The NYT took note of a bounce in the housing market in the last few months. As the article correctly points out, the bounce was likely driven by a sharp drop in mortgage rates that followed a decline in the ten-year treasury yield from a peak of more than 5.2 percent in the summer to a low of just 4.4 percent in the fall. The piece gets a couple of points wrong. First it attributes the rise in interest rates to 5.2 percent to fears of inflation. The average yield of the 10-year treasury has been about 3 percentage points above the inflation rate over the last 30 years. With inflation in the 2.5-3.0 percent range, it would be expected that the 10-year treasury rate would be in the 5.5-6.0 percent range, assuming no inflationary fears. If investors were concerned about inflation rising in the future, then we would expect higher yields, as would also be the case if large budget (and current account) deficits affect interest rates. The other mistake is that the article attributes the more recent decline in mortgage applications to the holidays. The data are seasonally adjusted, so there is no reason that the holidays should have affected the data any more this year than in prior years. In discussing the situation going forward, the article should have included a real bear to offset the views of the industry spokespeople. Remember, even the Nasdaq didn't drop from over 5000 to under 1200 in a day. There were many bounces on the way, which the gurus of the tech bubble pronounced as the beginning of a sustained rebound.
--Dean Baker