they are not conservative in the selection of appraisal comps, and so the risk tolerance pendulum has swung towards extreme conservatism. The investment appeal of housing and presumption that prices can only go up has lost its shine. Many households had stretched in the 200-2005 run up and some even invested in second homes or investment properties hoping to flip these units at higher prices. Those late to the party got burned. Drilling Down By Market we expect inverse relationships between interest rates and home prices, the lack of response since 2007 in many markets may be due to the extent that each market was affected by appetites for subprime and second mortgages. Recent run ups may also be a result of support from greater investment buying is those markets that got hit the hardest. We first drill down on Chicago. The typical inverse correlations between monthly mortgage and prices, in this case single family home price per square foot, for the Chicago metropolitan area are shown below: Period of time Correlation with 30 Year FRMs 1980-2012 -.803 1990-2000 -.566 2001-2005 -.766 Since 2005 .897 For the past four years the housing market has behaved differently in Chicago and for that matter in most other markets. Since January of 1980 to present the monthly average 30 year fixed rate mortgage, FRM, (Source: Freddie Mac) has been 8.45%. Since April of 2010 the 30 year FRM has been under 5% and in February of 2012 when home prices hit their bottom in the Chicago metro market at $137 per square foot for single family housing, the mortgage rates were 3.89%. In September of 2012 they were down to 3.47% and finally prices have shown some modest bounce, but much less so than most hard hit markets. These results are shown in Exhibit 2. In Exhibit 3 we show the results for just 2005 through first quarter 2013. If you look only at Exhibit 3 you’d think that, at least in Chicago, home prices move with interest rates instead of inversely to them. Exhibit 2: Chicago Single Family Prices Per Sq Ft Versus 30 Year FRM Data: Freddie Mac and Collateral Analytics
they are not conservative in the selection of appraisal comps, and so the risk tolerance pendulum has swung towards extreme conservatism. The investment appeal of housing and presumption that prices can only go up has lost its shine. Many households had stretched in the 200-2005 run up and some even invested in second homes or investment properties hoping to flip these units at higher prices. Those late to the party got burned. Drilling Down By Market we expect inverse relationships between interest rates and home prices, the lack of response since 2007 in many markets may be due to the extent that each market was affected by appetites for subprime and second mortgages. Recent run ups may also be a result of support from greater investment buying is those markets that got hit the hardest. We first drill down on Chicago. The typical inverse correlations between monthly mortgage and prices, in this case single family home price per square foot, for the Chicago metropolitan area are shown below: Period of time Correlation with 30 Year FRMs 1980-2012 -.803 1990-2000 -.566 2001-2005 -.766 Since 2005 .897 For the past four years the housing market has behaved differently in Chicago and for that matter in most other markets. Since January of 1980 to present the monthly average 30 year fixed rate mortgage, FRM, (Source: Freddie Mac) has been 8.45%. Since April of 2010 the 30 year FRM has been under 5% and in February of 2012 when home prices hit their bottom in the Chicago metro market at $137 per square foot for single family housing, the mortgage rates were 3.89%. In September of 2012 they were down to 3.47% and finally prices have shown some modest bounce, but much less so than most hard hit markets. These results are shown in Exhibit 2. In Exhibit 3 we show the results for just 2005 through first quarter 2013. If you look only at Exhibit 3 you’d think that, at least in Chicago, home prices move with interest rates instead of inversely to them. Exhibit 2: Chicago Single Family Prices Per Sq Ft Versus 30 Year FRM Data: Freddie Mac and Collateral Analytics
Another-tale-of-2-cities.docx