July 2018 was another disappointing month in the housing market. Sales of existing homes, according to the National Association of Realtors (NAR), declined again last month. At a seasonally-adjusted annual rate of 5.34 million, it was the lowest level of resales in two years.

Apart from the distortions last year in the aftermath of the big Gulf Coast storms, the housing market has been slumping since early last year. As has become typical, the NAR blames a lack of available-for-sale inventory for holding back the market. The economy, they say, is booming with the labor market each and every month some variation of “strong” and “robust.”

Yet, for reasons they can’t explain there remains this nationwide sellers strike. Plenty of buyers, supposedly, but where are the sellers?

Over the past few months, anyway, that has been less of a problem than before. While housing inventory isn’t growing, it isn’t contracting like it had been going back to 2015. In other words, there is less restraint from the seller side especially recently.

Then it has to be mortgage rates, at least in the trade group’s attempt at an explanation.

In addition to the steady climb in home prices over the past year, it’s evident that the quick run-up in mortgage rates earlier this spring has had somewhat of a cooling effect on home sales

It sounds plausible enough. Mortgage rates are up this year. The 30-year average fixed rate mortgage had been as low as 3.4% in later 2016 and 3.9% as recently as last December. In the latest week, for August 16, the rate is now 4.53%.

Mortgage rates, however, are a convenient excuse for big economic imbalances. Thirteen years ago, those were a weak economy and a massive credit-driven bubble. Today, it’s no economic growth but with constant attention focused on the faulty unemployment rate. In both cases, home prices were way out of balance given economic fundamentals, though for very different reasons.

Mortgage rates though higher now are not materially greater than they have been for a decade. They’ve been unusually low since 2011; a year that stands out for the opposite of monetary “stimulus.”

It is typical laziness that attributes mortgage rates to the Federal Reserve’s monetary policies. This gives the FOMC far too much credit. Mortgage rates bear little resemblance to its prior monetary target or the current quasi-corridor. There isn’t, and hasn’t been, much relationship between federal funds and mortgage rates.

But since everyone believes this is how it works, it sounds like it could mean something: the Fed says it is tightening and the housing market is now tighter, meaning weaker, therefore?

This misunderstanding is because what actually drives mortgage rates is the UST benchmark 10-year (and to some extent the 5s7s). That brings Alan Greenspan’s “conundrum” into the real estate market; meaning that long bond rates haven’t agreed with the FOMC’s monetary policy stance for much of the 21st century.

Therefore, if mortgage rates are moving, or not moving, as the case now, it’s not because of the Fed. These rate hikes serve to mask the underlying fundamentals which are often very different.

In the middle of 2005, at the height of the housing bubble, total resales were 7.1 million (SAAR). The average mortgage rate was 5.7% at that time, on its way to 6.7% a year later. Is that what killed the housing bubble? It’s what everyone believes, anyway.

Or was it the fact that home prices had appreciated so far and so fast on explosive credit (eurodollar) expansion that the mortgage rate itself was merely the small pin pricking the massively stretched balloon? In other words, it wasn’t mortgage rates or any rates that ended the fantasy, it was the difference between financial conditions (bubble) and economic reality (middling economic recovery, with pronounced labor market weakness).

This big difference is exactly Greenspan’s conundrum, and thus the 10-year yield defying almost all of the 17 “rate hikes” and mortgage rates rising only a little rather than the additional 425 bps added to the fed funds target.

With the monetary system breaking down in between then and now, that’s the difference between a 7 million sales level with mortgages at 5.7% and now only 5.3 million in sales with mortgages rising to 4.5%. It seems upside down, but that’s only because we are taught from Economics 101 that low rates mean more. In reality, especially anything based on something like the long bond, low rates mean less economic stuff including housing. 

Therefore, if rates were really rising rather than gyrating between low and less low, that would be a good thing for both the real estate market as well as the economy (if in the reverse order).

The mortgage rate isn’t killing affordability, the lack of economic growth is. The US builds and sells far fewer houses and housing units today than fifteen years ago despite mortgage rates for all of that time being substantially less. The mortgage average just doesn’t matter, which is ironically the message of the 10-year UST yield upon which it’s based.

The big problem in real estate isn’t really a lack of sellers or mortgage rates; at least neither of those as anything other than symptoms of the larger issue. The flattening yield curve at 3% nominal tells us everything we need to know about the housing market and its imbalances. They are different today than thirteen years ago. There’s no bubble, true, but that’s because there is no economy.