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Three Cents Worth: Katrina, Mortgages, and NYC Home Sales

[This week, resident chartist Jonathan Miller, tackles the relationship between the 30-year-mortage rate (blue line) and the average sales price of a Manhattan home (red bars) and explains how Katrina may result in lower sales prices in New York. The x-axis runs from the first quarter of '89 to the second quarter of '05. The y-axis runs from 0 to $1.4 million for sales prices and 12% for mortgage rates.]

Some analysts are worried that Hurricane Katrina will cause inflation in the U.S., but why would that be a bad thing for the New York residential real estate market?

It's because mortgage rates have been one of the principal catalysts for this latest real estate boom. There is a direct (inverse) relationship between mortgage rates and sales prices. The overall decline in mortgage rates over the past 15 years has increased affordability for home buyers. However, this is no secret to the seller. When rates go down, sales prices often go up.

Rates are generally tied to the bond market and the bond market hates inflation. The Fed has done a good job keeping a damper on inflation by raising short term rates 11 times since June 2004 which has helped mortgage rates remain low.

In the aftermath of Hurricane Katrina, both fuel prices and the cost of building materials prices have already seen increases. If inflation does rear its head, expect to finally see mortgage rates rise modestly. That could have a cooling effect on housing prices in New York City.

In the meantime, lets hope Hurricane Rita isn't as destructive as Katrina to people in its path.
· Average Sales Price vs. 30 Year Mortgage Rate [Miller Samuel]
· Three Cents Worth: Finding a Happy Median [Curbed]