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Opinion: Mortgage rates have a smaller impact on housing than you think; here’s proof

If we don’t learn from history, we are doomed to repeat it.

From 1998 to 2006, according to Freddie Mac, the median annual mortgage rate was 6.45%. At the same time, the median, annual average of existing home sales was 5.63 million units. Therefore, there were more housing sales in 1996 than there will be this year.

Mortgage rates today are not much higher than they were then. But today, there are 30 million more households (129 million) than there were in 1996 (99 million).

It goes to show what the failure to build enough homes from 2006 to the present combined with ultra-low, unrealistic mortgage rates and massive amounts of fiscal stimulus can do to the housing market. This is something that housing industry leaders should be thinking about — carefully.

The history of housing

Existing home sales hit 4 million units in 1978 for the first time. They fell by 25.3% from that level in 1980, fell another 18.8% in 1981 and by another 15.9% in 1982. Altogether, the last time the Fed hammered inflation with a rise in lending rates, housing sales fell 49% from the peak in 1978 to the trough of 1982 before bouncing upward by 39% in 1983 over 1982’s low.

One challenging historical fact is that while mortgage rates fell from 13.24% in 1983 to 7.81% in 1996, it took that long for housing sales to reach the levels they did in 1978 to 1979. During that time, total households in the U.S. grew by 16 million — just about 20% growth in the number of households in a time where housing sales were essentially flat for 17 years.

The next major downturn, which started in 2006, saw unit sales fall 10.3% from 2005 to 2006, then another 22.4% from 2006 to 2007 and another 20.9% from 2007 to 2008. There was a slight upturn in 2009, with unit sales increasing by 2.6% from 2008 to 2009. The total downturn was 44.9% in unit sales from the peak of 2005 to the trough of 2008.

While we generally understand that the unit sales of 2003 to 2005 were fed by fraudulent mortgage activities; nonetheless, unit sales in the record year of 2021 were only 4.1% ahead of those in 2003. When the average annual mortgage rate was 6.54% — or not all that much less than it is today.

How much of an impact do mortgage rates have?

Some of this data may indicate that mortgage rates have less of an impact on housing sales than we may believe. Other factors are likely to do with the explosive price increases of the last two years, especially as those relate to average household incomes.

Back to what has gone wrong. The lack of supply of new homes, both single-family detached, and multi-family (supply) has been overwhelmed by the availability of historically cheap mortgage finance and the enormous depth of financial resources of households. Recent Federal Reserve Board estimates are that American households have nearly $18 trillion of cash and marketable securities in their possession. 

This is basic economics. When demand exceeds supply you get inflation, period. 

Since the real housing market began its last recovery, it is estimated that between 4 to 5 million more households were created than houses of any kind were built. Demand crashed into supply and overwhelmed it. Too few houses and too much capital chasing them resulted in the explosion of the values of homes, apartment buildings and raw land to build them on.  This has resulted in a decline in affordability on a massive scale. 

The Fed’s attempt to cool off the economy to bring down inflation is necessary for many reasons. One of the biggest reasons is to soften housing prices so that affordability may come back to earth. However, if the country doesn’t find a way to significantly increase the supply of homes of all kinds, we will end up right back where started.

Steve Murray is a senior advisor to RealTrends and founder of RTC Consulting.

This column does not necessarily reflect the opinion of RealTrends’ editorial department and its owners.

To contact the author of this story:
Steve Murray at [email protected]

To contact the editor responsible for this story:
Tracey Velt at [email protected]

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