To support or reject the above models, we need to confront them with data. Unlike natural sciences, economics is a social science; therefore we rarely have data that come from laboratory experiments. Most of our research uses data collected over periods of time during which many relevant factors change simultaneously. A basic challenge in testing is how to disentangle the separate influences of these changing factors.
Table 2.4 contains data on the 5-year conventional mortgage interest rate and an index of resalehousing prices, quarterly for the period from the first quarter of 2007 to the fourth quarter of 2011. The house price index has a base value of 100 in the last quarter of 2006, and reflects a weighted average of detached bungalows, executive and detached two-story houses. Figure 2.5 is a scatter diagram of the data in Table 2.4.
A Scatter diagram plots pairs of values
simultaneously observed for two variables.
A clear negative relationship between the two variables is evident in Figure 2.5 A higher mortgage rate is associated with lower house prices.
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