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Three Cents Worth: Manhattan Prices 'n Rates Don't Jibe

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[This week, real estate appraiser, Curbed graph guru, blogger, and podcaster Jonathan Miller has his rate locked in.]

Mortgage rates are rising and that's probably a good long-term thing for the housing market in NYC and nationwide.

One of the biggest misunderstandings about the market is the correlation between mortgage interest rate and price trends?sometimes I'll get caught up in it myself. The logic follows that rising mortgage rates will leave less room for principal in the monthly housing payment and then prices fall. Makes sense logically if you don't factor in access to credit.

In the short term, changes in mortgage rates may have some knee jerk impact on prices?we often see demand surges with sudden rate changes?but over the long term it's hard to pin down the cause and effect relationship between rates and prices using actual data. It's never been successfully correlated to my knowledge.

I chose the 1989-2013 window for the chart because that's how far back I go with my publicly published median sales price data. In the chart, mortgage rates have been falling throughout the period. (And they were higher prior to 1989. A 30-year fixed rate was approaching 20 percent in the early 1980s.) Over the past few years rates have effectively fallen as far as they can which means they can either stay there or go up.

As the economy improves, mortgage rates are expected to rise?and that's a good thing for housing and getting us to a real recovery rather than one driven by a low inventory frenzy. Nationally the rise in prices is largely based on lack of supply that has been choked off by tight credit. Would-be sellers can't qualify for a lateral move or trade up so they sit and wait for prices to rise.

Rising mortgage rates suggest:

· The economy is slowly improving (i.e. incomes and employment).
· Fed is talking about loosening QE infinity so rates could float to more normal levels, which probably aren't a lot higher than now.
· Bank lending (hopefully) responds with some easing of lending standards causing more listings to enter the market (lots of other factors have to change too).
· Bank refi business plummets (it is) and that motivates easing of lending standards by banks from business perspective to keep purchase mortgage pipeline full.
· Easing lending conditions (no, not like 2004 absence of lending standards) allows more inventory to enter the market, tempering price growth as more homeowners list.
· Rising inventory tempers the pace of price growth allowing the market to be based on something real and sustainable.

Since I'm locked in at 3.5 percent fixed for the next 25 years I'm staying put and have no skin in this game.
· Matrix [matrix.millersamuel.com]
· Three Cents Worth archive [Curbed]