High, Low, Higher, Lowest

I hear that mortgage rates are going to come downÉ.

No kidding. Though they are likely to come down some more, mortgage rates already are down -- down a percent and a half since Christmas. Thirty year rates at 7.50-8.00% (depending on fees) are lower now than in the whole first two years of the Late Great Boom, and in the last 20 years higher only than the 1993 cruise to seven.

So, there's a new refinance boom underway? The housing market is about to re-ignite, right? Prices are soon to re-rocket?

Oh-for-three.

Current rates make it economical for anyone with a rate above 9.00% to refinance, but there were only a handful of loans created at those rates from September through early January. Loan volume in Boulder County has fallen almost 80% since the end of the twin refinance and purchase booms in early 1994. Cruel lender-to-lender joke: "So, Tom, have you refied both the loans you made last Winter?"

But what about the purchase market? Surely a percent and a half decline has ignited something?

Not yet.

The number of home sales in Boulder County began to slow in the Spring of 1994, and bottomed in the Fall, in most market segments 30-40% below 1992-93. So far this year, the number of sales is holding about even with 1994 overall, and better than the October-November dry gulch.

As there is a normal flow of new listings coming on the market, and the number of sales is down, the inventory of unsold listings is rising steadily.

Why haven't lower rates changed the picture this Spring? No one has a comprehensive and precise model for the role of interest rates in housing markets. Certainly, "high" rates hurt sales, and "low" rates help, but high and low are relative terms.

When I recite a little interest rate history to the average 30 year-old, I feel like granddad telling bedtime ghost stories. The Veterans Administration rate held below 5.00% from 1944 until 1959, and hit double digits for the first time ever in 1979. That landmark event forewarned the nightmare time (maybe I remember so well because I was so scared): in an eighteen month stretch from 1981 into 1982, mortgage rates couldn't get under 16%. Sixteen.

Today, an elderly X'er or trailing Boomer has no frame of reference for "high." They squirm, and question the wisdom of buying when rates are all the way up at 8.50%.

So, herewith two comprehensive but grossly imprecise theories of housing markets and interest rates.

One: home prices rise with local incomes. Extraordinary purchasing power accumulated in Boulder County in the 1980's while prices were flat. By early 1994 the excess was spent, and the housing boom stopped on the spot. New purchasing power is accumulating at 5-6% per year (the average increase in income), so in another couple of years, we'll have the footings for a 15-20% price pop. Meanwhile, unsold inventory will continue to accumulate.

Two: Interest rates motivate purchases only when the after tax mortgage rate is below the perceived home price appreciation rate. All technical analysis of investments involves comparing after tax returns; while average home buyers aren't technicians, they have good intuition about gains in value versus holding costs.

For example, in 1981 sales here were good, as 16% mortgage rates were offset by 15% appreciation and a 10% national inflation rate. Conversely, in 1988, mortgage rates had fallen below 10%, but appreciation was nil to negative, and sales were abysmal. Today's 8.00% mortgage rate converts to about 5.30% after taxes, roughly equal to the long term annual appreciation rate of nearby real estate. Therefore, approximate equilibrium and no new boom.

People buy houses for lots of reasons: because of a transfer, because of good or bad financial luck, because they need a bigger house, a smaller one, one closer to work, one with better schools, one in a prettier place, one without stairs, one without a flooding basementÉ.

Perhaps the least of the reasons people buy are expectations of bargain prices, or "low" interest rates. Most folks are not like dear, departed Opus, whose low resistance to bargains often brought 4,000 dozen Acme Turnip Twaddlers to his doorstep.