followed by .483 from 2003-2006 and .480 from 2007-2012. These numbers clearly outmatch the correlation between home sales and mortgage rates. And looking at the graph of existing home sales side-by-side with the graph for mortgage rates, there is no immediate trend or resemblance that appears. Based on this evidence alone, it appears evident that home sales are more closely related to home prices, and are not as closely related to mortgage rates, as we sometimes think.

Along with home prices, the strength of the housing market can also be closely gauged by the National Association of Home Builders Market Index. The NAHB is a monthly survey that reports the sentiment of home builders regarding current home sales and future expectations of sales. A reading above 50 indicates that home builders are generally optimistic and view conditions as good. In a comparison of existing home sale data to the NAHB from July 2000 to July 2013, the two showed a very close resemblance, as demonstrated by the graph below:

Boasting a correlation coefficient of .850 from 2000-2013, home sales and NAHB data is a valuable guide as to what direction home sales might be moving. And since the NAHB reached 51 for the month of May and 57 for the month of June (up from 41 in April, and 44 in May), it seems safe to say that a modest rise in home sales should soon follow.

In this vein, we reached out to the Executive Vice Chairman of the NAHB, Andrew Chaban, who also happens to be the CEO of Princeton Properties, one of the largest purveyors of multi-family housing in the country. In fairness, the first question I asked Andrew was whether higher mortgage rates are having an effect on the market. His response? "Of course they are, but to this point, mainly from a portfolio perspective." He then gave an example of how a $111 million portfolio he refinanced one-and-a-half months ago at 3.74% would now be at 5.3%, or cost an additional $2 million per year in interest. That said, most in his industry were "expecting" and "prepared" for this rise in interest/mortgage rates, he explains. Also, the supply demand curve in most anchor markets is still very much in favor of the builders/sellers and property managers. As Andrew put it, "Life will go on, and a lot more housing, both multi-family and single family, is needed."
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