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.

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ebworthen's picture

"Well let's see, we've blown another housing bubble with artificially low rates and with bailouts and buckets of QE which resulted in inflated prices and lower employment.  Good God!  We can't admit to that!  What are we going to say?"

"Rates, rising interest rates, and weather."

"Perfect!  I'll whip up some charts."

LawsofPhysics's picture

But the Fed has been consistent in saying they will "keep rates low indefinitely"...

Lying sacks of shit...

can't have it both ways.

Vampyroteuthis infernalis's picture

Damn, I wish I had a job like a Fed gov. Take charts and write rediculous lines through them. Make up numbers. Lie, lie some more and lie some more after that. Just make sure you get renominated for your cushy position.

I am more equal than others's picture



The charts were probably developed by PhDs interns who went to 'approved' indoctrinating school of higher education and have the requisite political views. Obama is god but since we have evolved he cannot be 'god' but a higher evolved primate. 

Headbanger's picture

Wonder what these fucktards will say when the S&P drops 25% in a few months time?

It's the weather!?

Fuck you Fed!

nope-1004's picture

Fed is a stupid bunch of liars, making shit up as they go along.  Rates are rising?  Where?  Show me, you idiots!  Bunch of lying assholes that claim rising rates in an environment where Bernocchio says "rates will never rise in my lifetime" is the reason the last common asset (housing) can't be milked anymore by the banks and people aren't buying into the lies.



Chief Wonder Bread's picture

Wait for the latest crop of Greenspankme clones to ride to the rescue.

Damn is that 'Brainard' *#@% Timmay's separated-at-birth twin or what?!

lordylord's picture

I love that 1st bar chart.  It reminds me of climate change/global warming articles (peer reviewed) that I read.  The conclusions do not follow the data.  Sorry Al Gore fans, suck it.

Old Man River's picture

It's the weather!?

Yup. Mark an 8, Dude. Pin it on them wildfires and El Neenyo (errr....drought?).

Stoploss's picture

Obviously the only market left anywhere is housing markets. 

Rates can never go up, or housing dies, it's simple.

The political componet which no one speaks of, reinforces the low rate policies that, as time progresses have to go lower for longer, before the desired effect is almost achieved.

Now we have mature bull market fund guy's ready to roll into bonds, thinking, or not, that some how there are enough bonds available. For every body.

Send in the clowns?

DoChenRollingBearing's picture



The Fed has been on a roll today, so much "pura basura".  We're doomed!

Grande Tetons's picture

Hijos de la chingada hablan pura basura. 

FieldingMellish's picture

The ideal excuse to keep ZIRP until Ben dies.

dontgoforit's picture

So much hockey schtick.

CheapBastard's picture

Fascinating that every realtor I talk to and the NAR vehemently deny rising interest rates will affect house prices. That flies in the face of history and common sense.

... not to mention job losses, stagnant income and an "official" CPI of 1.6% which is crushing seniors' retirement yields.

Winston of Oceania's picture

Interest rates UP house prices DOWN. Why they ask? When you can't sell something at a given price you must then lower the price until you cross the line of price discovery and a buyer is found. Well there's the problem right there; it makes perfect sense.

Son of Loki's picture

No doubt basic math to go for a lower priced house with a higher rate... then a higher priced house with a lower rate.


Common basic finance problem from 'FIN 101.'

LawsofPhysics's picture

"Rising rates?"  Where motherfucker?

We have ZIRP (NIRP in real terms)!!!

Roll the motherfucking guillotines already...

Nothing changes otherwise.

Serfs Up's picture

The alcoholic individual and serial bubble blowers have a lot in common, namely the inability to perform a useful self-assessment.

OldE_Ant's picture

lmao on this one.  Lets see just about everything else people need to pay to live skyrocketing (meat, eggs, milk, gas, insurance, taxes, etc.) maybe the fucking problem is the prices are unaffordable for more and more of the shrinking middle class.   Oh and the upper classes are paying more for artwork and probably don't need a 4th or 5th travel home, much less the maintenance headaches that go with them.

How about that real take home wages are flat to falling?  Or that to even get a loan now a days you have to be willing to bend over for the alien sized anal probe covered in dipping sand before they tell you 'your not credit worthy'.   Here is another classic deal breaker.  house was insured, but to transfer coverage has to be bound over (even by same company insuring) yet they won't do it because their standards now are higher than they were 20 years ago when they covered the house.

All kinds of shit going on here.  The sum total of it is that the new buyers who are supposed to be college grads and new families so deep in debt and making dirt for pay they have to live at home with parents.

You can't make this shit up sometimes, but sure as shit the FED makes it up every god damn day and sells it to us likes its the fucking gospel of YELLEN.


Osmium's picture

Existing home sales funded entirely with cash has never been higher just shows how great the recovery is.  Everyone is just sitting on a mountain of cash.

fonzannoon's picture

OT but i just checked a stawk that i own. it's up 4%. at first i was happy. then i looked and saw that it has traded 50, shares today when it normally trades about 800k shares.

it looks like stawks are going to trade like 10yr JGB's by summer.

Al Huxley's picture

That's ok, you just unload 50 shares/day and you'll be fine.

fonzannoon's picture

LOL btw i meant 50k shares today. still a fraction and thats not the only stawk doing that. literally no volume out there. flashy crashy time.

whatever with this Al. the 10yr yield is climbing. if we can push stawks up at the close we can prob avoid nikkei 13k for another night.

Al Huxley's picture

Pretty much everything's sitting on knife edges right now, I can't wait to see the superhero market managers manipulate their way out of this one!  Gold stocks look like a very solid shorting opportunity at this point, sitting right on the bottom trendline and having failed to rally over the past couple of weeks. 


You'd think these guys would mix it up now and then, but I guess after a while you just get used to collecting the money, and the extra effort to try and make it look like a realistic market seems like more effort than it's worth.

Bunga Bunga's picture

So the Federal Reserve is blaming itself? Why they didn't keep the rates lower? That's the easiest thing they can do.

Al Huxley's picture

Maybe RISING RATES could be blamed on the weather - kill two birds with one stone, and hold out real hope for an improving market as the temperatures improve.

SMC's picture

Goal seeking propaganda.

Perhaps this trash will be more effective when the majority of the population have been stupefied and indoctrinated via common core and will act without thinking, gleefully pursuing illusions without moral and ethical considerations as they are led into the slaughterhouse.

Spastica Rex's picture

Perhaps this trash will be more effective when the majority of the population have been stupefied and indoctrinated via common core

Well, I think the majority are already stupified and indoctrinated, and have been for a long time.

I think Common Core is strategy to help standardize and monetize the indoctrination process. Cut expensive unionized teachers out of the stupefication game, and you free up hundreds of billions every year to flow to testing companies, software makers, and government enforcers, among others.

Chuck Knoblauch's picture

I'm still trying to understand the decrease in the employment participation rate among youth from 25 to 29 year olds being attributed to retirement by the San Fran-sicko Fed.

RaceToTheBottom's picture

I believe economic thought now requires that interest rates are always 0.

Also collateral has been deemed not necessary.

Growth is now a given, not an outcome of risk.


I look forward to the time where we will spend our days giving roses to each other as rose thorns have been outlawed....

highwaytoserfdom's picture


Moar CDO to Fink to keep prices up And poverty for all ......Frankstien FED  




MrBoompi's picture

The San Francisco Fed huh?  So rates are the problem?  The problem isn't the median home price of $920,000 for a 2 bedroom piece of shit?  They can go fuck themselves.

Tjeff1's picture

Could they be setting up the ground work for an UN-TAPER????

lex parsimoniae's picture

double post sorry, crappy internet here

lex parsimoniae's picture

Rising rates my achin' butt.

Real life example from son trying to buy a place in Cali with 41% down. Appraisal comes in low, seller drops price 30k, escrow back on track w/interest rate in high 3's cruising along fine for 45 days, when ready to close: banker dreams up a technicality and the deal is virtually scrapped. still trying to comply with new technicality. Outcome TBD.

bottom line: no one qualifies for a mortgage

beercandad's picture

Went in the escrow /title company to sign final papers for a sale of one of my rentals, when out comes escrow "officer" with hand full of papers and the pronouncement that "things have changed" .You, mister seller will have to bend over and accept what ever we and the mortgage company tell you . 

I stood up and told them I didn't have to sell and they could shove their "new conditions" up the chute.

They had a hurried conference and decided that all is well and the original agreements are still "good".

orangegeek's picture

Philly Housing Index monthly reversed hard back in mid 2013.


The endless Fed buying pumped this index back up again, only to tank again in early 2014 (Fed put us here, Fed taper took us down).


Tanking home sales is a guessing game, as agencies continue to fudge their data/excuses.  Way too many incongruences - that's why housing indexes that get their data from the stock market tend to be the most reliable.

scubapro's picture


they want you to think they can influence housing, by stating that rates drive housing, and since the fed controls rates, simply look to old yellen to boost at her pleasure.


rates then, but not a 20% rise in prices plus a slight rise to very low (vs extremely low) interest rates....and theyre not flocking to the showrooms?  FEWER in the under 55 age group employed now vs 2007, at lower real wages....and they dont want to commit to 30yr loan and home maintneance?  how unpatriotic!

Freewheelin Franklin's picture

Keep in mind the generic explanation for this "surprising", and non-compliant with a general "economic recovery" finding, proffered 


Shouldn't that be coiffeured


starman's picture

here is my favorite quota "interest rates are at historical lows"!

Yeah and real estate at all time high! 

Mediocritas's picture

It's hardly rocket science, just simple sectoral balances, yet despite this having been known since the 1970's, mainstream economics still doesn't seem to appreciate it (and the Austrian school most certainly does not).

Look with your own eyes, the symmetry cannot be denied:

It isn't surprising that TSY yields track private sector animal spirits. When demand for private sector debt (eg investment bubble) is strong, demand for public sector debt is weak (low prices = high yields) and vice versa.

That's why housing starts track yields and it's why stocks typically move the opposite way to TSYs. Note that sectoral balances describes the entire private sector so the breakdown in the stock:bond relationship observed, since the Fed started dicking around with exotic programs, is being offset by a much broader economic malaise.

Said another way, the stock market is not the entire economy, just a subset responsive to distortion in the form of ZIRP-fuelled buybacks primarily, followed by speculation and exacerbated by front-running, stop-hunting trade-bots).

The Fed can screw around with exotic policies all it wants and will simply cause more distortions in select markets. Were it to step back and do nothing, TSY yields would rise (from the distortion of QE), the economy would completely crash and yields would then again fall without the Fed having to be on the bid as the traditional stock:bond relationship emerged. The true state of the US economy would be exposed.

Nothing is fixed until the core problem is addressed: a perpetual current account deficit. That's a political issue and an international one at that, given the USD is still the primary global reserve currency. The most likely "fix" is that the US must be made into an international safe-haven through international destabilization.

The Pentagon has more power than the Fed to influence the US economy, long term (though the Fed's power is indeed significant). Cue Radical Marijuana to describe the role of ultra-violence in global affairs (I know I can count on him, at least, to get it).

[edit: though there is an outside chance that the world ditches the USD in favor of SDRs in a 'peaceful' coup. Repatriating eurodollars would be highly inflationary, allowing the Fed to back out of all exotic programs and forcing the USA to suddenly take the pain of running a constant current account deficit / face reality. The subsequent loss of purchasing power would push people into poverty, kill imports, and require rebirth of the US manufacturing economy. Yeah, yeah, anger fuelled nationalism and misdirected out-tribe hatred leading to nuclear war, I did say "outside" chance].