Money magazine senior writer and Time.com snatch-away Stephen Gandel wrote a smart piece taking apart the Treasury Department’s sort-of-secret plan to bolster the housing market by driving down mortgage rates. Since the whole point of drumming up new buyers is to stabilize home prices, the part of the story I like most is the one that undermines that notion:
Some economist question whether the lower mortgage rates would even boost sales or home values. A 2006 study of mortgage rates and New York City housing prices going back to 1975 by Lucas Finco of Quadlet Consulting found no correlation between lower mortgage rates and higher housing prices, or vice versa. “The relationship between mortgage rates and home prices is pretty obscure,” says Jack Guttentag, a professor emeritus of finance at the Wharton School of Business.
James Hamilton, a professor of economics at the University of California, San Diego, says he used to think that lower mortgage rates were responsible for rising home sales in the first half of this decade, and for that reason he projected home prices would rebound in 2007. He now says rising home sales were the result of deterioration of lending standards and not lower mortgage rates. “I was wrong. The real story with home sales has to do with the availability of credit,” says Hamilton. “And credit is tight now.”
You can read the rest of the article here.