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[Getting Graphic] Mortgage Rate-Inventory Stew: Separating Real From Nominal

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Source: Barrons


I read an article in Barron’s [1] this weekend written by the chief U.S. economist at High Frequency Economics, of whom (grammar?) Dow Jones likes to rely on that was pretty cool. Ian provides some sobering insight about the national housing market in these two charts that are pretty powerful. Of course, anyone that can invert a data point to make a point is ok in my book.

Mortgage rates are low, yet the number of sales continue to drop. Inventory levels are high. He makes the argument that real (not nominal) [2] mortgage rates, calculated by deducting the rate of home price growth from actual (nominal) mortgage rates are actually high right now, explaining the low level of demand.

The key problem now is not the level of nominal mortgage rates, which are not particularly high by the standards of the past decade. Instead, buyers are backing off because the real mortgage rate has rocketed and continues to rise. At the peak of the boom, people essentially were being paid to buy a home. The average 30-year fixed mortgage rate in 2005 was a tax-deductible 5.9%. The Office of Federal Housing Enterprise Oversight says that home prices rose 10.7% that year.

As long as buyers expected prices to keep rising, the implied real mortgage rate — home-price increase minus mortgage-interest rate — was minus 4.8%. This was an enormous incentive to borrow heavily to buy real estate. Result: a bubble.

But recently, the average 30-year mortgage rate was 6.5%, so with home prices up just 3%, real mortgage rates are now 3.5%. And with most potential buyers well aware of the huge excess supply of homes, there’s no reason to expect prices to rebound soon. A reasonable person might expect them to fall further, boosting the real mortgage rate further.

Here’s Bob Hagerty’s monthly inventory piece in the WSJ [3] [free] providing more detail on rising inventory levels throughout the US based on ZipRealty data. June inventory is up 2.5% from May overall in the 18 markets covered.

Hence the notion that the national housing market probably has a few years to go before things stabilize.