Thursday, December 18, 2008

Silly Chatter on Mortgage Interest Rates


The WSJ runs a silly proposal.

[A] 4.5% mortgage rate will raise housing demand significantly. A simple forecast can be obtained by applying the 2003-2004 homeownership rates to 2007 households. We use the 2003-2004 home ownership rates because those were the years of the lowest previous mortgage rates (the average mortgage rate was 5.8%.)

While cash-flow is, perhaps, the most significant component of the home-purchase decision (i.e., the less you have to pay every month, the easier it is to make the purchase), it's not the only one. Another consideration is the price of the house in the first place.

Deflation of housing values is a fact; the WSJ's article would like to reverse that fact. One reason for the deflation is the price-to-rent ratio, which compares rents to purchase. And that ratio is significantly out of line with its historical trend. Typically, the ratio is 1.05; currently, it's 1.3 (Case-Schiller measure.)

The WSJ article would have us push the noodle up the hill.

HT: Calculated Risk

1 comment:

Shoebox said...

Ummmmm....wasn't it the whole "how high can I leverage cashflow" mentality that got us into the problem with have today? Cash flow works as long as there is incentive to continue the cash flow. If you are cash flowing an asset with a declining value, the decision to continue the cashflow becomes much more problematic!