More Brilliance From San Fran Fed: Existing Home Sales Tumble Blamed On "Rising" Rates

Tyler Durden's picture

In recent weeks the San Fran Fed has regaled us with such brilliant rhetorical questions: "How Important Are Hedge Funds In A Crisis" (after spending an unknown amount of taxpayer funds, it uncovered that the answer is "Very"), and "Is It Still Worth Going To College" (after spending even more taxpayer funds, its conclusion was "Yes", even though a subsequent Pew research study showed that the net worth of young college educated households with debt is below that of high school grads without debt).

Today, it stuns us with even more sheer brilliance in attempting to explain "The Slowdown in Existing Home Sales."

Keep in mind the generic explanation for this "surprising", and non-compliant with a general "economic recovery" finding, proffered by economists and experts in the past few months has been a simple one: "the harsh weather"... that was the case at least until we showed that the biggest slowdown in home sales in the peak snow month of January was in the region least impacted by weather: namely the West.

So what does the San Fran Fed propose as the explanation for the plunge in existing home sales? Why rising rates.

Some excerpts:

  • Sales of existing homes slowed noticeably over the second half of 2013, reflecting a more drawn-out recovery than expected for housing markets. A main reason for the slowdown is higher mortgage rates that have made financing more costly nationwide...
  • Although the housing market appeared to be on the road to recovery in recent years, sales of existing homes slowed markedly over the second half of 2013. This Economic Letter takes a closer look at some of the possible reasons for this decline. Evidence shows that existing home sales are not that far out of line with predictions based on economic fundamentals. The primary explanation for the slowdown is an increase in mortgage interest rates, which has made financing more difficult for homebuyers...
  • The fact that home sales in different parts of the country peaked and fell together suggests that some common underlying factors were at play. One such factor that could account for the decline in home sales is rising mortgage interest rates...

The conclusion:

The analysis in this Economic Letter suggests that changes in fundamentals such as rising mortgage rates can account for much of the sluggishness in existing home sales over the past year.

How does the SF Fed come up with this conclusion?

To gauge the effects of higher mortgage rates on home sales over time, I use a simple statistical model that relates existing home sales to past sales, past mortgage rates, and house price appreciation. I include past values of single-family construction permits to control for conditions in the market for new homes—a substitute for existing homes.


Figure 2 shows both actual data and dynamic simulations of existing home sales during the period of interest. The model simulations use seasonally adjusted monthly data through March 2013. Beyond that date, I use actual mortgage rates, house price appreciation, and building permits to predict sales of existing homes. This simulation is dynamic in the sense that the model predictions are based on past values of home sales, which themselves are predictions from early periods in the simulation. In the figure, the solid blue line shows the actual path of existing single-family home sales, and the dashed red line is the simulated path from the model. The dashed green line offers another simulation of what sales would have been if mortgage rates had remained at the low levels observed in April 2013.


Figure 2: Dynamic simulation of home sales



Figure 2 shows that the model follows the actual data fairly well through May 2013, when mortgage rates began to climb. At this point, the model predicts that sales should have leveled off and then declined for a short time. In fact, actual sales jumped just as mortgage rates went up. This could reflect buyers rushing to complete transactions before mortgage rates increased more, or other shocks to the system that the model doesn’t account for. The statistical model captures about one-half of the decline in home sales from July to October 2013.

Wait, did we say the Fed didn't blame the weather. It did:

After October 2013, actual home sales continued to fall through the winter months, probably due in part to unusually severe winter conditions in many parts of the country. Note that the model anticipated that home sales would recover by this time. 

This is all fine and great: surely if one blames rates and the weather one would get at least something right, even if as we showed it was the droughy West that was impacted most in January, so yeah - it was the weather - the hot weather that crippled sales.

As for rates, the Fed does have a point: they do impact existing home sales. The only problem is that according to actual, historical data, not some Fed model projection based on ridiculous assumptions, the impact is exactly the opposite of what the Fed proposes!

Exhibit A: a chart showing the yield on the 10 Year and the change in existing home sales. And no, one doesn't need a "dynamic simulation" of the impact of declining mortgage rates - one can just look at what is happening in the actual bond market.


What becomes quite clear is that not only are existing home sales not impacted favorably by declining rates which is what rates have actually done in 2014, but sales in fact are a modestly leading indicator to rates, which makes perfect sense - as the economy gets weaker for a variety of reasons, buyers simply pull out of the housing market, be it existing or otherwise, and this weakness then transforms into broader GDP weakness, which in turn results in lower interest rates (if not lower stocks which as is clear to everyone now are no longer driven by fundamentals but merely by how much liquidity central banks are pumping into the global market at any given point).

Surely the Fed isn't so clueless to miss this glaring refutation of their thesis? It isn't - it gives itself the following loophole.

It should be noted, however, that many other indicators of housing market activity—including housing starts and new home construction—remain significantly below what history would lead us to expect for this stage of the recovery. Thus, some other factors may be holding back home sales. For example, prospective homebuyers may have impaired access to credit, they may be underwater on their mortgages or have low home equity, or they may simply be reluctant to make large spending decisions when economic prospects are still somewhat uncertain. As the moderate recovery continues and these factors begin to dissipate, all forms of housing market activity, including existing home sales, should post more solid growth.

So while the Fed does account for what the real reason for the collapse in purchases is (namely that the US consumer simply can't make large spending decisions), it is once again wrong - it has nothing to do with reluctance as a result of "economic uncertainty" because last we checked the economy is always uncertain, despite what the central planners may wish to the contrary with their attempt to infuse absolute certainty about the future, but the biggest irony - and this is beyond the scope of this particular Fed paper - is that it is precisely the Fed's constant intervention in the economy and the market that is the cause of near-paralytic uncertainty about virtually everything: from the manipulated and rigged stock market, to what may happen to the economy once the Fed does pull out.

Uncertainly, however, which is only shared by 99% of the population. The 1% has never been more certain... or richer.

Which is why if the Fed were to actually do some real digging, it would find that the portion of existing home sales funded entirely with cash has never been higher!

Perhaps it is time for the Fed to do a paper analyzing that particular aspect of their constant micro-managing meddling in everything for the past 5+ years.