Nonsense on the Housing Market Makes Page One at WaPo

Print
Saturday, 22 March 2014 08:02

The Post gives us its latest concern about the housing market, telling us that higher interest rates will cause people to stay in their current homes where they have locked in low mortgage rates for long periods of time.

"The higher rates, soaring home prices and a tight inventory have kept potential buyers on the sidelines, hurting the sales of previously owned homes and undermining the recovery of the housing market, a huge contributor to economic growth."

The problem with this line is that the housing market has recovered pretty much all we should expect. In the mid-1990s, before the bubble began to dominate the market, existing home sales averaged about 3.5 million annually. If we adjust upward by 20 percent for population growth, we should expect existing home sales of around 4.2 million.

In fact, they have been running at around 4.8 million, considerably above trend levels. This is partially offset by lower than trend sales of new homes (this is due to the fact that unusually high vacancy rates are still discouraging new construction). However this piece is focused on explaining a weakness in the housing market that does not exist.

The piece also misrepresents the scenario we would face if interest rates rise further, implying that this will directly make housing less affordable. It ignores the fact that higher interest rates will likely lead to lower house prices. This will not completely offset the impact of higher interest rates on monthly housing costs, but the almost inevitable drop in house prices will alleviate the impact on higher interest rates. It is bizarre that the piece never mentioned this fact.