September 1st, 2011 (Modified on September 2nd, 2011)

Mortgage rates are national–home prices aren’t. Why?

by Peter Miller


Mortgage Rate ConceptHome prices were up in the second quarter or maybe they were down…

According to S&P/Case-Shiller, the U.S. National Home Price Index increased 3.6 percent in the second quarter of 2011 when compared with the first quarter. At the same time, the index has fallen 5.9 percent since the second quarter of 2010.

So you get to play editor–make a choice on which headline you want. Your statistically supportable and factually valid headline can be either:

 ”Home prices rise 3.6 percent in second quarter”


“Home prices fell 5.9 percent in past year.”

Are home prices rising or falling?

What these measures really tell us is that the effort to understand the current housing market remains unfulfilled.

We don’t know if home values are going up or down. If we could be sure prices were rising, that would add confidence to the marketplace and perhaps we would begin to see more buying, more demand and even higher home prices in some markets.

Alternatively, if prices have fallen and continue to fall, then many buyers will hibernate, waiting for the warm rays of a rising market to gently rouse them from a deep sleep.

National home price figures are unclear

It’s hardly amazing that national home prices figures are not especially clear.

They are, after all, an attempt to measure a commodity where every home is different. Just think about that the next time someone says, “Well, you know, my house would be worth $200,000 more if only it was located two miles to the west.”

Mortgage rates tell a different story

Mortgage rates are a different story.

Mortgage rates nationwide are fairly well homogenized. That’s the result of our secondary market and, so far, the willingness of investors to buy mortgage-backed securities (MBS).

Here’s an example for you to understand how this securitization system works:

Imagine that we have a small, local bank–Smith National. Smith has one branch and everyone in town banks there. Given its deposits, Smith has the capacity to loan as much as $10 million.

Smith might, for example, create 50 mortgages for $200,000 a piece (totaling $10 million). The question is: What happens when the 51st borrower walks through the door?

Smith National could say, “We have no money.” Or it could make the loan and collect fees and interest. But how can it make the mortgage without capital?

The answer is that Smith sells some or all of its mortgages in the secondary market. The loans are bought, packaged together, and then made into MBS.

The money collected by Smith through the sale of its mortgages can then be used to resupply its cash, and from that cash, new mortgages can be made. That’s how the 51st borrower can get a loan–and that’s why the mortgage rate charged by Smith Bank is pretty much the rate charged by Jones Bank.

In other words, money is “fungible”–a dollar in Newark has the same value as a dollar in San Diego.

The return wanted by mortgage investors can be found in the secondary market. Since the secondary market is national in scope, mortgage rates across the country are fairly even.

The result is that national mortgage rate quotes bear a close resemblance to what a borrower might actually pay.

With houses the story is different

A three-bedroom condo in Portland, Maine can have a vastly different value when compared with a three-bedroom condo in Portland, Ore.–or even a three-bedroom condo a mile away.

So, the next time you see a home price headline–whether good or bad, up or down–don’t worry. It’s just a short-hand way to try and better understand a theoretical marketplace, a place far, far down the road from the real world.

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One Response to “Mortgage rates are national–home prices aren’t. Why?”


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