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Three Cents Worth: Return to Frenzy?

[This week, our graph guy Jonathan Miller lines up mortgage rates against the CPI-adjusted average sales price in Manhattan. As always, good times ensue. Click on the image to exand.]

This week I thought I would place the 30-year fixed rates and 1-year adjustable rates alongside the percentage change in cpi-adjusted median sales price from the prior year quarter since 1990 to gain perspective on where mortgage rates are today and what correlation there is with the change in housing prices.

First of all mortgage rates right now and basically for the past 4 years are lower than the preceding decade. I am intrigued by public perception that mortgage rates are high. It's really that the reality of affordability has caught up with the market fueling the perception that rates are high.

The chart seems to show a lag time from periods of falling rates to rises in housing prices. It's logical that a slowing housing market can precede a recession.

There is a general sense from the lower GDP numbers that the national economy is cooling off, yet the latest manufacturing index numbers were dismal and probably offset the surge in the (lower paying) service sector employment figures. The national consensus seems to be that mortgage rates will be flat in the first half of 2006 but the futures markets are starting to show an increased probability that the Fed will be cutting rates in mid-2007 as the national economy continues to slip through the end of next year.

Manhattan is fairly well positioned on a regional economic level, unlike a large portion of the country, but a return to a frenzied activity level seems remote until inventory levels drop sharply. A modest decline in mortgage rates, which are being driven by weaker national economic conditions rather than local, still may not generate significantly more demand over the next year.
· CPI-Adjusted Median Sales Price v. Mortgage Rates [Miller Samuel]