Transcript Analyzing the Impact of Mortgage rates on New Home

Impact of Mortgage Rates on
New Home Construction in
Rhode Island
Jon Bradner
Michael Cancilliere
Justin Larson
Christopher Vacca
Abstract
•
Over the past 5 years we have seen massive financial upheaval, shattering of
many of our long held beliefs about home ownership and the housing market as
a whole.
•
In October 2007, the U.S. Secretary of the Treasury called the bursting housing
bubble "the most significant risk to our economy.“
•
Factors that have long been cornerstones of the housing market have undergone
significant change. Variables such as household income, unemployment rates,
foreclosure rates, and fluctuations in property taxes and mortgage rates have all
undergone significant, fundamental changes in the past 5 years.
•
Our study explores how relevant some previously trusted ‘guides’ are in the new
economic landscape. Specifically we will seek to prove the Ho: Mortgage rates
continue to have a significant impact on New Home construction rates.
•
This will be done by using statistical regression to analyze the impact of the
above variables against changes in demand for new Home Construction. We will
be seeking to prove our Ho, and by doing so begin to build a model that will allow
us to identify the variables that impact one of our country’s leading economic
indicators: New Home Construction.
Previous Work: Studies & Articles
Before 2011
Emrath 2005: Increased study is needed to determine what factors outside of
Mortgage rates impact home construction and sales:
• Changes in interest rates can significantly impact the ability to afford a house. This
presents a conflict of ideas as previously high interest rates suggested an increased
demand for housing.
• However, in the current market, interest rates may be changed to ward off inflation
or as part of other government regulations.
Fei Liu & Emrath 2008: The impact of home building on the economy
• Household income should impact new home construction in regards to forcasting
buying power
• it should also be viewed as an indicator of new home construction rates. A decline
in new home constructions may correlate with a decline in income (due to loss of
construction related jobs and industry), which may further decrease demand and
interest rates.
Previous Work: Studies & Articles
During 2011
Dietz & Siniavskaia 2011: On October 1, 2011, some mortgage loan limits and corresponding interest rates
for the government-sponsored enterprises dropped from their levels to stricter limits (established in 2008).
• This would reduce housing demand and place downward pressure on prices. As home sales are interrelated, this pressure on prices could spill over on other homes reducing the overall demand for
housing
• limit the willingness of contractors to embark on new home constructions.
Emrath 2011: Government regulations can impact new home construction
• Increased regulations tend to drive up costs and prices, necessitating a high level of demand to price
competitively.
• There is not a high demand for homes and there exists a significant glut in supply as millions of homes
are in foreclosure and short-sale situations.
Quint 2011: Quint projects that homes built as early as 2013 will be smaller and more efficient, which in
turn may mean reduced costs for the buyer, yet in turn mean lower profits for the builder or seller.
• This is significant as it is another factor that can play into new home construction as well as interest
rates as rates appear to be largely governed by demand.
Model
Hypothesis:
Data:
• Unemployment
•
The demand for new home
Rate
construction can be explained
• Mortgage Rate
•
by mortgage rates.
•
• Use ordinary least squares • Average
Household Income
linear regression model.
Median Home
Price
Total Home Sales
Percentage of
Foreclosed Homes
• Average Property
Taxes
No Intercept Linear Regression Model
b0 = 0
P-Value of Intercept = .205
Y=b1x1i + b2x2i + b3x3i + e
•
•
•
•
•
Y = Number of new home constructions (Dependent Variable)
X1 = Mortgage Rates
X2 = Total Home Sales
X3 = % of Homes Foreclosed
E = Standard Error
Results
• Mortgage rates and Total
Home Sales have positive
parameters.
• Percentage of Foreclosed
Homes has negative.
• P Value = 0.00001
• F Value = 69.19
• R-Squared = 82%
Results
Variable
Variance Inflation Factor
Mortgage Rates
1.498
Total Home Sales
1.040
% of Home Foreclosures
1.462
• One of the four regression assumptions is the absence of the
collinearity or that independent variables must be independent from
other independent variables
• The test for the multicollinearity is determined by the value for VIF
with a value below at least 10 but preferred to be below 5 indicating
an absence of collinearity
• Average VIF – 1.333
Results
• White’s test for homoscedasticity = 15.648
• P-Value for White’s test = 0.07461
Results
Variables
Mortgage Rates
Total Home Sales
% of Home Foreclosures
Elasticity
• 1.683
• 0.377
• -0.546
• As demand for new homes increase so do mortgage rates
• As demand increase so does total homes
• % of home foreclosures decreases when the demand for
new homes increase
Conclusion
The production of new home construction is
correlated to mortgage rates:
•The hypothesis proves to be correct, that mortgage
rates have a significant impact on production.
•The higher the mortgage rate, the more demand
there is for new home construction.
– Basically, the more demand there is for financing, the
higher interest rates will rise.
More studies could be done to determine what other
economic indicators would be appropriate to hedge
against mortgage rates for new construction.
Policy
Rhode Island was one of the hardest hit states in
terms of foreclosures.
• As mortgage rates stay low, or go down, the state
should create incentives for purchasing homes that
have been abandoned/foreclosed because it would
be economically inefficient for new construction.
– However, without new home construction jobs, Rhode
Island will also need to create a similar job market for
those skilled in new home construction.
• As mortgage rates rise, the state should encourage
tear downs of abandoned/foreclosed homes, in
order to maximize new construction income
Bibliography
1. How Government Regulation Affects the Price of a New Home., Emrath, Paul, Ph.D.
Economics and Housing Policy Group, National Association of Home Builders:
http://www.nahb.org/generic.aspx?sectionID=734&genericContentID=161065&channelID=
311
2. Interest Rates and House Prices: the “Priced Out” Effect., Emrath, Paul, PhD. Housing Policy,
March 2011: http://www.nahb.org/generic.aspx?genericContentID=37153
3. GSE and FHA Loan Limit Changes for 2011: Scope of Impact, Dietz, Robert, Ph.D., and
Siniavskaia, Natalia Ph.D., 2011., Economics and Housing Policy Group, National Association
of Home Builders:
4. The Direct Impact of Home Building and Remodeling on the U.S. Economy., Helen Fei Liu,
Helen and Emrath, Paul. October 2008
5. The New Home in 2015., Quint, Rose, Economics and Housing Research, Freddie Mac:
http://www.freddiemac.com/news/finance/
6. Interventions in Mortgage Default: Policies and Practices to Prevent Home Loss and Lower
Costs, Cutts, Amy and Merrill, William A., March 2008., Freddie Mac Working Paper #08-01:
http://www.freddiemac.com/news/pdf/interventions_in_mortgage_default.pdf
7. The Housing Landscape for America’s Working Families 2005, Lipman, Barbara J., New
Century Housing Vol. 5, Issue 1, April 2005,
8. Freddie Mac Website: http://www.freddiemac.com/news/finance/