Economics for One

Home Ownership vs. Interest and Savings Rates

A friend recently sent me a link to this chart.  I think the implied correlation of interest rates to home ownership is questionable.  On the other hand, it’s pretty clear that the savings rate and the interest rate are highly correlated.

Morgan Stanley Chart

Posted in Article | 2 comments

2 Comments so far

  1. Rob March 24th, 2009 7:14 am

    What the graph clearly shows is the impact of policy on purchasing behavior. Clinton’s Home Ownership Policy started in 1995. But I’m not sure why home ownership, by itself, even combined with the other two market traits, functions as a root cause for economic challenge. Something else has to be wrong, such as the mortgages were written to high risk borrowers, the risk wasn’t held by the entity that wrote the paper, and the terms were written on an adjustable rate that overburdened sub-credit-worthy borrowers when the rates eventually went up. My recollection is that those terms were part and parcel of the Clinton policy.

    Notice, too, that the decline in interest rate and savings rate begins fully 15 years before the housing ownership begins to grow. There are numerous jumps and declines in the interest rates, but the total home ownership more or less grows steadily.

    Finally, the units are wrong for a proper comparison. The housing graph is an intensity of total homes “owned” vs total homes lived in; it’s not a time rate of change of homes owned. Interest rates are not time rate of change, per se’, but the percentage of the amount borrowed charged for its use. And savings rate is the percentage of personal income retained. Just because the metrics contain the word “rate” doesn’t mean they are the same kind of rate. I think it would make more sense to take the first order derivative of these metrics and then attempt to determine if there is correlation.

    Part of my motivation for sending this to you, although I didn’t mention it at the time, was to show that Morgan Stanley published this.

  2. Rob March 25th, 2009 9:47 am

    I also wonder if it was worth destroying the economy to gain ~4% improvement in home ownership. I suppose politicians know the answer to that question.

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