Category Archive for: Housing [Return to Main]

Tuesday, January 10, 2017

Here's What Really Caused the Housing Crisis

Me, at MoneyWatch:

Here's what really caused the housing crisis: One story of the housing crisis goes like this: Government programs that helped low-income households purchase houses led to widespread defaults on the subprime loans they held, sparking the entire the financial meltdown. 
For example, Lawrence Kudlow and Stephen Moore, both of whom have been named as economic advisers to Donald Trump, argue that the financial crisis and recession were caused by policies Bill Clinton implemented that were designed to stop discrimination in housing loans, known as “red-lining,” in poor areas. In particular, they argue that the Community Reinvestment Act (CRA), legislated in 1977, is to blame:
“Under Clinton’s Housing and Urban Development (HUD) secretary, Andrew Cuomo, Community Reinvestment Act regulators gave banks higher ratings for home loans made in ‘credit-deprived’ areas. Banks were effectively rewarded for throwing out sound underwriting standards and writing loans to those who were at high risk of defaulting.
What’s more, in the Clinton push to issue home loans to lower income borrowers, Fannie Mae and Freddie Mac made a common practice to virtually end credit documentation, low credit scores were disregarded, and income and job history was also thrown aside. The phrase “subprime” became commonplace. What an understatement. … Tragically, when prices fell, lower-income folks who really could not afford these mortgages under normal credit standards, suffered massive foreclosures and personal bankruptcies.”
However..., that isn’t what happened. ...

Wednesday, December 07, 2016

The Trouble with DTI as an Underwriting Variable

Richard Green:

The Trouble with DTI as an Underwriting Variable--and as an Overlay: Access to mortgage credit continues to be a problem. Laurie Goodman at the Urban Institute shows that, under normal circumstances (say those of the pre-2002 period), we would expect to see 1 million more mortgage originations per year in the market than we are seeing. I suspect an important reason for this is the primacy of Debt-to-Income (DTI) as an underwriting variable.
There are two issues here. First, while DTI is a predictor of mortgage default, it is a fairly weak predictor. The reason is that it tends to be measured badly, for a variety of reasons. ...
Let's get more specific. Below are result from a linear default probability regression model based on the performance of all fixed rate mortgages purchased by Freddie Mac in the first quarter of 2004. This is a good year to pick, because it is rich in high DTI loans, and because its loans went through a (ahem) difficult period. ...
The definition of default is over-90 days late. ... This is an estimation sample with 166,585 randomly chosen observations; I did not include 114,583 observations so I could do out of sample prediction (which will come later). The default rate for the estimation sample is 14.34 percent; for the hold out sample is 14.31 percent, so Stata's random number generator did its job properly. For those that care, the R^2 is .12.
Note that while DTI is significant, it is not particularly important as a predictor of default. ...
The Consumer Financial Protection Board has deemed mortgages with DTIs above 43 percent to not be "qualified." This means lenders making these loans do not have a safe-harbor for proving that the loans meet an ability to repay standard. Fannie and Freddie are for now exempt from this rule, but they have generally not been willing to originate loans with DTIs in excess of 45 percent. This basically means that no matter the loan-applicant's score arising from a regression model predicting default, if her DTI is above 45 percent, she will not get a loan.
This is not only analytically incoherent, it means that high quality borrowers are failing to get loans, and that the mix of loans being originated is worse in quality than it otherwise would be. That's because a well-specified regression will do a better job sorting borrowers more likely default than a heuristic such as a DTI limit.
To make the point, I run the following comparison using my holdout sample: the default rate observed if we use the DTI cut-off rule vs a rule that ranks borrowers based on default likelihood. If we used the DTI rule, we would have ... a default rate of 14.0 percent. If we use the regression based rule, and make loans to slightly more borrowers..., we get an observed default rate of 10.0 percent. One could obviously loosen up on the regression rule, give more borrowers access to credit, and still have better loan performance.
Let's do one more exercise, and impose the DTI rule on top of the regression rule I used above. The number of borrower getting loans drops to 73,133 (or about 20 percent), while the default rate drops by .7 percent relative to the model alone. That means an awful lot of borrowers are rejected in exchange for a modest improvement in default. ... In short, whether the goal is access to credit, or loan performance (or, ideally, both), regression based underwriting just works far better than DTI overlays.
(I am happy to send code and results to anyone interested.)

Friday, November 18, 2016

Rent or Buy?

Tim Duy:

Rent or buy? Often I am asked this question, and I find I lack a satisfactory answer. I realize that people who ask me this question are typically in transitional phases in their lives – moving from young adulthood to real adulthood. The answer is perhaps more obvious on either side of that inflection point, less so in the middle of it.

From my experience, these are the pros and the cons:


  • You earn the untaxed imputed rent (you pay yourself rent) and receive a tax deduction on your mortgage interest. Double subsidy.
  • Assuming a fixed rate mortgage, you no longer face the prospects of future rent hikes.
  • Owner-occupied housing provides you both the service of shelter and an investment asset.
  • It is a leveraged asset, which improves returns in a rising market.
  • Mortgage rates are historically low. That won’t last if policymakers do their jobs.
  • Housing is a hedge against inflation.
  • You receive psychological benefits.


  • It doesn’t provide cash flow. Instead, it requires cash flow. Mortgage payments, property taxes, insurance, repairs, etc.
  • Most buyers do not recognize/plan for depreciation costs. I have heard that you should expect annual depreciation of 2% of the cost of your home. This seems consistent with my experience.
  • Maintenance and upkeep are time consuming, particularly for single-family housing. Anyone want to come over and rake leaves with me this weekend?
  • Depending on the market, it can be an illiquid asset. This can be a problem if you plan/need to move. This is especially the case if you buy in a region that is struggling economically.
  • It is a leveraged asset, which is brutal in a falling market.

I am guessing that commenters will add additional pros and cons.

My standard advice is that property should be a part of your portfolio, but not your entire portfolio. If buying a home leaves you cash poor or unable to save in your firm’s retirement plan, it probably isn’t a good option for you. If you plan to move soon, it probably isn’t a good option. If you are too busy with your career to deal with upkeep, it probably isn’t a good option. Recognize the risk that comes with the reward. If you aren’t ready to accept the risk, it probably isn’t a good option.

I don’t think you should let the recent housing bust play too heavily in your decision. I tend to think that was a fairly unique event. If you are waiting for another housing bust on a similar order of magnitude before you buy, you might be waiting forever.

I have heard the advice that you should buy the most expensive house you can because the burden will fall as your earnings rise. Bad advice, in my opinion. Following this advice will leave you cash poor and unable to meet other financial goals or prepare for a life change or emergency. My advice is to leave substantial margin for error. And buy for the neighborhood, not the house.

My experience as a homeowner has been generally positive, but I would say that my circumstances are somewhat unique. Partly through accident, and then later through design when we recognized the benefits, Mrs. FedWatch and I have always purchased housing that we could afford on just one of our incomes. As a result, we have had to make some housing sacrifices. Not really me so much, mostly for her. She complained the last house was “killing her soul.” That doesn't sound pleasant. And the current house needs some work. But on the upside, however, when Mrs. FedWatch wanted to take time off work, we did not face a financial hardship.

Good luck with whatever decision you make.

Friday, June 10, 2016

The Overinflated Fear of Being Priced Out of Housing

Robert Shiller:

The Overinflated Fear of Being Priced Out of Housing: Rising home prices set off fears that real estate will become even more expensive, making it impossible ever to buy a home in a given city.
It’s easy to understand how such worries spread, but the historical record suggests that these fears are generally exaggerated. ...
There is another wrinkle, however. Demand lately has tilted toward homes in central cities, where land is scarce, rather than in more spacious distant suburbs. This creates imbalances. ... While living space is constrained in the heart of large, high-priced cities like New York, builders elsewhere have usually been able to accommodate people’s demands for cheap large homes roughly where they want them. ...
Given these facts, why do people still worry that home prices are getting out of reach? The answer can’t be found in the housing data. Instead, these fears may reflect anxieties about other issues — like income inequality, globalization and the threat of job losses because of robots and artificial intelligence. In prosperous cities, rising prices may connote economic exclusion.
After all, American society is increasingly divided according to educational attainment and income. In some circles, rarefied home prices may set off worries about being unable to live in choice locations shared with successful people. Home prices may, unfortunately, be viewed as a measurement of success in life rather than merely of floor space, and fear of being priced out of housing may well be rooted in deeper broodings about maintaining a position in the social hierarchy.

Thursday, June 09, 2016

It’s Not Just Millennials Who Aren't Buying Homes

From Macroblog:

It’s Not Just Millennials Who Aren't Buying Homes: In recent years, much attention has been focused on the growing tendency of millennials to rent. Theories for the decrease in homeownership among young adults abound. They include rising student debt levels that crowd out additional borrowing, a tendency to live in more urban areas where the cost to buy is relatively high, a generally tougher credit environment, and even shifts in the perception of homeownership in the wake of the housing bust. The ideas have been widely debated, and yet no single factor seems to neatly explain the declining share of the millennial population opting to buy a house. (See this webcast by the Atlanta Fed's Center for Real Estate Analytics for a discussion of these issues.)
To the extent that these factors are true, they may be affecting the decisions of other generations as well. Chart 1 below shows the overall average homeownership rate and homeownership rates by age group from 1982 to 2015. It's clear that homeownership rates have declined for everyone during the past 10 years, not just for millennials.
In fact, homeownership among young Generation Xers has fallen by a bit more than the millennial generation since the housing peak—declining 11 percentage points since 2005 compared with a decline of 9 percentage points for those under 35 years old. ...
The data suggest that whatever is affecting millennials' homeownership decisions is applicable to older individuals as well. Further, it seems there are other, possibly larger, factors affecting homeownership, such as the changing face of America. Although homeownership rates by family types and racial groups are a bit above the level seen in 1994, the average person in 2015 was about as likely to live in a home that is owned or being bought. Thus, the shift in the distribution of the population toward racial groups and family types (and likely other factors) that tend to have lower homeownership rates is likely exerting an important influence on the overall homeownership rate.

Monday, April 04, 2016

Paul Krugman: Cities for Everyone

 "Real solutions to real problems":

Cities for Everyone, by Paul Krugman, Commentary, NY Times: Remember when Ted Cruz tried to take Donald Trump down by accusing him of having “New York values”? It didn’t work, of course, mainly because it addressed the wrong form of hatred. Mr. Cruz was trying to associate his rival with social liberalism — but among Republican voters distaste for, say, gay marriage runs a distant second to racial enmity, which the Trump campaign is catering to quite nicely, thank you.
But there was another reason...: Old-fashioned anti-urban rants don’t fit with the realities of modern American urbanism. Time was when big cities could be portrayed as arenas of dystopian social collapse, of rampant crime and drug addiction. These days, however, we’re experiencing an urban renaissance. ...
Upper-income Americans are moving into high-density areas, where they can benefit from city amenities; lower-income families are moving out of such areas... You may be tempted to say, so what else is new? Urban life has become desirable again, urban dwellings are in limited supply, so wouldn’t you expect the affluent to outbid the rest and move in? ...
But living in the city isn’t like living on the beach, because the shortage of urban dwellings is mainly artificial. Our big cities ... could comfortably hold quite a few more families... The reason they don’t is that rules and regulations block construction. Limits on building height, in particular, prevent us from making more use of the most efficient public transit system yet invented – the elevator. ... And that restrictiveness brings major economic costs. ...
So there’s a very strong case for allowing more building in our big cities. The question is, how can higher density be sold politically? The answer, surely, is to package a loosening of building restrictions with other measures. Which is why what’s happening in New York is so interesting.
In brief, Mayor Bill de Blasio has pushed through a program that would selectively loosen rules on density, height, and parking as long as developers include affordable and senior housing. ...
Not everyone likes this plan. ... But it’s a smart attempt to address the issue, in a way that could, among other things, at least slightly mitigate inequality.
And may I say how refreshing it is, in this ghastly year, to see a politician trying to offer real solutions to real problems? If this is an example of New York values in action, we need more of them.

Friday, December 18, 2015

Paul Krugman: 'The Big Short,' Housing Bubbles and Retold Lies

Why are Murdoch-controlled newspapers attacking "The Big Short?"

‘The Big Short,’ Housing Bubbles and Retold Lies, by Paul krugman, Commentary, NY Times: In May 2009 Congress created a special commission to examine the causes of the financial crisis. The idea was to emulate the celebrated Pecora Commission of the 1930s, which used careful historical analysis to help craft regulations that gave America two generations of financial stability.
But some members of the new commission had a different goal. ... Peter Wallison of the American Enterprise Institute, wrote to a fellow Republican on the commission ... it was important that what they said “not undermine the ability of the new House G.O.P. to modify or repeal Dodd-Frank”...; the party line, literally, required telling stories that would help Wall Street do it all over again.
Which brings me to a new movie the enemies of financial regulation really, really don’t want you to see.
The Big Short” ... does a terrific job of making Wall Street skulduggery entertaining, of exploiting the inherent black humor of how it went down. ... But you don’t want me to play film critic; you want to know whether the movie got the underlying ... story right. And the answer is yes, in all the ways that matter. ...
The ...housing ... bubble ... was inflated largely via opaque financial schemes that in many cases amounted to outright fraud — and it is an outrage that basically nobody ended up being punished ... aside from innocent bystanders, namely the millions of workers who lost their jobs and the millions of families that lost their homes.
While the movie gets the essentials of the financial crisis right, the true story ... is deeply inconvenient to some very rich and powerful people. They and their intellectual hired guns have therefore spent years disseminating an alternative view ... that places all the blame ... on ... too much government, especially government-sponsored agencies supposedly pushing too many loans on the poor.
Never mind that the supposed evidence for this view has been thoroughly debunked..., constant repetition, especially in captive media, keeps this imaginary history in circulation no matter how often it is shown to be false.
Sure enough, “The Big Short” has already been the subject of vitriolic attacks in Murdoch-controlled newspapers...
The ... people who made “The Big Short” should consider the attacks a kind of compliment: The attackers obviously worry that the film is entertaining enough that it will expose a large audience to the truth. Let’s hope that their fears are justified.

Wednesday, December 16, 2015

'The Real Issue with Fannie and Freddie'

Dean Baker:

Private Profit with Public Guarantee: The Real Issue with Fannie and Freddie: The NYT had a column by Jim Parrot and Mark Zandi on reforming Fannie Mae and Freddie Mac. ... The article argues that the problem with Fannie Mae and Freddie Mac was that they were considered too big to fail. It therefore puts forward the case for ending their monopoly on issuing government guaranteed mortgage-backed securities (MBS).
This argument seriously misrepresents the issues with Fannie Mae and Freddie Mac. The real problem was that they issued trillions of dollars in MBS that were implicitly backed up by the government. At the time they failed in the summer of 2008, the generally held view in financial circles was that the government would be obligated to honor their MBS regardless of whether or not it kept Fannie Mae and Freddie Mac in business. ...
This was a direct result of the perverse incentives created by a system where private shareholders and top executives stood to profit by passing risk off to the government. This incentive does not exist today. ... As long as Fannie and Freddie are essentially public companies, that do not offer high returns to shareholders and pay outlandish salaries to CEOs, no one has incentive to take excessive risks.
This changes if we allow private banks to issue mortgage backed securities with the guarantee of the government. This would mean that Goldman Sachs, Citigroup and the rest would be able to issue the same sort of subprime MBS they did in the bubble years with assurance that even in a worst case scenario the government would reimbursement investors for almost the full value of their investment. This is a great recipe for pumping up financial sector profits and another housing bubble. It does not make sense as public policy.

Friday, December 11, 2015

'House Prices and Job Losses'

From Bank Underground:

House Prices and Job Losses, by Emma Lyonette and Gabor Pinter: What explains the strong comovement between the housing market and the labour market in the UK? This blog summarises the findings of recent research by Pinter (2015) that emphasises the role of real estate as an important determinant of firms’ borrowing capacity. This is because real estate is widely used by corporates as collateral when trying to obtain external financing. Fluctuations in real estate prices may therefore cause fluctuations in firms’ borrowing capacity, which then affects firms’ decisions to undertake new investment, to create new jobs and to destroy existing jobs. The paper shows that this so-called collateral channel is important in understanding not only the recent Great Recession but historical UK business cycles in general. ...

Monday, November 30, 2015

Paul Krugman: Inequality and the City

"You don’t have to be a conservative to believe that we have too much regulation":

Inequality and the City, by Paul Krugman, Commentary, NY Times: New York, New York, a helluva town. The rents are up, but the crime rate is down. The food is better than ever, and the cultural scene is vibrant. Truly, it’s a golden age for the town I recently moved to — if you can afford the housing. But more and more people can’t.
And it’s not just New York. ... The story for many of our iconic cities is ... one of gentrification... Specifically, urban America reached an inflection point around 15 years ago: after decades of decline, central cities began getting richer, more educated, and, yes, whiter. Today our urban cores are providing ever more amenities, but largely to a very affluent minority. ...
We’re not just talking about the superrich here, or even the 1 percent. At a guess, we might be talking about the top 10 percent. And for these people, it’s a happy story. But what about all the people, surely a large majority, who are being priced out of America’s urban revival? Does it have to be that way?
The answer, surely, is no, at least not to the extent we’re seeing now. Rising demand for urban living by the elite could be met largely by increasing supply. There’s still room to build, even in New York, especially upward. Yet while there is something of a building boom in the city, it’s far smaller than the soaring prices warrant, mainly because land use restrictions are in the way.
And this is part of a broader national story. ... Yes, this is an issue on which you don’t have to be a conservative to believe that we have too much regulation.
The good news is that this is an issue over which local governments have a lot of influence. New York City can’t do much if anything about soaring inequality of incomes, but it could do a lot to increase the supply of housing, and thereby ensure that the inward migration of the elite doesn’t drive out everyone else. And its current mayor understands that.
But will that understanding lead to any action? That’s a subject I’ll have to return to another day. For now, let’s just say that in this age of gentrification, housing policy has become much more important than most people realize.

Thursday, October 01, 2015

'The Costs of Interest Rate Liftoff for Homeowner'

Two posts on housing. First, how will an increase in interest rates impact mortgage markets?:

The costs of interest rate liftoff for homeowners: Why central bankers should focus on inflation, by Carlos Garriga, Finn Kydland, and Roman Šustek: The Federal Reserve Bank and the Bank of England left their policy interest rates unchanged this month... But an interest rate liftoff in the near future remains on the table in both the US and the UK, provided the headwinds from China ease off and there is further evidence of improvements in the domestic economy. Inflation, however, still hovers in both economies stubbornly around zero percent. 
Interest rates set by central banks influence the economy through various transmission mechanisms. But one channel affects the typical household directly – the cost of servicing mortgage debt. ... Changes in the interest rate set by the central bank affect the size of mortgage payments, but differently for different types of loans. In addition, the real value of these payments depends on inflation. ...
Policy implications
To sum up, the effects of the liftoff on homeowners depend on three factors:
  • The prevalent mortgage type in the economy (fixed or adjustable rate mortgages);
  • The speed of the liftoff; and
  • What happens to inflation during the course of the liftoff.
If inflation stays constant at near zero then in the US, where fixed rate mortgage loans dominate, the liftoff will affect only new homeowners. In the UK, where adjustable rate mortgage loans dominate, the negative effects will in contrast be felt strongly by both new and existing homeowners.
However, if the liftoff is accompanied by sufficiently high inflation as in our examples, the negative effects will be weaker in both countries. In the US, the initial negative effect on new homeowners will be compensated by gradual positive effects on existing homeowners. And in the UK, provided the liftoff is sufficiently slow, neither existing nor new homeowners may face significantly higher real costs of servicing their mortgage debt. But if the liftoff is too fast, both types of homeowners in the UK will face higher real mortgage costs in the medium term, even if the liftoff is accompanied by positive inflation with no change in real rates.
Therefore, if the purpose of the liftoff is to ‘normalize’ nominal interest rates without derailing the recovery, central bankers in both the US and the UK should wait until the economies convincingly show signs of inflation taking off. Furthermore, the liftoff should be gradual and in line with inflation.

Second, allowing less creditworthy borrowers to refinance could stimulate the economy:

‘Home Affordable Refinancing Program’: Impact on borrowers, by Sumit Agarwal, Gene Amromin, Souphala Chomsisengphet, Tomasz Piskorski, Amit Seru, and Vincent Yao: Mortgage refinancing is one of the main ways households can benefit from a decline in the cost of credit. This column uses the US Government’s Home Affordable Refinancing Program (HARP) as a laboratory to examine the government’s ability to impact refinancing activity and spur household consumption. The results suggest that less creditworthy borrowers significantly increase their spending following refinancing. To the extent that such borrowers have the largest marginal propensity to consume, allowing them to refinance under the program could increase overall consumption and alleviate uneven economic outcomes across the country.

Sunday, August 16, 2015

'The U.S. Foreclosure Crisis Was Not Just a Subprime Event'

From the NBER Digest:

The U.S. Foreclosure Crisis Was Not Just a Subprime Event, by Les Picker, NBER: Many studies of the housing market collapse of the last decade, and the associated sharp rise in defaults and foreclosures, focus on the role of the subprime mortgage sector. Yet subprime loans comprise a relatively small share of the U.S. housing market, usually about 15 percent and never more than 21 percent. Many studies also focus on the period leading up to 2008, even though most foreclosures occurred subsequently. In "A New Look at the U.S. Foreclosure Crisis: Panel Data Evidence of Prime and Subprime Borrowers from 1997 to 2012" (NBER Working Paper No. 21261), Fernando Ferreira and Joseph Gyourko provide new facts about the foreclosure crisis and investigate various explanations of why homeowners lost their homes during the housing bust. They employ microdata that track outcomes well past the beginning of the crisis and cover all types of house purchase financing—prime and subprime mortgages, Federal Housing Administration (FHA)/Veterans Administration (VA)-insured loans, loans from small or infrequent lenders, and all-cash buyers. Their data contain information on over 33 million unique ownership sequences in just over 19 million distinct owner-occupied housing units from 1997-2012.


The researchers find that the crisis was not solely, or even primarily, a subprime sector event. It began that way, but quickly expanded into a much broader phenomenon dominated by prime borrowers' loss of homes. There were only seven quarters, all concentrated at the beginning of the housing market bust, when more homes were lost by subprime than by prime borrowers. In this period 39,094 more subprime than prime borrowers lost their homes. This small difference was reversed by the beginning of 2009. Between 2009 and 2012, 656,003 more prime than subprime borrowers lost their homes. Twice as many prime borrowers as subprime borrowers lost their homes over the full sample period.
The authors suggest that one reason for this pattern is that the number of prime borrowers dwarfs that of subprime borrowers and the other borrower/owner categories they consider. The prime borrower share averages around 60 percent and did not decline during the housing boom. Although the subprime borrower share nearly doubled during the boom, it peaked at just over 20 percent of the market. Subprime's increasing share came at the expense of the FHA/VA-insured sector, not the prime sector.
The authors' key empirical finding is that negative equity conditions can explain virtually all of the difference in foreclosure and short sale outcomes of prime borrowers compared to all cash owners. Negative equity also accounts for approximately two-thirds of the variation in subprime borrower distress. Both are true on average, over time, and across metropolitan areas.
None of the other 'usual suspects' raised by previous research or public commentators—housing quality, race and gender demographics, buyer income, and speculator status—were found to have had a major impact. Certain loan-related attributes such as initial loan-to-value (LTV), whether a refinancing occurred or a second mortgage was taken on, and loan cohort origination quarter did have some independent influence, but much weaker than that of current LTV.
The authors' findings imply that large numbers of prime borrowers who did not start out with extremely high LTVs still lost their homes to foreclosure. They conclude that the economic cycle was more important than initial buyer, housing and mortgage conditions in explaining the foreclosure crisis. These findings suggest that effective regulation is not just a matter of restricting certain exotic subprime contracts associated with extremely high default rates.

Friday, July 24, 2015

'The Housing Market Still Isn’t Rational'

For the fans of Robert Shiller:

The Housing Market Still Isn’t Rational: Home prices have been climbing. They have risen 27 percent nationally since 2012, even more in places like San Francisco. But why worry? If you accept the efficient markets theory — and believe that real estate is an efficient market — then these prices are based on “new information,” even if you don’t know what that information is.
The problem with this kind of thinking is that the efficient markets theory is at best a half-truth, as a voluminous literature on market anomalies shows. What’s more, even that half-truth is grounded mainly in the stock market, which attracts professional investors who sometimes do make the market behave efficiently.
The housing market is another matter. It is far less rational than even the often irrational stock market...[explains why]...
The bottom line is that there is no reason to assume that the real estate market is even close to efficient. You may want to buy a house if you love it and can afford it. But remember that you cannot safely rely on “comparable sales” to judge that the price is fair. The market isn’t efficient enough for that.

Wednesday, July 08, 2015

'How Sensitive Is Housing Demand to Down Payment Requirements and Mortgage Rates?'

Via Liberty Street Economics, these results are what I would have expected:

How Sensitive Is Housing Demand to Down Payment Requirements and Mortgage Rates?, by Andreas Fuster and Basit Zafar: When a household is looking to buy a home, financial considerations are usually very important. In particular, in deciding “how much house to buy,” a household must ponder how large a down payment it can make at the time of purchase, and also how much it can afford to pay each month. The minimum required down payment and the interest rate on available mortgages (which determines the monthly payment) are key elements in the decision. When these variables change, this likely affects the price a household is willing and able to pay for a home, and thus the housing market overall. However, measuring the strength of these effects is notoriously difficult. In this post, which is based on a recent staff report, we describe a novel approach to measure these effects. We find that a change in down payment requirements tends to have a large effect on housing demand—households’ willingness to pay for a given home—especially for current renters, whereas the effects of a change in the mortgage rate are modest. ...

Taken together, our findings suggest that the strength of housing demand is strongly affected by fundamentals (household wealth and income) and also the quantity of available financing (especially for first-time home buyers). The price of available financing (that is, the mortgage rate) may play a less important role than commonly thought...

Monday, June 08, 2015

'Why the Mortgage Interest Tax Deduction Should Disappear, But Won't'

Cecchetti & Schoenholtz:

Why the mortgage interest tax deduction should disappear, but won't: In the run-up to the 2012 U.S. Presidential election, Planet Money asked five economists from across the political spectrum for proposals that they would like to see in the platform of the candidates. The diverse group agreed, first and foremost, on the wisdom of eliminating the tax deductibility of mortgage interest. 
The vast majority of economists probably agree. We certainly do. But it won’t happen, because politicians with aspirations for reelection find it toxic. ...
The ... tax deductibility of mortgage interest ... raises inequality and reduces economic efficiency.
The source of increased inequality is simple. The private benefits of the mortgage interest deduction rise both with a person’s income and with the cost of their house. The higher your income, the higher your marginal tax rate; and the bigger your house, the bigger the possible mortgage. When either rises, the value of the tax deduction rises, too. ...
Aside from inequality concerns, there are other powerful reasons to dislike the mortgage interest deduction. Above all, it is inefficient. By subsidizing bigger, more expensive houses, the policy misallocates scarce savings away from productive investments that raise living standards through income- and job-creating innovations. It also makes our financial system more vulnerable: as we wrote in an earlier post, it encourages people to take on risks – in the form of large, subsidized mortgages – that they are not equipped to bear. In the recent crisis, risky mortgage debt was sufficient to put the entire financial system at risk. ...
Unfortunately, the tax deductibility of mortgage interest is here to stay. Nearly 50 million U.S. households currently have mortgages, and politicians don’t wish to alienate them.  
But the borrowers are only the most obvious beneficiaries.  In fact, all homeowners would suffer if the mortgage deduction were eliminated. The reason is that the value of everyone’s house would fall...
A simple computation allows us to estimate the economy-wide impact. ... If the subsidy were eliminated, homeowners would lose ... about $4.1 trillion. ... For comparison, the plunge of real estate value from the 2006 peak to the 2011 trough was $6.4 trillion. ...
Aside from the contractionary impact on the economy, many people would see such a drop in house prices as dramatically unfair. It’s true that the biggest losers in monetary terms would be the owners of the most valuable (oversized) houses; but the less well-off would suffer, too. While it is a progressive policy, all 80 million households that own homes would take a hit.
It is tempting to just give up and admit political defeat, but there may be a way out. Our suggestion is to build on past reforms that capped the tax deduction by limiting the size of eligible mortgages. ... Since roughly 10% of U.S. homes are worth more than $500,000, our proposal is to set the limit at the interest payments on a $400,000 mortgage (indexed appropriately). This would promote both efficiency and equality. ...
Policies that provide asset owners large “rents” (payments unwarranted by the scarcity of the asset itself) are incredibly difficult to eliminate, even when they are both unfair and inefficient. Such rents create an entire ecosystem of beneficiaries (in this case, ranging from construction firms and workers, to real estate brokers, to mortgage lenders and borrowers) who constitute a powerful political constituency blocking almost any reform. ...

Wednesday, May 06, 2015

Foreclosures Fueled Racial Segregation

Via EurekAlert!:

Study finds foreclosures fueled racial segregation in US: Some 9 million American families lost their homes to foreclosure during the late 2000s housing bust, driving many to economic ruin and in search of new residences. Hardest hit were black, Latino, and racially integrated neighborhoods, according to a new Cornell University analysis of the crisis.
Led by demographer Matthew Hall, researchers estimate racial segregation grew between Latinos and whites by nearly 50 percent and between blacks and whites by about 20 percent as whites abandoned and minorities moved into areas most heavily distressed by foreclosures.
Forthcoming in the June print issue of the American Sociological Review and recently published online, the paper, "Neighborhood Foreclosures, Racial/Ethnic Transitions, and Residential Segregation," noted that the crisis spurred one of the largest migrations in U.S. history, changes that could alter the complexion of American cities for a generation or more. ...
Examining virtually all urban residential foreclosures from 2005 to 2009, Hall and co-authors find that mostly black and mostly Latino neighborhoods lost homes at rates approximately three times higher than white areas, with ethnically mixed communities also deeply affected. They estimate that the typical neighborhood experienced 4.5 foreclosures per 100 homes during the crisis, but the figure rises to 8.1 and 6.2 homes in predominately black and Latino areas, respectively, while white neighborhoods lost only 2.3 homes on average. ...
"Not only were white households less likely to be foreclosed on, but they also were among the first to leave neighborhoods where foreclosures were high, particularly those with racially diverse residents," said Hall. ...

Thursday, April 30, 2015

Video: Demystifying the Chinese Housing Boom

Friday, April 24, 2015

'No Price Like Home: Global House Prices, 1870-2012'

Interesting paper:

No Price Like Home: Global House Prices, 1870-2012, by Katharina Knoll, Moritz Schularic, and Thomas Steger: Abstract: How have house prices evolved over the long‐run? This paper presents annual house prices for 14 advanced economies since 1870. Based on extensive data collection, we show that real house prices stayed constant from the 19th to the mid‐20th century, but rose strongly during the second half of the 20th century. Land prices, not replacement costs, are the key to understanding the trajectory of house prices. Rising land prices explain about 80 percent of the global house price boom that has taken place since World War II. Higher land values have pushed up wealth‐to‐income ratios in recent decades.

Monday, April 20, 2015

'Credit Supply and the Housing Boom'

This is from the Liberty Street Economics Blog at the NY Fed:

Credit Supply and the Housing Boom, by Alejandro Justiniano, Giorgio Primiceri, and Andrea Tambalotti: There is no consensus among economists as to what drove the rise of U.S. house prices and household debt in the period leading up to the recent financial crisis. In this post, we argue that the fundamental factor behind that boom was an increase in the supply of mortgage credit, which was brought about by securitization and shadow banking, along with a surge in capital inflows from abroad. This argument is based on the interpretation of four macroeconomic developments between 2000 and 2006 provided by a general equilibrium model of housing and credit.
The financial crisis precipitated the worst recession since the Great Depression. The spectacular rise in house prices and household debt during the first half of the 2000s, which is illustrated in the first two charts, was a crucial factor behind these events. Yet, economists disagree on the fundamental causes of this credit and housing boom.

Real House Prices

Household Mortgages-to-GDP Ratio

A common narrative attributes the surge in debtand house prices to a loosening of collateral requirements for mortgages, associated with higher initial loan-to-value (LTV) ratios, multiple mortgages on the same property, and expansive home equity lines of credit.
The fact that collateral requirements became looser, at least for certain borrowers, is fairly uncontroversial. But can higher LTVs account for the unprecedented increase in house prices and debt, while remaining consistent with other macroeconomic developments during the same period?
Two facts suggest that the answer to this question is no. First, if the relaxation of collateral constraints had been widespread, it should have resulted in a surge of mortgage debt relative to the value of real estate. In the data, however, household debt and real estate values rose in tandem, leaving their ratio roughly unchanged over the first half of the 2000s, as shown in the chart below. In fact, this ratio only spiked when home prices tumbled, starting in 2006.

Household Mortgages-to-Real Estate Ratio

Second, more relaxed collateral requirements make it possible for the borrowers to demand more credit. Therefore, interest rates should rise to convince the lenders to satisfy this additional demand. In the data, however, real mortgage interest rates fell during the 2000s, as shown below in the fourth chart.

Real Mortgage Interest Rates

The fall in mortgage interest rates depicted in the fourth chart points to a shift in credit supply as an alternative explanation of the credit and housing boom of the early 2000s. We develop this hypothesis within a simple general equilibrium model in Justiniano, Primiceri, and Tambalotti (2015).
In the model, borrowing is limited by a collateral constraint linked to real estate values. Changes to this constraint, such as when the maximum LTV increases, shift the demand for credit. On the lending side, there is a limit to the amount of funds that savers can direct toward mortgage finance, which is equivalent to a leverage restriction on financial intermediaries. Changes to this constraint shift the supply of credit.
Lending constraints capture a host of technological and institutional factors that restrain the flow of savings into the mortgage market. Starting in the late 1990s, the explosion of securitization together with changes in the regulatory environment lowered many of these barriers, increasing the supply of mortgage credit.
The pooling and tranching of mortgages into mortgage-backed securities (MBS) played a central role in loosening lending constraints through several channels. First, tranching creates highly rated assets out of pools of risky mortgages. These assets can then be purchased by those institutional investors that are restricted by regulation to hold only fixed-income securities with high ratings. As a result, the boom in securitization channeled into mortgages a large pool of savings that had previously been directed toward other safe assets, such as government bonds. Second, investing in these senior MBS tranches freed up intermediary capital, owing to their lower regulatory charges. This form of “regulatory arbitrage” allowed banks to increase leverage without raising new capital, expanding their ability to supply credit to mortgage markets. Third, securitization allowed banks to convert illiquid loans into liquid funds, reducing their funding costs and hence increasing their capacity to lend.
International factors also played an important role in increasing the supply of funds available to American home buyers, as global saving flowed into U.S. safe assets, including agency MBS, before the financial crisis (Bernanke, Bertaut, Pounder, DeMarco, and Kamin 2011).
The fifth chart plots the effects of a relaxation of lending constraints in our model. When savers and financial institutions are less restricted in their lending, the supply of credit increases and interest rates fall. Since access to credit requires collateral, the increased availability of funds at lower interest rates makes the existing collateral—houses—scarcer and hence more valuable. As a result of higher real estate values, borrowers can increase their debt, even though their debt-to-collateral ratio remains unchanged. These responses of debt, house prices, aggregate leverage, and mortgage rates match well the empirical facts illustrated in the previous four charts. We conclude from this experiment that a shift in credit supply, associated with looser lending constraints, was the fundamental driver of the credit and housing boom that preceded the Great Recession.

Response to a Change in the Lending-Limit

This interpretation of the sources of the credit and housing boom is consistent with the microeconometric evidence presented in the influential work of Mian and Sufi (2009, 2010). They show that an expansion in credit supply was the fundamental driver of the surge in household debt and that borrowing against the increased value of real estate accounts for a significant fraction of this build-up in debt.
 Our model, by providing a theoretical perspective on the important factors behind the financial crisis, should prove useful as a framework to study policies that might prevent a repeat of this experience.

The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of Chicago, the Federal Reserve Bank of New York, or the Federal Reserve System. Any errors or omissions are the responsibility of the author.

Friday, February 27, 2015

'Credit Supply and the Housing Boom'

Alejandro Justiniano, Giorgio Primiceri, and Andrea Tambalotti at Vox EU:

Credit supply and the housing boom: ... Conclusion In this column, we argued that any reconstruction of the fundamental causes of the housing and credit boom that preceded the Great Recession must be consistent with four stylised facts: house prices and debt surged, the ratio of debt to house values was roughly constant, and real mortgage rates fell. From the perspective of these four facts, explanations that rely exclusively on an increase in credit demand associated with more generous credit conditions—for instance in the form of higher loan-to-value ratios—are lacking. On the contrary, a shift in credit supply associated with the emergence of securitisation and shadow banking, is qualitatively and quantitatively consistent with the four facts.
This interpretation of the macroeconomic facts has the additional merit of being consistent with the micro-econometric evidence of Mian and Sufi (2009 and 2010). They show that an expansion in credit supply was the fundamental driver of the surge in household debt, and that borrowing against the increased value of real estate accounts for a significant fraction of this build-up in debt.
Shifting the focus of the inquiry into the causes of the boom from credit demand to credit supply has potentially important implications for the study of macro-prudential policy, since much of the literature on this topic has tended to model the boom as stemming from looser borrowing constraints. Exploring the normative implications of the alternative view proposed in this article is an exciting avenue for future research.

Wednesday, February 18, 2015

'Betting the House: Monetary Policy, Mortgage Booms and Housing Prices'

How risky is it when interest rates are held too low for too long?:

Betting the house: Monetary policy, mortgage booms and housing prices, by Òscar Jordà, Moritz Schularick, and Alan Taylor: Although the nexus between low interest rates and the recent house price bubble remains largely unproven, observers now worry that current loose monetary conditions will stir up froth in housing markets, thus setting the stage for another painful financial crash. Central banks are struggling between the desire to awaken economic activity from its post-crisis torpor and fear of kindling the next housing bubble. The Riksbank was recently caught on the horns of this dilemma, as Svensson (2012) describes. Our new research provides the much-needed empirical backdrop to inform the debate about these trade-offs.
The recent financial crisis has led to a re-examination of the role of housing finance in the macroeconomy. It has become a top research priority to dissect the sources of house price fluctuations and their effect on household spending, mortgage borrowing, the health of financial intermediaries, and ultimately on real economic outcomes. A rapidly growing literature investigates the link between monetary policy and house prices as well as the implications of house price fluctuations for monetary policy (Del Negro and Otrok 2007, Goodhart and Hofmann 2008, Jarocinski and Smets 2008, Allen and Rogoff 2011, Glaeser, Gottlieb et al. 2010, Williams 2011, Kuttner 2012, Mian and Sufi 2014).
Despite all these references, there is relatively little empirical research about the effects of monetary policy on asset prices, especially house prices. How do monetary conditions affect mortgage borrowing and housing markets? Do low interest rates cause households to lever up on mortgages and bid up house prices, thus increasing the risk of financial crisis? And what, if anything, should central banks do about it?
Monetary conditions and house prices: 140 years of evidence
In our new paper (Jordà et al. 2014), we analyse the link between monetary conditions, mortgage credit growth, and house prices using data spanning 140 years of modern economic history across 14 advanced economies. Such a long and broad historical analysis has become possible for the first time by bringing together two novel datasets, each of which is the result of an extensive multi-year data collection effort. The first dataset covers disaggregated bank credit data, including real estate lending to households and non-financial businesses, for 17 countries (Jordà et al. 2014). The second dataset, compiled for a study by Knoll et al. (2014), presents newly unearthed data covering long-run house prices for 14 out of the 17 economies in the first dataset, from 1870 to 2012. This is the first time both datasets have been combined. ...

After lots of data and analysis, they conclude:

... We have established that loose/tight monetary conditions make credit cheaper/dearer and houses more expensive/affordable. But what about the dark side of low interest rates – do they also increase the risk of a financial crash?
The answer to this question is clearly affirmative, as we show in the last part of our paper using crisis prediction models. Over the past 140 years of modern macroeconomic history, mortgage booms and house price bubbles have been associated with a higher likelihood of a financial crisis. This association is even stronger in the post-WW2 era, which was marked by the democratization of leverage through the expansion of housing finance relative to GDP and a rapidly growing share of real estate loans as a share of banks’ balance sheets.
Our findings have important implications for the post-crisis debate about central bank policy. We provide a quantitative measure of the financial stability risks that stem from extended periods of ultra-low interest rates. We also provide a quantitative measure of the effects of monetary policy on mortgage lending and house prices. These historical insights suggest that the potentially destabilizing by-products of easy money must be taken seriously and considered against the benefits of stimulating flagging economic activity. Policy, as always, must strike a fine balance between conflicting objectives.
An important implication of our study is that macroeconomic stabilization policy has implications for financial stability, and vice versa. Resolving this dichotomy requires central banks to make greater use of macroprudential tools alongside conventional interest rate policy. One tool is insufficient to do two jobs. That is the lesson from modern macroeconomic history. ...

Wednesday, January 21, 2015

Low-Income Loans Didn't Cause the Financial Crisis

At MoneyWatch:

Low-income loans didn't cause the financial crisis, by Mark Thoma: What caused the housing bubble and collapse of the financial system? Many fingers have pointed to a lack of regulation, financial innovation that didn't live up to its promises of risk-sharing and risk-reduction, and low interest rates from the Fed, which created an excess of liquidity.
Another cause that's often cited says the financial crisis was the result of government pressure to make subprime home loans to those at the lower end of the income scale. But recent work from the National Bureau of Economic Research provides no support for that claim. ...

Monday, January 19, 2015

Don't Blame Poor People for the Housing Crisis

Tyler Cowen:

Were poor people to blame for the housing crisis?, by Tyler Cowen:
When we break out the volume of mortgage origination from 2002 to 2006 by income deciles across the US population, we see that the distribution of mortgage debt is concentrated in middle and high income borrowers, not the poor. Middle and high income borrowers also contributed most significantly to the increase in defaults after 2007.
...That is from the new NBER working paper by Adelino, Schoar, and Severino.  In other words, poor people (or various ethnic groups, in some accounts) were not primarily at fault for the wave of mortgage defaults precipitating the financial crisis.  The biggest problems came in zip codes where home prices were having large run-ups. ...

Saturday, January 10, 2015

'Borrowers Forgo Billions through Failure to Refinance Mortgages'

Why don't more households refinance their mortgages when it would be beneficial to do so?:

Borrowers Forgo Billions through Failure to Refinance Mortgages, by Les Picker, NBER Digest: As of December 2010, approximately 20 percent of households with mortgages could have refinanced profitably but did not do so.
Buying and financing a house is one of the most important financial decisions a household makes. It can have substantial long-term consequences for household wealth accumulation. In the United States, where housing equity makes up almost two thirds of the median household's total wealth, public policies have been crafted to encourage home ownership and to help households finance and refinance home mortgages. The impact of these policies hinges on the decisions that households make.
Households that fail to refinance when interest rates decline can lose out on tens of thousands of dollars in savings. For example, a household with a 30-year, fixed-rate mortgage of $200,000 at an interest rate of 6.5 percent that refinances when rates fall to 4.5 percent will save over $80,000 in interest payments over the life of the loan, even after accounting for typical refinancing costs. With long-term mortgage rates at roughly 3.35 percent, this same household would save roughly $130,000 over the life of the loan by refinancing. But in spite of these potential savings, many households do not refinance when interest rates decline.

In Failure to Refinance (NBER Working Paper No. 20401), Benjamin J. Keys, Devin G. Pope, and Jaren C. Pope provide empirical evidence that many households in the U.S. fail to refinance, and they approximate the magnitude of forgone interest savings. The analysis utilizes a nationally representative sample of approximately one million single-family residential mortgages that were active in December 2010. These data include information about the origination characteristics of each loan, the current balance, second liens, payment history, and interest rate being paid. Given these data, the authors calculate how many households would save money over the life of the loan if they were to refinance their mortgages at the prevailing interest rate while adjusting for tax implications and probability of the household moving.
A key challenge in determining whether households are failing to refinance is knowing whether a household had the option to refinance - especially given the tightening banking standards over this time period. The authors take advantage of the rich data environment to make reasonable assumptions about the ability of individuals to refinance based on various factors (e.g. loan-to-value ratios) and provide evidence of robustness to the assumptions made.
The authors find that, in December of 2010, approximately 20 percent of households that appeared unconstrained to refinance and were in a position in which refinancing would have been beneficial had failed to do so. The median household would have saved $160 per month over the remaining life of the loan, and the total present discounted value of the forgone savings was approximately $11,500. The authors estimate that the total forgone savings of U.S. households was approximately $5.4 billion.
In 2009, the Federal Housing Finance Agency (FHFA) and the Department of the Treasury announced a refinancing program entitled "Home Affordable Refinance Program" (HARP). This program enabled homeowners who were current on their federally guaranteed mortgage and met other conditions of the loan to refinance to a lower interest rate even if they had little or no equity in their homes. When HARP was announced, FHFA and the Treasury estimated that four to five million borrowers whose mortgages were backed by Fannie Mae and Freddie Mac could take advantage of it. By September 2011, however, fewer than a million mortgagors had refinanced under HARP. Although modifications to the program have resulted in more households taking up refinance offers, the overall take-up rate remains low.
These results raise questions about why borrowers do not take advantage of refinancing opportunities that would substantially lower their interest payments. The authors suggest that there may be information barriers regarding potential benefits and costs of refinancing, and that expanding and developing partnerships with certified housing counseling agencies to offer more-targeted and in-depth workshops and counseling surrounding the refinancing decision could alleviate barriers for people in need of financial education.
The authors also suggest that psychological factors, such as procrastination, mistrust, and the inability to understand complex decisions, may be barriers to refinancing.

Tuesday, December 30, 2014

'How Morgan Stanley Pushed Risky Subprime Mortgage Lending'

Danielle Kurtzleben,

Damning court filings show Morgan Stanley pushed risky subprime mortgage lending:
  • Court filings say Morgan Stanley, a major Wall Street bank, pushed subprime lender New Century into making riskier and riskier mortgage loans, the New York Times reports.
  • The filings include damning emails, showing that Morgan Stanley employees knew about and even joked about some borrowers' inability to pay on their mortgages.
  • The Justice Department is now investigating the connection between Morgan Stanley and New Century.
  • The fines further tarnish the reputation of a big bank that, despite its heavy involvement in mortgage-backed securities, until recently had few crisis-related legal troubles.


Tuesday, October 21, 2014

What Makes Cities Successful?

This is related to yesterday's post "State 'Income Migration' Claims Are Deeply Flawed":

At the intersection of real estate and urban economics: Albert Saiz uses big data to understand real estate dynamics. As a professor in the Department of Urban Studies and Planning and director of MIT’s Center for Real Estate, his work is at the confluence of urban policy and city-making and the factors that drive real estate markets. An urban economist and director of the MIT Urban Economics Lab, Saiz studies the industrial composition of cities with an eye toward understanding what makes cities successful. He also creates and studies incredibly-detailed information about housing markets and how urban growth impacts real estate markets.
Immigration explains half of city growth
Saiz’s focus is primarily on housing markets, with a particular view on understanding the demographic influences impacting their growth. “Immigration explains 50 percent of the differences in growth between metropolitan areas in the United States,” he says. “If you want to understand real estate markets or housing markets, construction values, etc., you have to understand immigration and immigration trends.”
He also studies several other key drivers of city growth and demand for housing and real estate assets. These include areas of low taxation, high levels of an educated population, and more lifestyle-oriented influences. “As recently as 20 years ago, we tended to believe that people followed jobs,” Saiz explains. “It is still the case that productive areas are becoming more attractive for housing demand, but it is also true that jobs are following people. And people are moving more for lifestyle and amenities.” Today, Saiz’s students are more likely to indicate they want to work in a particular city than for a particular company. That means firms that want to attract young professionals have to locate in these more highly desirable areas. ...

Friday, September 19, 2014

'Home Free?'

James Surowiecki:

Home Free?, by James Surowiecki: In 2005, Utah set out to fix a problem that’s often thought of as unfixable: chronic homelessness. The state had almost two thousand chronically homeless people. Most of them had mental-health or substance-abuse issues, or both. At the time, the standard approach was to try to make homeless people “housing ready”: first, you got people into shelters or halfway houses and put them into treatment; only when they made progress could they get a chance at permanent housing. Utah, though, embraced a different strategy, called Housing First: it started by just giving the homeless homes.
Handing mentally ill substance abusers the keys to a new place may sound like an example of wasteful government spending. But it turned out to be the opposite: over time, Housing First has saved the government money. ...

Wednesday, September 03, 2014

Minority Mortgage Market Experiences and the Financial Crisis

Stephen Ross at Vox EU:

Minority mortgage market experiences leading up to and during the Financial Crisis, by Stephen L. Ross, Vox EU: The subprime lending crisis in the US triggered a broad financial panic that lead to the global recession. Domestically, it meant bankruptcy and disaster for many households. This column analyses racial discrimination in subprime lending. Careful estimation of a detailed dataset reveals across-lender effects to have substantially disadvantaged black and Hispanic borrowers.

The concluding paragraph:

... Minority homebuyers – especially blacks – tend to face a higher cost of mortgage credit and had substantially worse credit market outcomes during the recent downturn than white homebuyers with equivalent mortgage risk factors. In terms of the price of credit, a majority of the unexplained differences are associated with the lender from which the homebuyer obtained credit. These effects are felt most among minority borrowers with the lowest levels of education, and are likely due in part to the concentrated activity of subprime lenders in minority neighborhoods and a lack of knowledge of financial markets among minority borrowers with low levels of education. On the other hand, most of the racial differences in loan performance that are unexplained by traditional credit risk factors cannot be captured by controlling for the lender or other aspects of subprime lending. African-Americans and Hispanics appear to be more vulnerable to an economic downturn and to the associated risks of unemployment and housing price declines than observationally similar white homeowners. This higher vulnerability is most pronounced for borrowers who purchased their homes right before the onset of the financial crisis, even after controlling for the increased risk of negative equity associated with buying at the peak of the market. While the expansion of the subprime sector may have contributed to a higher cost of credit for black homebuyers, their concentration in high cost loans (and in the subprime market more generally) can explain only a small portion of the racial differences in foreclosure. Rather, a broad spectrum of black and Hispanic borrowers appear to be especially vulnerable to the economic downturn and associated shocks to their ability to meet their mortgage commitments.

Friday, August 22, 2014

Minority Mortgage Market Experiences During the Financial Crisis

Via Vox EU:

Minority mortgage market experiences leading up to and during the financial crisis, by Stephen L. Ross, Vox EU: The foreclosure crisis that followed the subprime crisis has had significant negative consequences for minority homeowners. This column reviews recent evidence in the racial and ethnic differences in high cost loans and in loan performance. Minority homeowners, especially black homebuyers, faced higher price of mortgage credit and had worse credit market outcomes during the crisis. This is largely due to the fact that minority borrowers are especially vulnerable to the economic downturn. ...

Thursday, July 17, 2014

'Debt, Great Recession and the Awful Recovery'

Cecchetti & Schoenholtz:

Debt, Great Recession and the Awful Recovery: ... In their new book, House of Debt, Atif Mian and Amir Sufi portray the income and wealth differences between borrowers and lenders as the key to the Great Recession and the Awful Recovery (our term). If, as they argue, the “debt overhang” story trumps the now-conventional narrative of a financial crisis-driven economic collapse, policymakers will also need to revise the tools they use to combat such deep slumps. ...
House of Debt is at its best in showing that: (1) a dramatic easing of credit conditions for low-quality borrowers fed the U.S. mortgage boom in the years before the Great Recession; (2) that boom was a major driver of the U.S. housing price bubble; and (3) leveraged housing losses diminished U.S. consumption and destroyed jobs.
The evidence for these propositions is carefully documented... The strong conclusion is that – as in many other asset bubbles across history and time – an extraordinary credit expansion stoked the boom and exacerbated the bust. Of that we can now be sure.
What is less clear is that these facts diminish the importance of the U.S. intermediation crisis as a trigger for both the Great Recession and the Awful Recovery..., while the U.S. recession started in the final quarter of 2007, it turned vicious only after the September 2008 failure of Lehman. ...
What about the remedy? Would greater debt forgiveness have limited the squeeze on households and reduced the pullback? Almost certainly. ...
The discussion about remedies to debt and leverage cycles is still in its infancy. House of Debt shows why that discussion is so important. Its contribution to understanding the Great Recession (and other big economic cycles) will influence analysts and policymakers for years, even those (like us) who give much greater weight to the role of banks and the financial crisis than the authors.

They also talk about the desirability of "new financial contracts that place the burden of bearing the risk of house price declines primarily on wealthy investors (rather than on borrowers) who can better afford it."

Thursday, May 29, 2014

The Great Recession's 'Biggest Policy Mistake'

At MoneyWatch:

The Great Recession's "biggest policy mistake", by Mark Thoma, CBS News: Two recent books, Timothy Geithner's "Stress Test: Reflections on Financial Crises" and "House of Debt" by Atif Mian and Amir Sufi, have reignited a discussion over the Obama administration's policies and attitude on mortgage debt relief.
In contrast with the former New York Fed president and later Treasury Secretary's account about the efforts to save the U.S. economy from the collapsing housing market, others say the administration -- more particularly the Geithner-led Treasury -- did not push aggressively for mortgage debt relief .
As a result, very little was done to help households struggling with mortgage debt. Indeed, Mian and Sufi argue that "The fact that Secretary Geithner and the Obama administration did not push for debt write-downs more aggressively remains the biggest policy mistake of the Great Recession."
Who is correct? ...[continue]...

Saturday, May 17, 2014

'You Don’t Have to Fill a Tire Through the Leak'

Brad DeLong:

Reviewing Ryan Avent’s Review of Amir Sufi and Atif Mian’s House of Debt, by Brad DeLong:  ... Mian and Sufi do an excellent job of documenting the size of the negative shock to spending from the household sector via the housing equity-underwater mortgage-wealth channel–and in the process do, I think, successfully demolish Tim Geithner’s claims in his Stress Test that aggressively refinancing mortgages would not have materially helped the economy. ...
As Larry Summers, Paul Krugman, Joe Stiglitz, and Laura Tyson all like to say: you don’t have to fill a tire through the leak. restoring consumer spending via successfully rewriting mortgage contracts to rebalance household balance sheets would have been a wonderful thing to do. It would still be a wonderful thing to do. But it was and is not the only thing to do to get us out of our current mess. ...
I thought–from the Great Depression era history of the HOLC and the RFC, from the 1980s history of the Latin American debt crisis, from the 1990s history of the RTC, from innumerable emerging-market crises, et cetera, that we understood very well that this is what we should do. Whenever the financial system got sufficiently wedged we resolved it–we turned debt into equity, and we crammed losses down onto debt holders whose investments were ex post judged to have been ex ante unwise.
And from my standpoint the true puzzle is why Bernanke, Geithner, and Obama were so uninterested in pulling out the Walter Bagehot-Hyman Minsky-Charlie Kindleberger playbook and following it in housing finance from 2009-2014. Did they read no history? ...

Saturday, April 26, 2014

'The Moment Is Right for Housing Reform'

Jason Furman and James Stock on housing finance reform:

The Moment Is Right for Housing Reform, Commentary, WSJ: ... The reformed housing-finance system should enable the dreams of middle-class and aspiring middle-class Americans to own homes by supporting consumer-friendly mortgage products such as the 30-year fixed-rate mortgage. It should provide help ... to creditworthy first-time borrowers who might otherwise have trouble qualifying for a mortgage; and it should stimulate broad access to mortgages for historically underserved communities.
A reformed housing-finance system should support rental housing... It should stimulate competition and innovation..., while building in consumer protections... And it should protect the taxpayer by placing substantial private capital in front of any government guarantee—and ensure that the taxpayer be properly compensated for that guarantee.
Less discussed, but also important...: Housing-finance reform presents an opportunity to enhance macroeconomic stability by making the housing sector more cyclically resilient. Housing has long been one of the most volatile sectors of the economy,... with ... the most vulnerable and disadvantaged bearing the brunt of housing-related or magnified recessions. ...
Housing-finance reform is a key unfinished piece of business from the financial crisis, and putting all the parts together is a complex undertaking. But the current period of relative economic calm is exactly the right time to do so. ...

Monday, April 21, 2014

'House Prices and Secular Stagnation'

Simon Wren-Lewis:

House prices and secular stagnation: This post starts off talking about the UK, but then goes global
 ...Housing is becoming more and more unaffordable for first time buyers. Yet prices are currently booming (at least in London), and demand is so high estate agents are apparently now holding mass viewings to cope. In the UK the media now routinely call this a bubble, and the term ‘super bubble’ is now being used. ...
Bubbles are where prices move further and further away from their fundamental value, simply because everyone expects prices to continue to rise. ...
If we think of housing as an asset, then the total return to this asset if you held it forever is the weighted sum of all future rents, where you value rents today more than rents in the future. Economists call this the discounted sum of rents. (If you are a homeowner, it is the rent that you are avoiding paying.) So why would house prices go up, if rents were roughly constant and were expected to remain so? The answer is that prices would go up if the rate at which you discounted the future fell. The relevant discount rate here is the real interest rate on alternative assets. That interest rate has indeed fallen over much the same time period as house prices have increased, as Chapter 3 of the IMF’s World Economic Outlook for March 2014 documents. ...
It is the expected return on other assets that matters here. The fact that actual real interest rates have fallen in the past would not matter much if they were expected to recover quickly. A key idea behind today’s discussion of secular stagnation is that real interest rates might stay pretty low for a long period of time. That in turn implies that house prices will be much higher relative to incomes than they were when real interest rates were higher.
So what appears to be a bubble may instead be a symptom of secular stagnation. ...
Does this mean we should stop calling what is happening in the UK a bubble? The first point is that secular stagnation is just an idea, and it may prove wrong, and if it does house prices may come tumbling down. Second, even if it is not wrong, it is still possible to have a bubble on top of the increase implied by lower interest rates. Indeed one of the concerns about the lower real interest rates associated with secular stagnation is that, by raising asset prices not just in housing but elsewhere, it may encourage bubbles to develop on top. So all we can say with certainty, for the UK at least, is that the Financial Policy Committee will have their work cut out when they next meet in June.

Monday, March 17, 2014

Moving Day

I am moving today, so blogging is unlikely until much later (sold my house and am moving to an apartment temporarily until I figure out what I want to do).

Thursday, March 13, 2014

'U.S. Says One Thing, Does Another on Mortgage Fraud'

Are you surprised by this?:

U.S. Says One Thing, Does Another on Mortgage Fraud, Watchdog Says, by Matt Apuzzo, NY Times: Four years after President Obama promised to crack down on mortgage fraud, his administration has quietly made the crime its lowest priority and has closed hundreds of cases after little or no investigation, the Justice Department’s internal watchdog said on Thursday.
The report by the department’s inspector general undercuts the president’s contentions that the government is holding people responsible for the collapse of the financial and housing markets. The administration has been criticized, in particular, for not pursuing large banks and their executives. ...
Meanwhile, the Justice Department repeatedly exaggerated its accomplishments using inaccurate data, the report found. ...

Sunday, February 23, 2014

'Housing Weakness: Temporary or Enduring?'


Housing Weakness: Temporary or Enduring?, by Bill McBride: The recent data for housing has been weak, with new home sales and housing starts mostly moving sideways over the last year (with plenty of ups and downs, and I expect downward revisions to Q4 new home sales). Existing home sales have declined 14% from a peak of 5.38 million in July 2013 on a seasonally adjusted annual rate basis (SAAR), to just 4.62 million SAAR in January.

There are several reasons for the recent weakness...

Wednesday, January 15, 2014

Does Sweden Have a Housing Bubble?


Does Sweden have a housing bubble?: Nobel laureate in economics Paul Krugman told newspaper Svenska Dagbladet recently that based solely on the fact that "prices have gone up a lot and that household debt is quite high", Sweden is probably showing the symptoms of a housing bubble.

His claim prompted a response from his former colleague Lars E.O. Svensson.

"Prices have gone up for good fundamental reasons" (interview)

The former deputy governor of the Swedish Central Bank and an economics professor himself, Svensson told Radio Sweden he disagrees that Sweden has a housing bubble.

"If you look at the facts since 2007, prices have increased only a little in real terms and they have actually fallen relative to disposable income. So that doesn't look like a bubble," says Svensson.

Krugman told SvD that over the last few years, "all the places where people said oh this is different, it's turned out that no, actually it wasn't. So, just on that general thing, I'd say probably it's a bubble."

However, Svensson insists that Sweden's case is different from other countries which have proven to have housing bubbles. "Typically, you've had a lot of speculation, a lot of construction, very little savings..." he says, whereas in his view, Sweden has the opposite situation.

Monday, January 06, 2014

Government Homeownership Policy Does *Not* Explain the Housing Bubble

Once again, Dean Baker takes on Peter Wallison's claim that government homeownership policy caused the housing bubble:

Peter Wallison's Housing Bubble, Beat the Press: Peter Wallison, who was White House Counsel under President Reagan and has long been a fellow at the American Enterprise Institute, told NYT readers today that the housing bubble is back. Wallison is right to be concerned about the return of a bubble, as I have pointed out elsewhere, but his account of the last bubble and the risks of a new one are strangely off the mark.
Wallison wants to blame the bubble on government policy of promoting homeownership. There certainly has been a problem of a housing policy that is far too tilted toward homeownership, but this does not explain the bubble. Fannie Mae and Freddie Mac were bad actors in the bubble years, buying up trillions of dollars of loans issued on houses purchased at bubble inflated prices, as I said at the time.
However the worst loans were securitized by folks like Citigroup, Merrill Lynch, and Goldman Sachs. They weren't securitizing junk mortgages to meet government goals for low-income homeownership, they were doing it to make money. And they made lots of money in these years. In fact, the private securitizers were so successful in securitizing junk mortgages that they almost put the Federal Housing Authority (FHA) out of business. Since the FHA maintained its lending standards it couldn't compete with the zero down payment loans being securitized on Wall Street. It saw its market share fall to 2 percent at the peak of the bubble. Some of us warned about the problem posed by the bubble in low-income communities at the time. ...
As I have frequently noted, house prices were growing very rapidly in the first half of 2013 posing a real risk of a return to a bubble. However Bernanke's taper talk in June and the resulting rise in mortgage rates appears to have curbed the irrational exuberance, although it will be important to watch future price appreciation closely. In any case, it appears that the main culprits today are private equity funds and hedge funds who have been buying up large blocks of homes as investment properties, not low income buyers.

Here are many, many more posts making te same argument. It wasn't Fannie and Freddie, and it wasn't the CRA.

Monday, October 21, 2013

Predatory Lending and the Subprime Crisis

From the NBER:

Predatory Lending and the Subprime Crisis, by Sumit Agarwal, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet, Douglas D. Evanoff, NBER Working Paper No. 19550 Issued in October 2013: We measure the effect of an anti-predatory pilot program (Chicago, 2006) on mortgage default rates to test whether predatory lending was a key element in fueling the subprime crisis. Under the program, risky borrowers and/or risky mortgage contracts triggered review sessions by housing counselors who shared their findings with the state regulator. The pilot cut market activity in half, largely through the exit of lenders specializing in risky loans and through decline in the share of subprime borrowers. Our results suggest that predatory lending practices contributed to high mortgage default rates among subprime borrowers, raising them by about a third.

Saturday, September 28, 2013

'Housing Market Is Heating Up, if Not Yet Bubbling'

Robert Shiller:

Housing Market Is Heating Up, if Not Yet Bubbling, by Robert Shiller, Commentary, NY Times: Home prices have been rising rapidly, so much so that there is talk that we are entering another national bubble. ...
Is it possible that we are lapsing into what I call a bubble mentality — a self-reinforcing cycle of popular belief that prices can only go higher? ...
People who are now inclined to buy a home are most often just thinking that we are gradually recovering from a recession and that this is a good time to buy. The mental framing still seems to be about economic recovery and the likelihood that interest rates will rise. People mostly don’t seem to be prompted by the anticipation of another housing boom.
That’s the thinking at the moment. But whether these attitudes mutate into a national epidemic of bubble thinking — one big enough to outweigh higher mortgage rates, fiscal austerity in Congress and other factors — remains to be seen.

Wednesday, August 28, 2013

'Regulators Repeat What They Did During the Last Housing Boom'

James Kwak is not happy:

Regulators Repeat Exactly What They Did During the Last Housing Boom, by James Kwak: The Dodd-Frank Act was supposed to require securitizers to retain 5 percent of the credit risk of the mortgage-backed securities that they issued, in order to reduce the risk of a repeat of the last housing bubble. Today, the federal financial regulators said, “Whatever,” and ignored that requirement. In particular, they created an exemption that would have covered at least 98 percent of all mortgages issued last year.

Why? Because

“adding additional layers of regulation would have contracted credit for first time home buyers and borrowers without large down payments, and prevented private capital from entering the market.”

That’s according to the head of the Mortgage Bankers Association.

This is the exact same argument that was made in favor of deregulation during the two decades prior to the last financial crisis, without the slightest hint of irony. It’s further proof that everyone has either forgotten that the financial crisis happened or is pretending that it didn’t happen because, well, maybe it won’t happen again?

Even leaving aside the specific merits of this decision, the worrying thing is that the intellectual, regulatory, and political climate seems to be basically the same as it was in 2004: no one wants to to anything that might be construed as hurting the economy, and no one wants to offend the housing industry.

Friday, August 23, 2013

'Three Key Comments' on New Home Sales

New home sales fell in July (see New Home Sales decline sharply to 394,000 Annual Rate in July). Calculated Risk (Bill McBride) has "Three key comments":

1. This is just one month of data (I note this whenever we see a weak or strong sales report). There is plenty of month-to-month noise for new home sales and frequent large revisions.

2. The downward revisions to previous months were expected (In the weekly schedule I wrote: "Based on the homebuilder reports, there will probably be some downward revisions to sales for previous months."). But these revisions do suggest the housing recovery was not as strong as previously thought.

3. Important: Any impact from rising mortgage rates would show up in the New Home sales report before the existing home sales report. New home sales are counted when contracts are signed, and existing home sales when the transactions are closed - so the timing is different. For existing home sales, I think there was a push to close before the mortgage interest rate lock expired - so closed existing home sales in July were strong - and I expect a decline in existing home sales in August.

For New Home sales, I expect some buyers were shocked by the increase in rates - and they held off signing a contract in July.  But this doesn't mean the housing recovery is over - far from it.  In fact I think the housing recovery (starts / new home sales) has just begun. 

Looking at the first seven months of 2013, there has been a significant increase in sales this year.  The Census Bureau reported that there were 271 new homes sold in the first half of 2013, up 21.5% from the 223 thousand sold during the same period in 2012. This was the highest sales for the first seven months of the year since 2008.

And even though there has been a large increase in the sales rate, sales are just above the lows for previous recessions. This suggests significant upside over the next few years.  Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years - substantially higher than the current sales rate. ...

Thursday, July 25, 2013

Fed Watch: Negative Feedback Loops?

More on housing from Tim Duy, and how it might or might not influence thinking at the Federal Reserve:

Negative Feedback Loops?, by Tim Duy: Earlier this week, we were greeted with news that new homes sales posted a solid increase in June:


Calculated Risk has more here and here, with the conclusion that is was "a solid report even with the downward revisions to previous months." More interesting, though, is that the gains came amid a spike in mortgage rates. This could be taken as evidence that the rate rise has had only minimal impacts on housing markets, thus clearing the way for the Fed to scale back asset purchases sooner than later.
That said, today we learned this, via Bloomberg:
Rising mortgage rates contributed to increased cancellations and a dropoff in traffic in June, according to Fort Worth, Texas-based D.R. Horton....
....Homebuyers are “shocked and disturbed” rates have moved up so fast, D.R. Horton Chief Executive Officer Donald Tomnitz said on a conference call.
But not everyone in the industry is singing the same tune:
Richard Dugas, PulteGroup’s chief executive officer, said on a conference call today that the higher mortgage rates haven’t hurt demand and buyer traffic remained consistent throughout the quarter and into July.
“We’re in the camp that if higher rates reflect improving economic conditions we’d expect a housing recovery to remain on track,” Dugas said. “As an industry, we can sell more houses if more people have jobs, even with modestly higher rates.”
On the margin, some buyers were certainly impacted by the sharp gain in rates, but rates are only one part of the buying decision - factors like job growth also matter. The initial sticker shock might only be temporary. And perhaps even higher rates are necessary to make a significant dent in the housing market. From Bloomberg:
As Jed Kolko, Trulia’s chief economist wrote yesterday, homebuyers say rising rates is their top worry when looking to buy, even more so than rising prices or finding a home they like. But as Kolko points out, people’s actions aren’t matching their words so far. Despite the higher rates, applications for purchase mortgages rose in June, as did asking prices for homes. Trulia’s data suggest that mortgage rates around 6 percent would be a tipping point that cause a majority of people to reconsider buying.
Overall, I would say the negative anecdotal housing evidence is too limited at this point to have a policy impact. And note the positive anecdotal evidence from the latest Beige Book:
Residential real estate activity increased at a moderate to strong pace in most Districts. Most Districts reported increases in home sales. Cleveland noted that June sales of single-family homes were down compared with earlier in the spring but up from last year. Boston, New York, Minneapolis, Kansas City, Dallas, and San Francisco noted strong residential real estate markets. Home prices increased throughout the majority of the reporting Districts. Boston, New York, Richmond, Atlanta, Minneapolis, Kansas City, and Dallas noted low or declining home inventories and upward pressures on home prices in some areas. Residential construction activity also improved moderately across the Districts, and contacts in New York, Philadelphia, Chicago, Minneapolis, Dallas, and San Francisco reported faster growth in multi-family construction, in particular.
Moreover, it is not clear that taking some steam off the housing market was not an intent of some policymakers. San Francisco Federal Reserve President John Williams was quoted recently saying:
“The outsized response” in the yields of 10-year Treasuries in recent weeks may have stemmed from complacency and “froth” in the market, Williams said. Some investors expected the Fed to keep quantitative easing and zero interest rates in place for longer than officials were anticipating.
“The market reaction to me probably is a sign that there was complacency and excesses going on,” Williams said. “It’s a good thing that maybe came to an end, or maybe was lessened.”
But earlier in the article he said:
Federal Reserve Bank of San Francisco President John Williams, who has never dissented from a policy decision, said “it’s still too early” for the Fed to begin trimming its bond-buying, warning of risks to the economy from low inflation and government budget cuts.
“We need to be sure that the economy can maintain its momentum in the face of ongoing fiscal contraction,” Williams said in a speech today in Rohnert Park, California. “It is also prudent to wait a bit and make sure that inflation doesn’t keep coming in below expectations, possibly signaling a more persistent decline in inflation.”
I find a lot of inconsistency in Fedspeak of late. If the economy needs continued support, why even begin the tapering discussion? And if the economy needs continuing support, then the rate rise represents a real tightening of monetary conditions, not just a lessening of accommodation, so how can Fed officials cheer-lead the rate rise? We saw something similar from Federal Reserve Chairman Ben Bernanke:
The second reason for increases in rates is probably the unwinding of leveraged and perhaps excessively risky positions in the market. It's probably a good thing to hav e that happen, although the tightening that's associated with that is unwelcome. But at least the benefit of that is that some concerns about building financial risks are mitigated in that way and probably make some FOMC participants comfortable with this tool going forward.
In my opinion, we no longer know the Fed's reaction function. The reaction function does not appear to be entirely dependent on unemployment and inflation. There was never any reason to adjust QE on that basis, that's why Bernanke's post-FOMC comments caught everyone by surprise. If you take the economy off the table, then the Fed appears to have a financial stability variable now built into their reaction function. Perhaps that variable reflects concerns about leverage, perhaps, as Izabella Kamiska suggests, it reflects liquidity issues. Maybe they were worried about lighting a fire beneath Housing Bubble 2.0. We just don't know; we just know that they are not entirely dissatisfied with rising rates despite the potential for negative feedback on the economy.
Bottom Line: Still too early to conclude the extent of the negative feedback of the recent rise in rates. Moreover, it is not clear to what extent Fed officials are unhappy with that feedback. Less so than we might suppose if they now have a financial stability variable in their reaction function. If so, policy efforts will center less on reversing the rate increase than in moderating the pace of increases.

'Comments on New Home Sales'

Haven't checked in with Calculated Risk for awhile. He remains optimistic:

A Few Comments on New Home Sales, by Bill McBride, Calculated Risk: ... Looking at the first half of 2013, there has been a significant increase in sales this year.  ... This was the highest sales for the first half of the year since 2008.
And even though there has been a large increase in the sales rate, sales are just above the lows for previous recessions. This suggests significant upside over the next few years. Based on estimates of household formation and demographics, I expect sales ... substantially higher than the current sales rate.
And an important point worth repeating every month: Housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future's so bright, I gotta wear shades. ...

I'm a bit more cautious about the future (and I hope policymakers don't assume that we can sound the all clear). What do you think?

Saturday, July 13, 2013

Shiller: Owning a Home Isn’t Always a Virtue

Robert Shiller argues that "national policy needs to take away much of the enormous subsidy to homeownership":

Owning a Home Isn’t Always a Virtue, by Robert Shiller, Commentary, NY Times: Encouraging homeownership has been considered a national goal at least since “Own Your Own Home Day” was introduced in 1920 by various business and civic groups as part of a National Thrift Week. The newly popular word “homeownership” represented a goal and a virtue for every good citizen — to get out of the tenements and into one’s own home. Homeownership was thought to encourage planning, discipline, permanency and community spirit.
In the aftermath of the subprime mortgage crisis, our national commitment to homeownership is sure to be questioned as we consider what to do about Fannie Mae and Freddie Mac, the enterprises that are meant to increase the supply of money available for mortgages and are now under government conservatorship; the Federal Housing Administration, which directly subsidizes homeownership; and the Federal Reserve’s quantitative easing program, which was intended to lower interest rates. For both political and economic reasons, any or all of these encouragements for homeownership — not to mention the mortgage interest deduction — could be sharply curtailed.
Which is why this is a good time to ask a basic question: In today’s world, is it wise for the government to subsidize homeownership? ...

His arguments, at least as I read them, seem to favor home ownership over renting (especially if you toss out the argument about mobility, as you should). But maybe that's just my own biases (I think home ownership is better than renting for a variety of reasons, perhaps connected to growing up in a small town rather than a big city, but that seems to be a fairly lonely position these days). But even if homeownership is better, subsidies aren't justified unless there is a market failure of some sort (e.g. a positive externality to neighbors from owning rather than renting, and so on), differences in the ability to purchase a home due to historical inequities in the distribution of income, wealth, and opportunity, that kind of thing (which I believe are present).

Thursday, July 11, 2013

'The Myth of the Lock-In Effect'

From the Cleveland Fed, the "lock-in effect" -- the inability to move because homeowners are underwater and would lose money if they sold their homes -- was not the cause of "stubbornly" high employment. As they say, the more likely reason that people didn't move to take new jobs was the lack of good job opportunities. Why move if the job opportunities elsewhere are no better than where you are? When jobs did exist, "underwater homeowners are probably more likely to move than borrowers with equity in their homes":

The Myth of the Lock-In Effect: One story that made the media rounds during the recession and early recovery claimed that under­water homes — when people owe more than the property’s value —  were deterring unemployed people from moving to get new jobs. People with negative equity could sell only at a loss, an option so unattractive that they refused to pull up stakes in search of work.
It was a good story with a catchy name, “the lock-in effect.” It seemed to help explain why joblessness persisted so stubbornly during the recovery’s first fitful years. And it seemed to support data showing that mobility was declining in the states with the most underwater homes.
But now a team of researchers is spoiling that story, perhaps once and for all. These economists, including the Cleveland Fed’s Yuliya Demyanyk, found conclusive evidence that negative home equity is not an important barrier to labor mobility. In fact, underwater homeowners are probably more likely to move than borrowers with equity in their homes.
“If a hypothetical unemployed, underwater homeowner gets a job offer, he is going to take it,” Demyanyk said.
The study was twofold. First, the researchers looked at credit-report data. The reports gave them enough longitudinal information about borrowers to infer whether they moved to new regions and whether falling home prices limited mobility — particularly for people with negative home equity.
Next, the researchers designed a theoretical model to replicate the experience of real-world homeowners. It churned out results suggesting that the findings — that underwater homeowners weren’t reluctant to move — were plausible. Key to the model is the idea that people would rather move to get a steady paycheck than stay in an underwater home in a place with no job prospects.
This paper is not the first to debunk the lock-in-effect story. Others, including work by the San Francisco Fed, have likewise found little evidence that people didn’t move during the recession because of the condition of their mortgages.
More plausible is that Americans faced almost uniformly dismal employment options across the country — opportunities to move for good jobs were few and far between.
An implication for national policy­makers is that job creation efforts need not focus on the regions hit hardest by the housing bust. Consider that at the end of 2009, the under­water problem was concentrated in four “sand” states — Arizona, Florida, California, and Nevada — and in Michigan, all with negative equity rates topping 35 percent of total mortgages. If national policymakers thought only about creating jobs in those states out of fear that negative-equity borrowers wouldn’t move to other states for employment, they might be missing an opportunity to lift employment more broadly.

More details on the study here, working paper here.

Wednesday, May 15, 2013

Homeowners Do Not Increase Consumption When Their Housing Prices Increase?

New and contrary results on the wealth effect for housing:

Homeowners do not increase consumption despite their property rising in value, EurekAlert: Although the value of our property might rise, we do not increase our consumption. This is the conclusion by economists from University of Copenhagen and University of Oxford in new research which is contrary to the widely believed assumption amongst economists that if there occurs a rise in house prices then a natural rise in consumption will follow. The results of the study is published in The Economic Journal.
"We argue that leading economists should not wholly be focused on monitoring the housing market. Economists are closely watching the developments on the housing market with the expectation that house prices and household consumption tend to move in tandem, but this is not necessarily the case," says Professor of Economics at University of Copenhagen, Søren Leth-Petersen.
Søren Leth-Petersen has, alongside Professor Martin Browning from University of Oxford and Associate Professor Mette Gørtz from University of Copenhagen, tested this widespread assumption of 'wealth effect' and concluded that the theory has no significant effect.
Søren Leth-Petersen explains that when economists use the theory of  'wealth effect' the presumption is that older homeowners will adjust their consumption the most when house prices change whilst younger homeowners will adjust their consumption the least. However, according to this research, most homeowners do not feel richer in line with the rise of housing wealth.
"Our research shows that homeowners aged 45 and over, do not increase their consumption significantly when the value of their property goes up, and this goes against the theory of 'wealth effect'. Thus, we are able to reject the theory as the connecting link between rising house prices and increased consumption," explains Søren Leth-Petersen. ...
The research shows that homeowners aged 45 and over did not react significantly to the rise in house prices. However, the younger homeowners, who are typically short of finances, took the opportunity to take out additional consumption loans when given the chance. ...

Tuesday, April 30, 2013

'Are We Purging the Poorest?'

“Should public resources go to the group most likely to take full advantage of them, or to the group that is most desperately in need of assistance?”:

Are we purging the poorest?, by Peter Dizikes, MIT News Office: In cities across America over the last two decades, high-rise public-housing projects, riddled with crime and poverty, have been torn down. In their places, developers have constructed lower-rise, mixed-use buildings. Crime has dropped, neighborhoods have gentrified, and many observers have lauded the overall approach.

But urban historian Lawrence J. Vale of MIT does not agree that the downsizing of public housing has been an obvious success.

“We’re faced with a situation of crisis in housing for those of the very lowest incomes,” says Vale, the Ford Professor of Urban Design and Planning at MIT. “Public housing has continued to fall far short of meeting the demand from low-income people.”

Take Chicago, where the last of the Cabrini-Green high-rises was torn down in 2011, ending a dismantling that commenced in 1993. Those buildings — just a short walk from the neighborhood where Vale grew up — have been replaced by lower-density residences. But where 3,600 apartments were once located, there are now just 400 units constructed for ex-Cabrini residents. Other Cabrini-Green occupants were given vouchers to help subsidize their housing costs, but their whereabouts have not been extensively tracked.

“There is a contradiction in saying to people, ‘You’re living in a terrible place, and we’re going to put massive investment into it to make it as safe and attractive as possible, but by the way, the vast majority of you are not going to be able to live here again once we do so,’” Vale says. “And there is relatively little effort to truly follow through on what the life trajectory is for those who go elsewhere and don’t have an opportunity to return to the redeveloped housing.”

Now Vale is expanding on that argument in a new book, “Purging the Poorest: Public Housing and the Design Politics of Twice-Cleared Communities”...

“Chicago and Atlanta are probably the nation’s most conspicuous experiments in getting rid of, or at least transforming, family public housing,” Vale explains. However, he notes, “It’s hard to find an older American city that doesn’t have at least one example of this double clearance.”

Essentially, Vale says, these cities exemplify one basic question: “Should public resources go to the group most likely to take full advantage of them, or to the group that is most desperately in need of assistance?”

Vale sees U.S. policy as vacillating between these views over time. At first, public housing was meant “to reward an upwardly mobile working-class population” — making public housing a place for strivers. Slums were cleared and larger apartment buildings developed, including Atlanta’s Techwood Homes, the first such major project in the country. 

But after 1960, public housing tended to be the domain of urban families mired in poverty. “The conventional wisdom was that public housing dangerously concentrated poor people in a poorly designed and poorly managed system of projects, and we are now thankfully tearing it all down,” Vale says. “But that was mostly a middle phase of concentrated poverty from 1960 to 1990.”

Over the last two decades, he says, the pendulum has swung back, leaving a smaller number of housing units available for the less-troubled, which Vale calls “another round of trying to find the deserving poor who are able to live in close proximity with now-desirable downtown areas.”

Vale’s critique of this downsizing involves several elements. Projects such as Cabrini-Green might have been bad, but displacing people from them means “the loss of the community networks they had, their church, the people doing day care for their children, the opportunities that neighborhood did provide, even in the context of violence.”

Demolishing public housing can hurt former residents financially, too. “Techwood and Cabrini-Green were very central to downtown and people have lost job opportunities,” Vale says. Indeed, the elimination of those developments, even with all their attendant problems, does not seem to have measurably helped many former residents gain work...
“We don’t have very fine-tuned instruments to understand the difference between the person who genuinely needs assistance and the person who is gaming the system,” Vale says. “Far larger numbers of people get demonized, marginalized or ignored, instead of assisted.” ...
Ultimately, Vale thinks, the reality of the ongoing demand for public housing makes it an issue we have not solved. 

“The irony of public housing is that people stigmatize it in every possible way, except the waiting lists continue to grow and it continues to be very much in demand,” Vale says. “If this is such a terrible [thing], why are so many hundreds of thousands of people trying to get into it? And why are we reducing the number of public-housing units?”

Saturday, April 27, 2013

A Dream House?

A quick one from the road - Robert Shiller on housing:

Today’s Dream House May Not Be Tomorrow’s, by Robert Shiller, Commentary, NY Times: Houses are just buildings, but homes are often beautiful dreams. Unfortunately, as millions of people have learned in the housing crisis, those dreams don’t always comport with reality.
Economic and demographic changes may severely impair the value of a home when it’s time to sell, a decade or more in the future. Will a particular home still be fashionable then? Will social and economic shifts tilt demand toward new designs and types of communities —even toward renting rather than an outright purchase? Any of these factors could affect home prices substantially. ...

His bottom line is that:

Forecasting is indeed risky, because of factors like construction productivity, inflation, and the growth and bursting of speculative bubbles in both home prices and long-term interest rates. The outlook is so ambiguous that there is no single answer to the question of housing’s potential as a long-term investment.


... it may be wisest to choose the housing that best meets your personal needs, among the choices you can afford.