Category Archive for: Housing [Return to Main]

Thursday, July 25, 2013

'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.

And:

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

Sunday, April 14, 2013

Is There an Upward Slope to Real House Prices?

Calculated Risk disagrees with Robert Shiller:

Shiller and the Upward Slope of Real House Prices, by Bill McBride: Professor Robert Shiller wrote in the NY Times: Why Home Prices Change (or Don’t)

Home prices look remarkably stable when corrected for inflation. Over the 100 years ending in 1990 — before the recent housing boom — real home prices rose only 0.2 percent a year, on average. The smallness of that increase seems best explained by rising productivity in construction, which offset increasing costs of land and labor.

Shiller's comment on the stability of real house prices is based on the long run price index he constructed for the second edition of his book "Irrational Exuberance".

As I've noted before, if Shiller had used some different indexes for earlier periods, his graph would have indicated an upward slope for real house prices. Here was an earlier post on this: The upward slope of Real House Prices. ... The indexes I used captured a larger percentage of the market than the indexes Shiller used.

Tom Lawler has also written in depth about this: Lawler: On the upward trend in Real House Prices. ...

A key reason for the upward slope in real house prices is because some areas are land constrained, and with an increasing population, the value of land increases faster than inflation. ...

The bottom line is there is an upward slope to real house prices.

Tuesday, February 26, 2013

Calculated Risk on New Home Sales

Calculated Risk:

New Home Sales at 437,000 SAAR in January, by Bill McBride: ... On New Home Sales: The Census Bureau reports New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 437 thousand. This was up from a revised 378 thousand SAAR in December (revised up from 369 thousand). ...
This is the strongest sales rate since 2008. This was another solid report. ... [New Home Sales graphs]

There are, of course, lots of graphs in the original post. In another post, he adds:

1) January is seasonally the weakest month of the year for new home sales, so January has the largest positive seasonal adjustment. Also this was just one month with a sales rate over 400 thousand - and we shouldn't read too much into one month of data. But this was the highest level since July 2008 and it is clear the housing recovery is ongoing. 
2) Although there was a large increase in the sales rate, sales are still near the lows for previous recessions. This suggest 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).
3) 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. Note: The key downside risk is too much austerity too quickly, but that is a different post. ...

Saturday, January 26, 2013

Shiller: Don't Count on a New Housing Boom

Robert Shiller says caution is in order in housing markets:

A New Housing Boom? Don’t Count on It, by Robert Shiller, Commentary, NY Times: We're beginning to hear noises that we’ve reached a major turning point in the housing market — and that, with interest rates so low, this is a rare opportunity to buy. But are such observations on target?
It would be comforting if they were. Yet the unfortunate truth is that the tea leaves don’t clearly suggest any particular path for prices, either up or down..., any short-run increase in inflation-adjusted home prices has been virtually worthless as an indicator of where home prices will be going over the next five or more years. ...
The bottom line for potential home buyers or sellers is probably this: Don’t do anything dramatic or difficult. There is too much uncertainty... If you have personal reasons for getting into or out of the housing market, go ahead. Otherwise, don’t stay up worrying about home prices any more than you do about stock prices. ...

Tuesday, January 22, 2013

'Wealth Effects Revisited: 1975-2012'

Housing cycles matter:

Wealth Effects Revisited: 1975-2012, by Karl E. Case, John M. Quigley, Robert J. Shiller, NBER Working Paper No. 18667, January 2013 [open link, previous version]: We re-examine the links between changes in housing wealth, financial wealth, and consumer spending. We extend a panel of U.S. states observed quarterly during the seventeen-year period, 1982 through 1999, to the thirty-seven year period, 1975 through 2012Q2. Using techniques reported previously, we impute the aggregate value of owner-occupied housing, the value of financial assets, and measures of aggregate consumption for each of the geographic units over time. We estimate regression models in levels, first differences and in error-correction form, relating per capita consumption to per capita income and wealth. We find a statistically significant and rather large effect of housing wealth upon household consumption. This effect is consistently larger than the effect of stock market wealth upon consumption.
In our earlier version of this paper we found that households increase their spending when house prices rise, but we found no significant decrease in consumption when house prices fall. The results presented here with the extended data now show that declines in house prices stimulate large and significant decreases in household spending.
The elasticities implied by this work are large. An increase in real housing wealth comparable to the rise between 2001 and 2005 would, over the four years, push up household spending by a total of about 4.3%. A decrease in real housing wealth comparable to the crash which took place between 2005 and 2009 would lead to a drop of about 3.5%

Thursday, January 17, 2013

'More Ideological Excuse Making for Bad Banks'

 Barry Ritholtz takes on:

...this bit of AEI silliness:

“And here I thought it was the borrower’s job to determine if he has the means to repay a loan.”

It used to be. Homebuyers would look at their income, assets, monthly cash flow, job security, debt outstanding and things like that to determine if the family could afford to own a home. The lender’s job was to perform adequate due diligence and protect against loss by requiring a down payment.

No. That is Wrong. It so wrong on so many many levels that I have to stop what I was going to be doing this morning and respond to this silliness instead:

1. Banks — not borrowers — are the ones who actually make the loan decision.

2. Banks have access to capital. Depositors give banks money (FDIC helps that) and banks also can tap the Fed for even more capital. The banks have obligation to all of these entities to adhere to good lending standards.

3. It is the banks job to determine credit worthiness. THAT IS WHAT THEY DO. If they do not care to be bother to make this determination, then perhaps they should consider something other than the money lending business as a vocation.

Left to themselves, most humans would borrow much more money than they can reasonably handle. This is not a political statement, it is an observation about Human Nature.

Banks and other credit sources know this — that is why they review income and FICO scores and past payment history and debt load and employment record and tax returns. It is to verify the credit worthiness of the applicant.

No, this isn’t an exercise in due diligence — “Hey, figure out what you can afford, and we will check your work for you.” That is not what maintaining Lending Standards means.

This is why the no doc, no credit check, liar loans were destined to fail. ...

He is discussing a column by Caroline Baum:

Further..., Ms. Baum could not help herself to bring up the usual bugaboos: “Without re-litigating the cause of the housing bubble — greedy bankers or government housing policy” — that’s because that debate is over, and the Peter Wallisons and Ed Pintos of the world overwhelmingly lost it.
The only reason to go back to that debate — as was done repeatedly in the column — is because the outcome of that disagrees with your ideology. The statement “Government housing policies caused the crisis” is enormously useful, however, as it signifies cognitive dissonance on the part of its proponent.

No matter how much evidence piles up against it, and there is presently a significant amount, they can't let go of the idea that the housing crisis was caused by the government trying to help poor people. That's not what happened, but the facts are a large blow to their ideology and they aren't about to admit that what they've been claiming is wrong.

Sunday, January 06, 2013

'The Blame the Community Reinvestment Act Industry'

Dean Baker:

The Blame the Community Reinvestment Act Industry, by Dean Baker (Creative Commons License): One of the major occupations for economists these days is blaming efforts to help poor people for the housing bubble and bust. The main villains in this story are Fannie Mae, Freddic Mac, the Federal Housing Authority (FHA) and the Community Reinvestment Act (CRA). A reader recently sent me another work in this proud tradition.
I just did a quick reading of the paper, but it seems that the smoking gun in this one is that banks subject to the CRA appeared to do more lending in CRA tracts in the periods where their lending behavior was being scrutinized by regulators. Just to remind folks, the CRA requires banks to make loans in the areas from which they were taking deposits, in particular focusing on areas that are disproportionately African American or Hispanic. The authors take this timing result, which is especially pronounced in the peak bubble years of 2004-2006, as evidence that the CRA played a major role in the pushing of bad loans on moderate income people. As they note, the loans issued in these tracts in these periods had a much higher default rate than other loans.
It's not clear that this gun is smoking quite as much the paper implies. First, it is important to remember that the biggest peddlers of subprime loans were mortgage lenders like Ameriquest and Countrywide. These lenders were for the most part not subject to the CRA since they were not banks (they raised money through the capital markets, not by taking deposits). Therefore the CRA was not a gun to the head of these lenders forcing them to make bad loans.
However even for the banks to whom the CRA did apply the evidence in this paper is less compelling than it may seem. Let's assume that banks do care about their CRA ratings for the reasons mentioned in the paper. (The CRA rating would likely be a factor that would come up when a bank was interested in a buyout or merger.) Let's also imagine that banks time their loans to CRA tracts so that they can show more loans in the periods where their compliance is being reviewed. Let's also hypothesize that in total the CRA doesn't get banks to make any more loans to CRA tracts than they would otherwise.
In this case, we would get exactly the sort of pattern of lending found in this study. Banks that are subject to the CRA would refrain from focusing on CRA tracts when they know no one is looking. Then when the light is on, they would make a stronger effort to make loans in the neighborhoods covered by the CRA. If banks engaged in this sort of timing of loans to CRA tracts, we would find that loans during CRA review periods were higher than in other times, even if there was no net increase in loans as a result of the CRA.
As a practical matter, I would be surprised if the CRA had no effect whatsoever on lending to the covered tracts. But it's not clear how this paper can distinguish a timing effect from a situation where banks actually increased lending to CRA tracts beyond what they would have done without the law.
In the process of prosecuting the case against the CRA, the paper produces some exonerating evidence for Fannie and Freddie. It finds that the CRA effect was strongly associated with private securitization because the investment banks had lower standards than Fannie and Freddie. It comments on this finding:
"We conjecture that banks are more likely to originate loans to risky borrowers around CRA examinations when they have an avenue to securitize and pass these loans to private investors after the exam."
And, just to remind folks, the FHA became almost irrelevant in the peak bubble years, with its share of the market dwindling to almost nothing. At the time it was derided as an outmoded relic since the private sector was so much more efficient in providing loans to low and moderate income families.
Anyhow, I don't think there is any doubt that the efforts to push homeownership went seriously awry in the bubble years. Many of the organizations that encouraged moderate income families to buy homes at badly inflated prices as a wealth building strategy should be wearing bags over their heads for the next three decades. But there is no escaping the fact that the main motivation for issuing the bad mortgages was money: the banks were booking huge profits in these years. And no believer in the free market can think that bankers have to be told by government bureaucrats to go out and make money.

Saturday, October 06, 2012

Shiller: Housing Fever Can Work Both Ways

One of these days I'll figure out why I am so resistant to Robert Shiller's "stories" approach to economic issues:

Housing Fever Can Work Both Ways, by Robert Shiller, Commentary, NY Times: The boom and bust in the housing market was a dual social epidemic. First, there was an epidemic of positive thinking that led to high expectations for long-term home price appreciation — and for the economy, too. Then, after 2005, an epidemic of negative thinking discouraged many people from buying a house or from spending in general, and kept many employers from hiring.
We would all like to think that our economy makes more sense than that, and, in some ways, it does.
Certainly, there were other factors behind this boom and bust. But many of them — for example, Federal Reserve actions, government policies toward housing, even the effects on the United States of developments in other countries’ economies — were arguably driven by this same social epidemic. ...
People waiting to buy a home may be waiting for a sense that prices have a rosy long-term future. Home prices in the United States have been rising for several months, and that is generating some optimism that now is the time to buy. However, the social waves also carry other, less encouraging stories that compete with such optimism — for example, foreclosures, unemployment, Europe’s troubles and the Asian slowdown.
Will optimism about real estate emerge as a leading story? If this is a major upturning point for the housing market, it is still sociologically opaque.

Friday, October 05, 2012

'The Community Reinvestment Act Did Not Induce Subprime Lending'

Via Richard Green:

Rub ́en Herna ́ndez-Murillo, Andra C. Ghent, and Michael T. Owyang show that the Community Reinvestment Act did not induce subprime lending: They look at lending originations and loan performance on either side of the CRA thresholds. If CRA encouraged subprime lending, one should see a discontinuity at the thresholds, but there is none.
These are originations for 2-28 subprime loans. Under CRA, lenders received credit for originating and funding loans in census tracts whose median incomes were below 80 percent of area median income. If the CRA was inducing lending, we should see a jump in lending to the left of the 80 percent cut-off--there isn't (either visually or econometrically). They find the same result when looking at pricing and default.

Wednesday, September 26, 2012

Should Home-Ownership be Discouraged?

Richard Green, in a debate at The Economist on home ownership:

The opposition's closing remarks Sep 26th 2012, by Richard K. Green: In his comments, Ed Glaeser makes a point that I wholeheartedly agree with: the American system of housing subsidies makes little sense. The largest housing subsidy, the mortgage interest deduction,... does little to help those at the margin of home-owning...
Nevertheless, I think Mr Glaeser sells his own study short when he argues that the civic connections established through home-owning are not very important. Home-owning can help countries overcome legacies in which property owners have exploited property users—legacies that include the hacienda system in Latin America and the Philippines, and sharecropping and company towns in America. There are important links between ownership, personal independence and the sense of control, as well as the ability to be socially mobile.
One could argue that we in America engaged in an experiment in discouraging home-ownership for ... minorities in general and African-Americans in particular. For many years, real-estate agents and lenders in America discriminated against minorities who tried to purchase houses, and American housing finance policy discriminated against African-American and central city neighborhoods. ... Hence the inability of African-Americans to own homes was very much the result of policies that targeted African-Americans.
One of the upshots of this is that the home-ownership rate among African Americans, at 46%, is considerably lower than it is for white Americans, at 71%. Controls for wealth, income and demographics are not sufficient to explain the gap. And ... African-Americans continue to get loans at less favorable terms than others.
But does any of this matter? ...—home equity explains the likelihood that children will complete college better than any other type of asset... It seems that a lack of access to owner-occupied housing has prevented African-Americans' access to a college degree. ... Educational attainment is crucial to social mobility. ... This is both economically and socially destructive.

The entire debate is here.

Sunday, September 23, 2012

'Mitt Romney's Housing Market Plan Has to Be a Joke'

Brad DeLong points to Joe Weisenthal's response to the Romney campaign's housing plan (calling it a "plan" gives it more credit than it deserves):

Mitt Romney's Housing Market Plan Has Got to Be a Joke, by Joe Weisenthal: At this point, we have no choice but to conclude that the Mitt Romney campaign is just trolling whiny journalists who have complained about the lack of detail in his plans.

Yesterday evening (a Friday evening!) the campaign revealed a whitepaper titled Securing the American Dream and The Future of Housing Policy that's so unsubstantial, we half-suspect the timing was done so that nobody would see it amid the release of the 2011 tax documents, which came out about 20 minutes earlier. This is honestly a sentence in his whitepaper on The Future Of Housing Policy:

The Romney-Ryan plan will completely end “too-big-to-fail” by reforming the GSEs.

Romney and Ryan believe that "too-big-to-fail", which generally refers to the assumption that a collapse of a major Wall Street institution would be catastrophic to the overall economy, thus making a bailout imperative, would be solved by the reform of Fannie and Freddie. Or maybe Romney and Ryan believe that only Fannie and Freddie are too big to fail, and that the collapse of a mega-bank would be fine. Those are the only possible readings of that sentence. As for Romney and Ryan's plan to reform the GSEs, the plan is to... reform them..., basically there are no details at all. Too Big To Fail will be fixed by reforming the GSEs, and the GSEs will be fixed... somehow….

It's reasonable to think that the challenger who is trying to disrupt the status quo, actually says something that would... disrupt the status quo. Failing to provide any details or a plan during the heart of the campaign undermines the notion that he is a serious alternative.

Bonus Brad DeLong ridicule of the "plan":

"End 'Too-Big-to-Fail' by Reforming the GSEs": Are Romney and His Campaign That Pig-Ignorant?

The Romney-Ryan plan will completely end “too-big-to-fail” by reforming the GSEs. The four years since taxpayers took over Fannie Mae and Freddie Mac, spending $140 billion in the process, is too long to wait for reform. Rather than just talk about reform, a Romney-Ryan Administration will protect taxpayers from additional risk in the future by reforming Fannie Mae and Freddie Mac and provide a long-term, sustainable solution for the future of housing finance reform in our country.

That is the Romney housing white paper's section on the GSEs and "Too-Big-to-Fail".

That is not the introduction to the section.

That is the section.

That is the entire section.

I don't know which is scarier:

  1. That Romney and everybody else in his campaign think that a "white paper" on housing can cover both the GSEs and "Too-Big-to-Fail" in 85 words.

  2. That Romney and everybody else in his campaign think that if the GSEs are somehow "reformed" that that can somehow magically resolve "Too-Big-to-Fail" as well--make it so that there are no longer any problems of systemic risk associated with the potential bankruptcy of Citi, JPMC, Wells-Fargo, BoA, GS, Morgan Stanley, or any of the other systemically-important financial institutions.

People: which scares you more?...

Monday, August 13, 2012

Mass Mortgage Refinancing

Joe Stiglitz and Mark Zandi endorse the Merkely plan for mass mortgage refinancing: 

The One Housing Solution Left: Mass Mortgage Refinancing, by Joseph E. Stiglitz and Mark Zandi, Commentary, NY Times: ...With 13.5 million homeowners underwater ... the odds are high that many millions ... will lose their homes.
Housing remains the biggest impediment to economic recovery, yet Washington seems paralyzed. ... Late last month, the top regulator overseeing Fannie Mae and Freddie Mac blocked a plan backed by the Obama administration to let the companies forgive some of the mortgage debt owed by stressed homeowners. ...
With principal writedown no longer an option, the government needs to find a new way to facilitate mass mortgage refinancings. With rates at record lows, refinancing would allow homeowners to significantly reduce their monthly payments... A mass refinancing program would work like a potent tax cut. ...
Well over half of all American homeowners with mortgages are ... excellent candidates to refinance. ... But many ... can’t refinance because the collapse in house prices has wiped out their home equity.
Senator Jeff Merkley, an Oregon Democrat, has proposed a remedy. Under his plan,... underwater homeowners who are current on their payments and meet other requirements would have the option to refinance to either lower their monthly payments or pay down their loans and rebuild equity. ...
If the program was very successful, we envisage that two million outstanding loans could be placed in ... trust at its peak. If the average mortgage balance was $150,000, then at the peak there would be $300 billion outstanding. ...
Since the Great Recession began almost five years ago, housing has been at the heart of our economic woes. If we do nothing, the problem will eventually resolve itself, but only with significant pain and a long wait. Mr. Merkley’s plan would speed the healing.

Tuesday, August 07, 2012

'The Making of America’s Imbalances'

Via Menzie Chinn at Econbrowser, Paul Wachtel and Moritz Schularick look at the evidence for Bernanke's savings glut hypothesis, and find that "the American credit boom of the 2000s had few direct links to reserve accumulation in emerging markets. The mortgage boom was financed by the US financial sector which intermediated foreign funds from private sources." Thus, if there is blame here, it should be assigned to private markets -- they are not as infallible as some woud like you to believe -- rather than government behavior:

Guest Contribution: The Making of America’s Imbalances, by Paul Wachtel and Moritz Schularick: Many observers in the West have embraced a reading of the financial crisis in which global imbalances and the surge in uphill net capital flows from poor to rich countries play a dominant role. ... Such explanations conveniently blame events that took place outside of the advanced economies for at least providing the initial impetus for the economic and financial mess Ben Bernanke’s savings glut hypothesis (Bernanke 2005) skillfully argues that a large and sudden rise of desired savings from developing countries – a savings glut – flooded the US economy. The implication is that low American interest rates and, ultimately, the financial crisis were due to the unusual saving behavior elsewhere.
Others disagree with such an imbalance-centered view of the crisis. ... This debate suggests that a closer look at the composition and role of imbalances in the run up to the crisis is warranted. ...
In our new paper -- “The Making of America’s Imbalances” -- we examine the evolution of sectoral financial balances in the US economy in the past 50 years using the Flow of Funds accounts. ... What do we find? ... Who financed the household borrowing binge of the 2000s? China and other emerging markets played virtually no direct role in the financing flows behind the American credit bubble. In brief, the U.S. financial sector provided the financing for mortgage-hungry America (until it collapsed with the crisis). But where did Wall Street find the savings to fuel to fire?
In the 2000s, the American financial system fed the credit hunger of the American economy mainly by issuing debt liabilities in international financial markets; but it was the foreign private sector, not foreign governments, that provided most of the fuel for the fire. Foreign official inflows went almost exclusively into Treasury securities while private investors bought bonds and other instruments issued by U.S. financial. In other words, those who are looking for international drivers of the American credit bubble, should not look to Beijing and Riyadh, but to international private capital markets. The capital inflow bonanza of the 2000s that enabled the American credit bubble (Chinn and Frieden 2011) was primarily a private sector inflow... Beijing may have financed the war in Iraq at low cost while Wall Street, foreign banks and private investors fueled the housing bubble. ...

As they emphasize in the paper, "the flows that fed the bubble were private, not official. ... Our results ... stand in clear opposition to arguments that link the bubble in US housing markets in the 2000s with the global glut of savings (Bernanke 2005). The increase in leverage in the US plays as important a role as the capital inflows from the rest of the world."

Tuesday, July 31, 2012

'Fire Ed DeMarco'

Yep:

Fire Ed DeMarco, by Paul Krugman: Do it now. ... DeMarco heads the Federal Housing Finance Agency, which oversees Fannie and Freddie. And he has just rejected a request from the Treasury Department that he offer debt relief to troubled homeowners — a request backed by an offer by Treasury to pay up to 63 cents to the FHFA for every dollar of debt forgiven.
DeMarco’s basis for the rejection was that this forgiveness would represent a net loss to taxpayers, even if his agency came out ahead.
That’s a very arguable point even on its own terms, because the paper he cited (pdf) in support of his stance took no account of the positive effects on the economy of debt relief — even though those effects are the main reason for offering such relief. ... Furthermore, even if there’s a small net cost to taxpayers, debt relief is still worth doing if it yields large economic benefits.
In any case, however, deciding whether debt relief is a good policy for the nation as a whole is not DeMarco’s job. His job — as long as he keeps it, which I hope is a very short period of time — is to run his agency. If the Secretary of the Treasury, acting on behalf of the president, believes that it is in the national interest to spend some taxpayer funds on debt relief, in a way that actually improves the FHFA’s budget position, the agency’s director has no business deciding on his own that he prefers not to act.
I don’t know what DeMarco’s specific legal mandate is. But there is simply no way that it makes sense for an agency director to use his position to block implementation of the president’s economic policy, not because it would hurt his agency’s operations, but simply because he disagrees with that policy.
This guy needs to go.

If households can't get help repairing their balance sheets, then the recovery from the balance sheet recession -- such as it is -- will be even slower. Banks got the help they needed with their balance sheet problems, but households have not received as much attention.

Tuesday, July 17, 2012

Has the Market Finally Bottomed Out?

Is the housing market bottoming out? Joshua Abel, Richard Peach, and Joseph Tracy of the NY Fed have a highly hedged answer:

Just Released: Housing Checkup–Has the Market Finally Bottomed Out?, by Joshua Abel, Richard Peach, and Joseph Tracy, Liberty Street Economics: In this post, we examine a number of important housing market “vital signs” that collectively help to indicate the health status of local markets at the county level. The post also serves as an introduction to a set of interactive maps, based on home price index data from CoreLogic, that we will regularly update on the New York Fed's website for readers interested in continuing to track the convalescence of the U.S. housing markets. The maps show the year-over-year change in home prices for nearly 1,200 counties through May and include a video sequence tracking these price changes since 2003.
Over the past few months, some national housing market indicators have begun to look a bit brighter. As of May, the CoreLogic national home price index had risen three months in a row. While still at a relatively low level, housing starts now have a clear upward trend. These developments have led some analysts to declare that, after five years of generally declining prices and activity, the housing market has finally bottomed out. While the national statistics are encouraging, whether or not the housing market has bottomed out is actually a much more difficult question to address for a couple of reasons. First, the United States is not a single housing market but rather a collection of numerous local housing markets. Second, the health of a local housing market is determined by a variety of indicators in addition to prices....

And the conclusion:

Overall Health Assessment
The stabilization of the housing market suggested by various national indicators is corroborated by looking at a number of indicators disaggregated to the county level. Importantly, the median county is now experiencing stable house prices on a year-over-year basis. Transaction volumes in most markets, while still far below normal, have steadied. Finally, the share of distressed sales, although still very high in many markets, appears to have peaked. If these trends continue, then local housing markets are making progress in their convalescence. However, our analysis indicates that most local housing markets still have a way to go to achieve a clean bill of health.

Calculated Risk says:

... I think it is likely that prices have bottomed, although I expect prices to be choppy going forward - and I expect any nominal price increase over the next year or two to be small.
I've seen some forecasts of additional 20% price declines on the repeat sales indexes. Three words: Not. Gonna. Happen.
Others, like Barry Ritholtz at the Big Picture, have argued that we could see an additional 10% price decline in the Case-Shiller indexes. I think that is unlikely, but not impossible. The argument for further price declines is that there are still a large number of distressed properties in the foreclosure pipeline - and that there are over 10 million property owners with negative equity, and that could lead to even more distressed sales. So even though prices are pretty much back to "normal" based on real prices and price-to-rent ratio (see below), the argument is that all of these distressed sales could push prices down further. Also, Barry argues that prices following a bubble usually "overshoot".
Those are solid arguments, but I think that some of the policy initiatives (refinance programs, emphasis on modifications, REO-to-rental and more) will lessen the downward pressure from distressed sales - and I also think any "overshoot" will be in real terms (inflation adjusted) as opposed to nominal terms. It is probably correct that any increase in house prices will lead to more inventory (sellers waiting for a "better market"), but that is an argument for why prices will not increase - as opposed to an argument for further price declines.
My view is prices will be up slightly year-over-year next March (when prices usually bottom seasonally for the repeat sales indexes). Some analysts see a small decrease (like 1% to 2%) over the next 12 months, but that isn't much different than a small increase (when compared to forecasts of 10% or 20% declines). ...

Thursday, July 12, 2012

Minority Borrowers Paid More for Mortgages

Nope, there's no need for regulation of financial markets, or for something like a consumer financial protection bureau:

Justice Department Details Higher Rates Charged to Minority Borrowers, by Janet Paskin, WSJ: At least 34,000 African-American, Hispanic and other minority borrowers paid more for their mortgages or were steered into subprime loans when they could have qualified for better rates, according to the Department of Justice. The DOJ settled a fair-lending lawsuit with Wells Fargo, the nation’s largest mortgage lender, on Thursday.

That adds up to real money – and, in some cases, real stress:

As a result of being placed in a subprime loan, an African-American or Hispanic borrower… was subject to possible pre-payment penalties, increased risk of credit problems, default, and foreclosure, and the emotional distress that accompanies such economic stress.

The complaint also says that between 2004 and 2008, “highly qualified prime retail and wholesale applicants for Wells Fargo residential mortgage loans were more than four times as likely to receive a subprime loan if they were African-American and more than three times as likely if they were Hispanic than if they were white.”

During the same period, the complaint says, “borrowers with less favorable credit qualifications were more likely to receive prime loans if they were white than borrowers who were African-American or Hispanic.” ... Bank of America agreed to pay $335 million in settling similar charges in December. ...

I suppose I should add: It wasn't the CRA.

Thursday, July 05, 2012

Fed Watch: What Are We Expecting From Housing?

Tim Duy:

What Are We Expecting From Housing?, by Tim Duy: Josh Lehner and Bill McBride note that the manufacturing slowdown does not necessarily indicate recession, something I noted as well. Another version of that story is seen by comparing the ISM headline number with the new orders data:

Ismno

Again, manufacturing slowdowns in 1995 and 1998 did not presage recessions (albeit possibly due to offsetting monetary policy). McBride reiterates that housing is a better leading indicator than manufacturing, and Lehner discusses a "tradeoff" from manufacturing to housing.
For my part, I am wondering what people expect when they talk about a housing recovery. I tend to break the housing story into two parts. One is the residential construction story, the activity that amounts to screwing sticks of wood onto slabs of concrete. The related contribution to GDP growth since 1985:

Rescont

During the 2002-2005 period, arguably the height of the housing bubble, residential construction contributed an average of 0.4 percentage points to GDP growth each quarter. In the first quarter of this year, the contribution was 0.42 percentage points. So, barring the occasional pop in the data, housing is already contributing to GDP growth about what we would expect.
Presumably, we would be hoping that as the housing rebound deepens, there will be secondary impacts. For this reason I am hesitant to embrace the "tradeoff" terminology. Certainly we can envision accelerated home building triggering an increase in both manufacturing (capital equipment) and consumer (job/income growth) activity as well; these tend to be interconnected activities. So maybe the overall impact is a bit higher.
That said, there is another element to the housing story - the household balance sheet issue. Arguably, as Karl Smith has said, the housing bubble was less about a construction bubble (again, note the relatively limited contribution to GDP growth; we didn't necessarily build too many units, especially given the subsequent construction drought), and more about a price bubble. And that price bubble fueled spending activity via mortgage equity withdrawal. The chart via Bill McBride:

Mew

Of course, equity withdrawal has collapsed because equity as collapsed:

Equity

So here is the question: What was more important in holding the economy close to potential output, residential construction itself, or the housing price bubble? I tend to believe the price-driven balance sheet effects were driving dynamics over this past business cycle. Absent a healing of household balance sheets (or, relatedly, monetary policy that supported such healing via somewhat higher inflation expectations to reduce debt in real terms), I would expect overall growth to remain subdued, despite a rebound in residential construction. The latter is helpful and important, but not by itself a magic bullet.

Sunday, June 24, 2012

"Reviving Real Estate Requires Collective Action"

Robert Shiller:

Reviving Real Estate Requires Collective Action, by Robert Shiller, Commentary, NY Times: Imagine that you are watching an outdoor theater production while sitting on the grass. You have difficulty seeing, so you prop yourself up on your knees. Soon everyone behind you does the same. Eventually, most people are kneeling or standing, yet they are less comfortable than they were before and have no better view. Everyone should sit down, and everyone knows it, but no one does.
This is a collective action problem, a phenomenon that is, unfortunately, all too common. At the moment, the trouble in our real estate markets and the drag these markets are placing on our entire economy may be understood as a collective action problem. In a nutshell, mortgage lenders need to write down the amounts owed by individual homeowners — that is, let everyone sit down and relax — but the different stakeholders have been unable to reach an agreement, even if it is in their common interest. ...
If such mortgage principal reductions could be applied on a large scale, there could be large neighborhood effects, raising a sense of optimism among homeowners and bolstering the value of all homes and, ultimately, the whole economy. But mortgage lenders in all their different forms lack a group strategy. ...

He goes on to suggest several solutions to this problem.

Sunday, June 10, 2012

Mortgage Payments are Not the Top Priority in a Severe Recession

When people get into financial difficulties and have to decide which loans to pay, mortgage payments used to come first. That is no longer true:

Paying mortgage isn't a top priority in tough times, research shows, by Mary Umberger, LA Times: If we've learned one thing from the housing downturn, it's that making the monthly mortgage payment is no longer a sacred concept in many American households. ... When times are tight, consumers put paying for their cars first. Then the credit cards will be paid. The once-mighty mortgage has slipped to No. 3. ...
Why have cars taken the top priority?
We believe that it's primarily because consumers need their cars to get to work or to seek employment. Being able to seek employment is particularly relevant because of how long people have been out of work.
Another factor is what we call the timing of consequences. If you stop paying on your credit cards, the credit card account gets closed, and you can't use it anymore. When you stop paying your auto loans, at some point fairly soon people are going to come to take that car away from you.
But when you stop paying the mortgage, the average time to foreclosure in so-called nonjudicial states [in which the courts aren't involved in the process] is 300 days. In judicial states, in which the courts rule in foreclosures, now you're looking at 10 to 20 months before you'll be evicted.
And you have to look at the idea of equity. In the "traditional" hierarchy, you'd say that people valued their homes above all else. But this is slightly inaccurate: They valued their equity above all else. When equity evaporates for consumers, the home is not so important.
Is this a permanent change in our attitudes?
We don't think so. We think that when home values become stable, when unemployment returns to healthier levels ... we would expect those traditional forces to return to normal. It's not that consumers have become irrational; they're actually rational. ...

I would also add that the expected consequences of default on a mortgage, e.g. the ability to get credit in the future, aren't as large as they used to be.

Tuesday, May 29, 2012

Poised for a Srong Come Back?

Richard Green makes a prediction:

Maybe I am too eager to believe it, and...: ..I expect to be smote down for saying it, but I think the two month old, mediocre, Case-Shiller number that came out today is consistent with the idea that the housing market will really come back big this year (I said so in the paper and on the radio today, so I might as well say it here).
Inventories in many hard hit markets are now low by historical standards. Time on market has fallen. HARP II can accelerate amortization (which is its most important feature). Prices are really cheap, both when the user cost they produce is compared with rent, and when compared with incomes (by World standards).

Thursday, May 03, 2012

"Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis"

I haven't have time to read this today, but thought I'd note it in case someone does have time and wants to comment on the methodology and/or results:

Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis, Public Policy Discussion Paper No. 12-2
by Christopher L. Foote, Kristopher S. Gerardi, and Paul S. Willen
: This paper presents 12 facts about the mortgage market. The authors argue that the facts refute the popular story that the crisis resulted from financial industry insiders deceiving uninformed mortgage borrowers and investors. Instead, they argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. The authors then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly.

Wednesday, April 11, 2012

Monetary Policy: More or Less?

Narayana Kocherlakota recently says (and Jason Rave is not happy):

I would say that it would be appropriate to change the Fed’s current forward guidance to the public about the future course of interest rates. Currently, the FOMC statement reads that the Committee believes that conditions will warrant extraordinarily low interest rates through late 2014. My own belief is that we will need to initiate our somewhat lengthy exit strategy sometime in the next six to nine months or so, and that conditions will warrant raising rates sometime in 2013 or, possibly, late 2012.

But I hope that John Williams, and others with similar views, carry the day:

Let me summarize where the Fed stands in terms of achieving its congressionally mandated goals. We are far below maximum employment and are likely to remain there for some time. The housing bust and financial crisis set in motion an extraordinarily harsh recession, which has held down consumer, businesses, and government spending. By contrast, inflation is contained and may even fall next year below our 2% target.
Under these circumstances, it’s essential that we keep strong monetary stimulus in place. The recovery has been sluggish nationwide... High unemployment, restrained demand, and idle production capacity are national in scope. These are just the sorts of problems monetary policy can address. ...

The hawks will keep pushing to tighten sooner rather than later, so let's hope those who want to do more, or at least not do less, can at least produce the gridlock needed to keep current policy in palce.

Wednesday, March 21, 2012

"The Changing Face of Foreclosures"

Another reason to attack the unemployment problem aggressively -- unemployment causes foreclosues:

The Changing Face of Foreclosures, by Joshua Abel and Joseph Tracy, Liberty Street: The foreclosure crisis in America continues to grow, with more than 3 million homes foreclosed since 2008 and another 2 million in the process of foreclosure. President Obama, in his speech of February 2, 2012, argued for expanded refinancing opportunities for homeowners and programs to expedite the transition of foreclosed homes into rental housing. In this post, we document the changing face of foreclosures since 2006 and the transformation of the crisis from a subprime mortgage problem to a prime mortgage problem owing to the housing bust and persistent high unemployment. Recognizing this change is critical because the design of housing policies should reflect the types of homeowners who are at risk of foreclosure today rather than those who were at risk at the onset of the financial crisis.
It is well known that problems with nonprime lending helped to spark the housing crisis, which was a catalyst for the financial crisis and ensuing recession. Also well known is the progressive erosion of underwriting standards in nonprime lending toward the end of the housing boom. As a result, many nonprime loans were made to borrowers who did not have the ability to pay for them, especially if house prices did not continue to increase. Not surprisingly, then, as house prices began to flatten and decline in 2006, foreclosure starts were dominated by nonprime borrowers. As shown in our first chart, nonprime borrowers accounted for about 65 percent of foreclosure starts in 2006. However, as the financial crisis led to the Great Recession (indicated in grey), the composition of borrowers entering foreclosure shifted quite dramatically. By 2009, prime borrowers had eclipsed nonprime borrowers as the dominant source of new foreclosures. In fact, from 2009 until the present, prime borrowers have accounted for the majority of all new foreclosure starts. A fairly steady 10 percent of foreclosure starts were associated with mortgages guaranteed by the Federal Housing Administration or the Department of Veterans Affairs.

Share of Foreclosure

What accounts for the dramatic change in the composition of foreclosure starts since 2006? Our next chart shows two important economic factors that have affected homeowners over this period—house prices and unemployment. For each mortgage that enters foreclosure, we calculate the percentage change in metropolitan area house prices from the time that the mortgage was originated to the time it entered foreclosure. We report average changes across all new foreclosures by year and quarter. From 2006 through 2008, as the share of new foreclosures was shifting from nonprime to prime borrowers, we see that initially foreclosures involved properties that were on average still increasing in value
(as measured by the positive cumulative change in the metro area house price index defined above), but then shifted to properties with declining house prices (in 2008), and eventually to properties where on average house prices had declined by 20 percent (in 2009). In fact, since 2009, properties entering foreclosure have continued to face a 20 percent decline in value on average.
We also calculate the change in the local (defined as the metropolitan area) unemployment rate. Just as foreclosure starts were initially associated with properties whose value was still rising, so foreclosures in 2006 and 2007 were linked to local labor markets where the unemployment rate was still declining. In 2008, however, foreclosures shifted to markets where unemployment was beginning to rise and, in 2009, to markets where unemployment had increased on average by more than 2 percentage points. In 2010, foreclosure starts occurred in markets where the increase in the local unemployment rate exceeded 5 percentage points on average since the mortgages were originated. The shift in the composition of new foreclosures from borrowers with nonprime mortgages to those with prime mortgages reflects the fact that falling house prices and rising unemployment tend to impact all borrowers in a local housing market, not just nonprime borrowers. As a result, traditionally safe borrowers began falling behind on their payments as they felt the severe effects of the housing bust and high unemployment.

Economic Conditions

In the design of housing policy, an important consideration is the extent to which foreclosures result from situations where borrowers cannot afford their mortgage from the outset. In these circumstances, foreclosures can be viewed as the market process for removing borrowers who should not have been approved for a mortgage in the first place or who cannot sustain their mortgage going forward. When affordability is the key determinant of foreclosures, policies aimed at reducing the flow into foreclosure run the risk of slowing an adjustment process necessary for an eventual housing market recovery. A useful metric for the ability of a borrower to afford a mortgage is the “debt-to-income” (DTI) ratio. This measures the cost of the mortgage (monthly payments, property taxes, and homeowner’s insurance) relative to the borrower’s income. Unfortunately, because the data that we use from Lender Processing Services do not consistently report the DTI ratio, we cannot assess this affordability measure across time for foreclosure starts.
However, we provide an alternative indirect measure of affordability. The basic idea is that in cases where a borrower cannot afford a mortgage from the outset, payment problems are likely to materialize sooner rather than later. In the chart below, we look at the time between the origination of a mortgage and the beginning of the string of missed payments that ultimately led to foreclosure. We show the 25th percentile (25 percent of the times were shorter, P25), the median (50 percent of the times were shorter, P50), and the 75th percentile (75 percent of the times were shorter, P75). Initially, when most foreclosure starts were associated with nonprime mortgages, 25 percent of the borrowers had been in the house fewer than eight months before falling behind on their payments, and 50 percent fewer than eighteen months. However, more recently, as the composition of foreclosures shifted to prime borrowers, 75 percent had been in the house more than three years, and 50 percent more than four years. This suggests that as the recession hit, foreclosures shifted from borrowers who often could not afford their houses to borrowers who had demonstrated that they could (by virtue of making payment for several years) but began to fall behind on their payments when they were hit by the dual crises of house price declines and high unemployment.

Percentiles of Duration

This change in the face of foreclosures is mirrored in many other dimensions. Our last chart shows the evolution in the distribution of origination credit (FICO) scores over time for new foreclosures. In 2006, 25 percent of foreclosure starts were associated with borrowers who had a credit score of 580 or below at the time they took out the mortgage, and 50 percent had credit scores of 620 or below. However, by 2009, as the recession set in and shifted the mix of foreclosures to prime borrowers, 50 percent of new foreclosures had origination credit scores of nearly 680, and 25 percent had credit scores of 720 or higher.

Percentiles of FICO

Nonprime lending during the housing boom was concentrated in what were called “exotic” mortgages with little down payment, initial “teaser” rates and, in some cases, negative amortization. However, since 2010, 65 percent of foreclosure starts have been associated with borrowers who took out thirty-year fixed-rate amortizing mortgages (viewed by consumer advocates as the “safest” mortgage product)—up from 40 percent early in the crisis. Similarly, the prime borrowers who have entered foreclosure in the past several years have on average made a meaningful down payment of 20 percent.
A large foreclosure pipeline hangs over U.S. housing markets, creating headwinds for housing market recovery. What began as a nonprime mortgage problem has evolved into a prime mortgage problem with the onset of the recession. The inability to afford a home has been replaced by declining house prices and high unemployment as the primary driver of new foreclosures. Clearly, these changes have implications for the design of housing policy: By recognizing the shifting face of foreclosures, policymakers can make more informed choices about the most effective forms of intervention and the groups of borrowers that could best be served by them.

Wednesday, February 08, 2012

Energy Prices Caused the Recession?

Here's a new one, according to Santorum "The housing bubble was caused because of a dramatic spike in energy prices...":

The Gasoline “Bubble”?, by Ed Kilgore: ... Check out these Santorum remarks from the campaign trail in Colorado the other day:

Stressing the importance for the country to provide cheap energy to its citizens, Santorum blamed the recession not on sub-prime mortgages or the derivatives market but on spiking fuel prices.
“We went into a recession in 2008. People forget why. They thought it was a housing bubble. The housing bubble was caused because of a dramatic spike in energy prices that caused the housing bubble to burst,” Santorum told the audience. “People had to pay so much money to air condition and heat their homes or pay for gasoline that they couldn’t pay their mortgage.”

Hmmm.

Now we are all used to Republican pols treating gasoline prices as some sort of ultimate, can’t miss issue that trumps everything else. And it is refreshing to find a GOP presidential candidate who isn’t explicitly or implicitly claiming our economic problems were caused by hordes of shiftless poor and minority folk who conspired with ACORN and Freddie and Fannie to take out mortgages that had no intention of paying. But the idea that gasoline and home heating costs caused the whole mess is a new one to me...

So the way to prevent future housing bubble problems is, of course, to deregulate the energy industry.

Tuesday, January 31, 2012

Race and Housing

Via Richard Green:

Good news and bad news on race and housing, Richard Green: Ed Glaeser and Jake Vigdor find that all-white neighborhoods are a thing of the past.  They find:

  • The most standard segregation measure shows that American cities are now more integrated than they’ve been since 1910. Segregation rose dramatically with black migration to cities in the mid-twentieth century. On average, this rise has been entirely erased by integration since the 1960s.

  • All-white neighborhoods are effectively extinct. A half-century ago, one-fifth of America’s urban neighborhoods had exactly zero black residents. Today, African-American residents can be found in 199 out of every 200 neighborhoods nationwide. The remaining neighborhoods are mostly in remote rural areas or in cities with very little black population.

  • Gentrification and immigration have made a dent in segregation. While these phenomena are clearly important in some areas, the rise of black suburbanization explains much more of the decline in segregation.

  • Ghetto neighborhoods persist, but most are in decline. For every diversifying ghetto neighborhood, many more house a dwindling population of black residents.

That said, Andy Reschovsky sends me to the most recent US Census Homeownership and Vacancy Report, which shows the ration of black to white ownership rates fell from .643 in 2006 to .617 in 2011; for hispanics, the fall was from .651 to .632.

Saturday, January 21, 2012

"The Ongoing Debt Transformation"

Via Paul Krugman:

The Ongoing Debt Transformation, by Paul Krugman: A follow-up on my note about US deleveraging. It turns out that if you measure debt as a percentage of potential GDP (as estimated by the CBO) and use a stacked-area graph, you get a pretty clear picture. Here it is, using nonfinancial debt (for reasons explained in the previous post):

All data from FRED.

What we see here is that there was an explosion of total debt during the Bush years; since then debt has stabilized relative to potential output. But there has been a redistribution, with private debt falling while public debt rises.
Arguably, this is exactly what needs to happen: the federal deficit is sustaining the economy while balance-sheet constrained private actors deleverage. ...
Once balance sheets are sufficiently repaired, private demand should recover, and the federal government will no longer need deficit spending to keep the economy afloat.
Obviously (at least to me) we should have been stabilizing things at a higher level, with less unemployment. But this is a picture not of runaway borrowing, but of progress being made in dealing with an excessive level of private debt.

Let me just add one note. So long as household balance sheets are still being repaired, demand will be too low and the economy will struggle to recover. Restoring balance sheets takes time -- the fall in housing values and the crash of financial markets took their toll on household finances and the damage is still being repaired. One of the biggest threats to household balance sheets is the loss of a job. Losing a job devastates household finances, and balance sheet repair is all but impossible for the unemployed. Thus, job creation is the first problem that needed to be addressed, and we have not done nearly enough to help to create job opportunities. More jobs could have saved many, many household balance sheets from disaster, and helped other households repair the damage at a much faster rate (and it would have also avoided the permanent costs to individuals and the economy associated with long-term unemployment).

But job creation is not the only way the government could have helped household balance sheets, and this could have been accomplished without increasing total debt. Imagine, for example, that the federal government had done more to help households that are struggling to pay their mortgages and are in danger of foreclosure. Private sector debt reduction -- mortgage, student loan, or credit card writedowns -- would have made the blue area in the graph fall even faster, and the red area would have increased faster to compensate as the government took this debt onto its balance sheet. But, importantly, the total amount of debt need not have changed. This simply transfers debt from the private to the public sector. (Note: This says nothing about the optimal level of public debt -- more public debt used for job creation programs and private sector debt reduction would have helped the economy recover even faster -- this is about the best mix of public and private debt for a given level of total debt).

The transfer of private sector debt to the public sector increases the rate at which households repair their balance sheets, and thus helps households return to normal (non-bubble) patterns of consumption faster. This helps GDP to recover faster as well and, since income would be higher but debt the same, allows us to pay off the same total debt, both public and private, from a higher income base (one could argue that the increase in household confidence from balance sheet repair would be offset by a decrease in confidence from higher public debt, but there's little evidence to support the latter effect, especially since our overall debt doesn't change). Thus, even though households will ultimately pay off the public debt, transferring some of the debt to the public sector temporarily allows them to wait until their situation improves before the tax bills for the debt come due (and some of the burden can be redistributed across income classes if that is desirable). That allows households to devote more of their income to consumption rather than bill paying -- which is important for households who are barely getting by as it is -- and the extra demand this creates helps the economy recover faster making it easier to pay off both the public and private debt.

Higher income, higher employment, and no change in total debt seems like a deal we ought to take, but fear from the wealthy that they might be asked to pay a larger share of the bills than others, or any share for that matter, the insistence from moralists that people should not be allowed to escape their debts (even if their problems were caused by the popping of a bubble that the experts told them wouldn't pop, or by other factors that they had no control over), and ideological opposition from conservatives to government programs of any kind are standing in the way.

Sunday, January 15, 2012

Who Invests in Agency Mortgage-Backed Securities?

AMBSI                              [via NY Fed]

Monday, December 19, 2011

Paul Krugman: Will China Break?

Uh-oh?:

Will China Break?, by Paul Krugman, Commentary, NY Times: Consider the following picture: Recent growth has relied on a huge construction boom fueled by surging real estate prices, and exhibiting all the classic signs of a bubble. There was rapid growth in credit — with much of that growth taking place not through traditional banking but rather through unregulated “shadow banking” neither subject to government supervision nor backed by government guarantees. Now the bubble is bursting — and there are real reasons to fear financial and economic crisis.
Am I describing Japan at the end of the 1980s? Or am I describing America in 2007? I could be. But right now I’m talking about China, which is emerging as another danger spot in a world economy that really, really doesn’t need this right now. ...
The most striking thing about the Chinese economy over the past decade was the way household consumption, although rising, lagged behind overall growth. At this point consumer spending is only about 35 percent of G.D.P., about half the level in the United States.
So who’s buying the goods and services China produces? Part of the answer is, well, us:... China increasingly relied on trade surpluses to keep manufacturing afloat. But the bigger story from China’s point of view is investment spending, which has soared to almost half of G.D.P.
The obvious question is, with consumer demand relatively weak, what motivated all that investment? And the answer, to an important extent, is that it depended on an ever-inflating real estate bubble. ...
And there was another parallel with U.S. experience: as credit boomed, much of it came not from banks but from an unsupervised, unprotected shadow banking system..: in China as in America a few years ago, the financial system may be much more vulnerable than data on conventional banking reveal.
Now the bubble is visibly bursting. How much damage will it do to the Chinese economy — and the world? ...
For what it’s worth, statements about economic policy from Chinese officials don’t strike me as being especially clear-headed. In particular, the way China has been lashing out at foreigners — among other things, imposing a punitive tariff on imports of U.S.-made autos that will do nothing to help its economy but will help poison trade relations — does not sound like a mature government that knows what it’s doing. ...
I hope that I’m being needlessly alarmist here. But it’s impossible not to be worried: China’s story just sounds too much like the crack-ups we’ve already seen elsewhere. And a world economy already suffering from the mess in Europe really, really doesn’t need a new epicenter of crisis.

Saturday, December 17, 2011

It Wasn't Fannie and Freddie

Richard Green:

It is possible to hold the following two views at the same time
(1) The executives for Fannie Mae and Freddie Mac should be held to account for their contributions to the crisis; and
(2) Compared with banks, shadow and otherwise, Fannie and Freddie were pikers in their contributions to the crisis.

For the Last Time, Fannie and Freddie Didn't Cause the Housing Crisis.

Tuesday, December 13, 2011

Repeating the "Big Lie"

If you are going to read this, be sure to read this first so you can properly evaluate the credibility of the author -- an author who insists, despite mountains of evidence to the contrary, that ACORN caused the crisis:

...Congressman Frank was one of the leaders of the effort in Congress to meet the demands of activists like ACORN for an easing of underwriting standards in order to make home ownership more accessible to more people. It was perhaps a worthwhile goal, but it caused the financial crisis...

That's nuts to put it mildly. See here, or any of the other many, many debunkings of this attempt to push the blame for the housing crisis on programs that tried to help the poor. The hope, of course, is that this will undermine support for social programs intended to help the disadvantaged -- that's the underlying agenda as the post below this one points out. For that reason, it's important not to let the "big lie" go unchallenged as it is repeated again and again by those supporting the right's political agenda.

Monday, December 05, 2011

Investor Speculation and the Housing Bubble

Research from Andrew Haughwout, Donghoon Lee, Joseph Tracy, and Wilbert van der Klaauw of the NY Fed shows that speculative behavior driven by highly leveraged loans was "much more important in the housing boom and bust during the 2000s than previously thought." Thus, this supports the limits on leverage I and others have been calling for as a means of limiting the fallout from the collapse of asset bubbles:

“Flip This House”: Investor Speculation and the Housing Bubble, by Andrew Haughwout, Donghoon Lee, Joseph Tracy, and Wilbert van der Klaauw, FRBNY: The recent financial crisis—the worst in eighty years—had its origins in the enormous increase and subsequent collapse in housing prices during the 2000s. While the housing bubble has been the subject of intense public debate and research, no single answer has emerged to explain why prices rose so fast and fell so precipitously. In this post, we present new findings from our recent New York Fed study that uses unique data to suggest that real estate “investors”—borrowers who use financial leverage in the form of mortgage credit to purchase multiple residential properties—played a previously unrecognized, but very important, role. These investors likely helped push prices up during 2004-06; but when prices turned down in early 2006, they defaulted in large numbers and thereby contributed importantly to the intensity of the housing cycle’s downward leg. ...
At the peak of the boom in 2006, over a third of all U.S. home purchase lending was made to people who already owned at least one house. In the four states with the most pronounced housing cycles, the investor share was nearly half—45 percent. Investor shares roughly doubled between 2000 and 2006. While some of these loans went to borrowers with “just” two homes, the increase in percentage terms is largest among those owning three or more properties. In 2006, Arizona, California, Florida, and Nevada investors owning three or more properties were responsible for nearly 20 percent of originations, almost triple their share in 2000.
Because investors don’t plan to own properties for long, they care much more about reducing their down-payments than reducing their interest rates. The expansion of the nonprime mortgage market during the 2000s provided the perfect opportunity for optimistic investors to get low-down-payment credit, albeit at high interest rates..., investors were far more likely than owner-occupants to use nonprime credit to make their purchases, especially at the peak. ...
So far, we have half the story: Optimistic investors—speculators—used low-down-payment, nonprime credit to place highly leveraged bets on the housing market, perhaps facilitated for some by reporting an intention to live in the house. Because they didn’t have to put much money at risk, these investors were able to continue to buy housing even as prices rose further. All of these developments were especially noticeable in Arizona, California, Florida, and Nevada. Longstanding tradition in the mortgage lending business and the predictions of economic models hold that investors will quickly default if prices begin a persistent fall. This is what happened starting in 2006...

An interesting feature ... that we document in our study is that borrowers with multiple mortgages start out being better risks—their loans were less likely to become seriously delinquent before 2006—but end up accounting for a disproportionate amount of defaults thereafter. What changed in 2006? Prices started to fall. In 2007-09, investors were responsible for more than a quarter of seriously delinquent mortgage balances nationwide, and more than a third in Arizona, California, Florida, and Nevada. While this sharp change in the risk assessment of owners of three or more properties may not seem surprising, it also applied to investors with “just” two homes. If there were reason to believe this latter group was less prone to act like investors, the data don’t support this view....
We conclude that investors were much more important in the housing boom and bust during the 2000s than previously thought. The availability of low- and no-down-payment mortgages in the nonprime sector enabled investors to make these bets. This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family. In the end, even the value of the 20 percent down-payments made by responsible, prime borrowers was wiped out—leaving the housing market, and the economy, in the vulnerable state we find them in today.
The idea that asset price booms may be driven by optimistic or speculative investors who make highly leveraged bets on asset prices, then quickly default if their expectations are not realized, is not new. Indeed, John Geneakoplos of Yale University argues that such behavior is a fundamental driver of what he calls the “leverage cycle.” To our knowledge, our study provides the first direct evidence that such behavior may have been important in the 2000s housing cycle.
But what, if anything, does it teach us about policy? We conclude that it’s very important for lenders (and regulators) to manage leverage as asset bubbles are inflating. In the 2000s, securitized nonprime credit emerged to allow leverage to increase, with effects that extended far beyond this sector, including spillovers from defaulted mortgages to the value of other properties (see Campbell, Giglio, and Pathak [2009]). Effective regulation of speculative borrowing, like what is being attempted in China today, may be needed to prevent this kind of crisis from recurring.

This is pretty far away from the (false) story that Republicans tell about the crisis being caused by the government forcing banks to make loans to unqualified borrowers.

Tuesday, November 29, 2011

How to Avoid Public Anger over Bank Bailouts

How to avoid public anger over bank bailouts, e.g. the recent uproar over the report from Bloomberg that too big to fail banks made $13 billion on loans from the discount window:

Better than a Bank Bailout: A Federal Lottery

(I'm not sure if I'm serious about this or not, the point is that we need to focus policy on people, not banks.)

Friday, November 18, 2011

Disparities in Mortgage Lending

Richard Green highlights a new report on mortgage lending:

Read CRL on Disparities in Mortgage Lending, by Richard Green: The Center for Responsible Lending's research team of Carolina Reid (who has been working tirelessly at developing data on subprime mortgages for some time now), Roberto Quercia, We Li, and Debbie Grunstein Bocian has produced Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures. They argue

(1) The nation is not even halfway through the foreclosure crisis. Among mortgages made between 2004 and 2008, 6.4 percent have ended in foreclosure, and an additional 8.3 percent are at immediate, serious risk.
(2) Foreclosure patterns are strongly linked with patterns of risky lending. The foreclosure rates are consistently worse for borrowers who received high-risk loan products that were aggressively marketed before the housing crash, such as loans with prepayment penalties, hybrid adjustable-rate mortgages (ARMs), and option ARMs. Foreclosure rates are highest in neighborhoods where these loans were concentrated.
(3)The majority of people affected by foreclosures have been white families. However, borrowers of color are more than twice as likely to lose their home as white households. These higher rates reflect the fact that African Americans and Latinos were consistently more likely to receive high-risk loan products, even after accounting for income and credit status.

It is really striking how African-Americans and Hispanics were steered into crappy loans, even controlling for income and credit history. Beyond all this, the web site accompanying the report has really nicely organized data on severely delinquent loans and loans in foreclosure by state, race, ethnicity and MSA.

Thursday, October 20, 2011

How to Clean Up the Housing Mess

[Gave a talk this morning, see here, and traveling this afternoon, so just a quick drive by post from the airport for now.]

Alan Blinder:

How to Clean Up the Housing Mess, by Alan Blinder, Commentary, WSJ: About four years ago, as the housing bust worsened, our country faced an entirely predictable problem: A huge wave of foreclosures was headed our way. The issue of the day was how to stop it before it engulfed the entire economy. My suggestion then was to revive the Depression-era Home Owners' Loan Corporation, which refinanced about a tenth of all the mortgages in America and closed its books with a small profit. Never mind the details; the suggestion was ignored. Maybe there were better ideas, anyway.
Sadly, however, we did almost nothing to stop the predicted foreclosure wave, which is now drowning us. The issue at this late date is how we can mitigate the damage.
One oft-repeated answer comes from the intellectual descendants of Andrew Mellon and Herbert Spencer: liquidate, liquidate, liquidate. Let the housing market find its natural bottom, and the chips fall where they may.
I beg to differ. Some of the reasons are humanitarian. Millions of foreclosures are ruining millions of lives and devastating many communities. We can do better than Social Darwinism.
But many of the reasons are strictly economic. The seemingly-endless housing slump is dragging down our economy. By now, massive underbuilding during the slump far exceeds the overbuilding during the boom. So, by rights, a shortage of houses should be pushing up house prices, incentivizing home builders, and boosting growth in gross domestic product. Instead, actual and prospective foreclosures hang over the housing market like a wet blanket.
That we let this happen is tragic. ...

Thursday, October 06, 2011

The Mortgage Interest Deduction

Richard Green says it's time to reform the Mortgage Interest Deduction:

My testimony to Senate Finance Committee on Housing and Tax Reform, by Richard Green: I testified today. Here is how the written testimony opens:
...I have long thought that the Mortgage Interest Deduction is a residual of the 1913 tax code, accomplishes little that its supporters claim for it, pushes capital away from plant and equipment toward housing, and benefits high income (although perhaps not very high income) households more than the remainder of the country.
I will divide my remarks into 8 parts; (1) I will argue that the Mortgage Interest Deduction is a residual of the 1913 tax code, and was not created to encourage homeownership; (2) that those on the margin of homeowning get little-to-no benefit from the Mortgage Interest Deduction, and that the policy therefore does little to encourage homeownership; (3) that the Mortgage Interest Deduction does encourage those who would be homeowners anyway to purchase larger houses than they otherwise would; (4) that even in the absence of the Mortgage Interest Deduction, owner-occupants receive a large tax benefit; (5) that phasing out the Mortgage Interest Deduction would encourage households to pay down their mortgages more quickly, and would therefore encourage households to rely less on leverage; (6) household deleveraging would lead to greater market stability, but would also mean that the revenues generated by the elimination of the deduction would be smaller than static estimates suggest; (7) at a time when the housing market remains quite weak, it is important that the Mortgage Interest Deduction be phased out carefully; (8) that if we do wish to encourage homeownership via tax policy, a targeted, refundable credit would be more effective than the current Mortgage Interest Deduction.

Thursday, August 25, 2011

No Evidence That Government Housing Policy Caused the Crisis

This shouldn't be news -- the idea that the CRA or GSEs caused the crisis doesn't hold up against the evidence. But people still believe the myth, so it doesn't hurt to have one more paper showing that there is "little evidence to support the view that either the CRA or the GSE goals caused excessive or less prudent lending than otherwise would have taken place. ... In fact, the evidence suggests that loan outcomes may have been marginally better in tracts that were served by more CRA-covered lenders":

The Subprime Crisis: Is Government Housing Policy to Blame?, by Robert B. Avery and Kenneth P. Brevoort, Working paper, FRB: Abstract: A growing literature suggests that housing policy, embodied by the Community Reinvestment Act (CRA) and the affordable housing goals of the government sponsored enterprises, may have caused the subprime crisis. The conclusions drawn in this literature, for the most part, have been based on associations between aggregated national trends. In this paper we examine more directly whether these programs were associated with worse outcomes in the mortgage market, including delinquency rates and measures of loan quality. We rely on two empirical approaches. In the first approach, which focuses on the CRA, we conjecture that historical legacies create significant variations in the lenders that serve otherwise comparable neighborhoods. Because not all lenders are subject to the CRA, this creates a quasi-natural experiment of the CRA's effect. We test this conjecture by examining whether neighborhoods that have been disproportionally served by CRA-covered institutions historically experienced worse outcomes. The second approach takes advantage of the fact that both the CRA and GSE goals rely on clearly defined geographic areas to determine which loans are favored by the regulations. Using a regression discontinuity approach, our tests compare the marginal areas just above and below the thresholds that define eligibility, where any effect of the CRA or GSE goals should be clearest. We find little evidence that either the CRA or the GSE goals played a significant role in the subprime crisis. Our lender tests indicate that areas disproportionately served by lenders covered by the CRA experienced lower delinquency rates and less risky lending. Similarly, the threshold tests show no evidence that either program had a significantly negative effect on outcomes.

Monday, August 22, 2011

The US Jobless Recovery: Assertive Management Meets the Double Hangover

Robert Gordon says the changing balance of power between labor and management helps to explain the jobless recovery:

The case of the US jobless recovery: Assertive management meets the double hangover, by Robert J. Gordon, Vox EU: High and persistent unemployment in the US has emerged as one of the most important macroeconomic legacies of the 2007–09 world economic crisis. While the decline of business activity in the US was no larger than in Europe, the US is an outlier in its outsized response of the unemployment rate to its decline in output (IMF 2011).

Here we quantify the shortfall of US employment—some 10.4 million missing jobs—and ask: Why did the number of jobs decline so much and why has it recovered so little? Two sets of causes stand out.

  • First, there has been a changing balance of economic power in the US between management and labour in the past two decades that has led to more aggressive firing of workers when business profits head south.
  • Second, the large negative output gap (actual real GDP below trend or potential) is not shrinking, due to the “double hangover” persisting in the aftermath of the housing bubble.

By explaining why the recovery of aggregate demand has been so weak, we provide an understanding of the refusal of the large negative output gap to shrink—a refusal shared by its twin, the employment gap.

Dimensions of the job shortfall: 10.4 million missing jobs in the recovery

Part of the job shortfall is reflected in the rise of measured unemployment. The rest comes from a decline in labour-force participation. The employment-population ratio (E/P in the figures) measure combines the two.1 As shown in Figure 1, the ratio (as shown by the green line) was 64.3% at the NBER business cycle peak in 2001:Q1. By the next peak (2007:Q4) it had fallen to 62.8% (blue line).

  • This descent from 64.3% to 62.8% led numerous commentators to lament that the 2001-07 US economic recovery was not a complete recovery. Indeed, the seemingly ‘minor’ 1.5% drop in the ratio represents more than 3.6 million “missing” jobs—even before the recent recession.
  • In mid-2011, the ratio (wavering red line) is only 58.1%—far below 2001 and 2007 levels.

How many jobs are lacking? Figure 2 shows that the shortfall amounts to 10.4 million missing jobs compared to the 2007 version of normality and a much higher 14.1 million missing jobs compared to the 2001 definition. In the rest of this analysis, we take the less ambitious 2007 value for the ratio of 62.8% as the relevant benchmark.

Figure 1. Actual vs. two criteria of normal employment per capita (2000 Q1—2011 Q2)

Figure 2. Actual vs hypothetical employment, 2000 Q1—2011 Q2

What caused the destruction of 10.4 million jobs?

The first explanation is the change in managerial power. For decades I have been tracking the responsiveness of labour market variables to the output gap (see most recently Gordon 2003 and 2010).

  • Before the mid-80s a 1% change in the output gap would generate roughly a response of 0.45% in the similarly-defined gap of the Employment-Population ratio.
  • The rest of the 1% shortfall of real GDP would show up in declining productivity and in hours per employee.

The observed ratios in the data for 1954–86 are roughly consistent with the predictions made by Arthur Okun (1962) in what soon became christened as ‘Okun’s Law’.

After the mid-1980s, however, these responses changed in a process I have described as the “Demise of Okun’s Law”. The response of the ratio jumped from 0.45 in the 1954–86 interval to 0.78 in an otherwise identical regression equation applied to 1986–2011. This means that when output slumps, employment drops much more than it would have done previously.

The disposable worker hypothesis

When the economy begins to sink—like the Titanic after the iceberg struck—firms begin to cut costs any way they can; tossing employees overboard is the most direct way. For every worker tossed overboard in a sinking economy prior to 1986, about 1.5 are now tossed overboard. Why are firms so much more aggressive in cutting employment costs? My “disposable worker hypothesis” (Gordon 2010) attributes this shift of behaviour to a complementary set of factors that amounts to “workers are weak and management is strong.” The weakened bargaining position of workers is explained by the same set of four factors that underlie higher inequality among the bottom 90% of the American income distribution since the 1970s—weaker unions, a lower real minimum wage, competition from imports, and competition from low-skilled immigrants.

But the rise of inequality has also boosted the income share of the top 1% relative to the rest of the top 10%. In the 1990s corporate management values shifted toward more emphasis on shareholder value and executive compensation, with less importance placed on the welfare of workers, and a key driver of this change in attitudes was the sharply higher role of stock options in executive compensation. When stock market values plunged by 50% in 2000–02, corporate managers, seeing their compensation collapse with profits and the stock market, turned with all guns blazing to every type of costs, laying off employees in unprecedented numbers. This hypothesis was validated by Steven Oliner et al (2007), who showed using cross-sectional data that industries experiencing the steepest declines in profits in 2000–02 had the largest declines in employment and largest increases in productivity.

Why was employment cut by so much in 2008–09? Again, as in 2000–02, profits collapsed and the stock market fell by half. Beyond that was the psychological trauma of the crisis; fear was evident in risk spreads on junk bonds, and the market for many types of securities dried up. Firms naturally feared for their own survival and tossed many workers overboard.

Three million missing jobs due to altered management response to recession

Figure 3 provides the results of a simple experiment regarding the loss of jobs.

  • Labour-market responses to business-cycle shortfalls were quite different when estimated with regressions over the 1954–1986 (“early”) and 1986–2011 (“late”) sample periods.
  • Responses of employment and other labour market variables were much larger in the “late” period (as predicted by the disposable worker hypothesis).

Given the decline in the output gap, simulated employment fell short by 9.82 million with the “late” dynamic adjustment behaviour, quite close to the 10.39 million actual shortfall. Yet with the “early” coefficients employment fell by a substantial but significantly smaller total of 6.72 million.

Figure 3. Actual vs hypothetical and dynamic simulation employment 2007 Q4—2011 Q2

Thus labour’s weakened bargaining situation with changes in management behaviour toward greater emphasis on cost-cutting in recessions accounts for roughly 3 million lost jobs in the current jobless recovery. The other 6.72 million would have been lost even with the earlier responses because the output gap was so large.

Why is aggregate demand so weak? The double hangover explanation

This explains the outsized job cuts that came in response to the recession. But we are still left with the question of explaining why the output gap is still so negative 2 years after the NBER business-cycle trough (June 2009).

America’s double hangover goes back to the consumption binge that accompanied the 2000–06 housing bubble.

  • The residential construction industry was building houses at a pace much higher than the underlying rate of household formation.
  • Housing demand was boosted by speculators who bought new condominiums hoping to “flip” them for easy profits and by mortgage brokers who were out combing the weeds for low-income families to whom they could peddle dangerous adjustable-rate interest-only mortgages.
  • Consumption of all types, particularly of durable goods like autos and appliances and services like nail salons and child tutoring, grew faster than income, implying an ever-declining personal saving rate.

Households could use not only their own income to buy consumer goods and services but could finance expenditures in excess of income through second mortgages and refinancing that allowed them to drain cash from their appreciating residences.

Once the bubble burst and house prices began to tumble, the double hangover began.

  • The first hangover was the excess supply of housing.

This led to a glut of unsold houses and condos that put continuous downward pressure on home prices. Foreclosures added to the glut; each foreclosure raises the supply of vacant housing units by one unit while increasing the demand for housing units by zero, because the foreclosed family has by definition defaulted on its mortgage and cannot obtain credit for several years into the future. Many homeowners avoided foreclosure but were “underwater,” with houses now worth less than the face value of the mortgage and thus faced the hapless choice of draining resources to pay the mortgages or defaulting, with the consequence of a ruined credit rating.

  • The second hangover was the impact of excessive indebtedness.

Just as consumption could exceed income as debts were being run up, so the second hangover required consumption to be below income while debts were paid off. The ratio of total household indebtedness to personal disposable income rose from 90% in 1995 to 133% in 2007 and has since fallen just to 120%. Year after year of saving and underconsumption will continue as households continue to pay off debts.

Just as hangovers have negative impacts on family members and job performance, so the double hangover of the slump in residential housing investment and in personal consumption expenditures has spilled over to other components of GDP. Nonresidential investment was hit as firms supplying consumers and home builders reduced their need for new computers, machinery, factories, office buildings, and hotels. State and local governments, by law required to balance their current budgets, began to lay off school teachers and other employees.

Translating lost spending into lost jobs

Table 1 lists the major components of spending and the subcomponents and displays the percentage shortfalls in output. Then we use the shares of each subcomponent in the total output shortfall to calculate the jobs shortfall for each subcomponent. Notice that this method treats all components of spending as equally labour-intensive, an acceptable approximation for this exercise.

  • The shortfall of consumer-services spending is the largest subcomponent; it translates into 3.59 million missing jobs.2
  • Next come the 2.17 million lost jobs in residential construction (on top of those lost between 2006:Q1 and 2007:Q4),
  • The 1.76 million in nonresidential structures,
  • 1.65 million in consumer durables,
  • 1.47 million in state and local government, and
  • 1.38 million in equipment and software.
The overall simulated job shortage would have been 11.88 million but for the helpful performance of net exports. Its positive contribution brings the figure to a smaller but still unfortunate 10.39 million.

Table 1. Contribution of GDP components to output gap and employment shortfall 2011:Q2

Vox-gordon

Conclusion

A change in labour market dynamics accounts for about 3 million of the over 10 million missing jobs in mid-2011. This shift can be traced to weakness of labour and growing assertiveness of management. But even with the labour-market institutions of 1955 through 1985, the weakness of aggregate demand in the recession and recovery would have cost roughly 7 million jobs instead of the 10 million jobs that are actually missing compared to normal economic conditions such as occurred in 2007.

The recession itself is usually and correctly traced to the collapse of the housing bubble and the post-Lehman financial panic. But the recovery has been unusually weak, completely unlike the economy’s rapid bounce-back in 1983–84, and this requires an explanation as well. The best place to start is the double-hangover approach, which explains not just the collapse of residential structures investment but also the continued and growing weakness in consumer spending. Perhaps the most surprising result of this essay is that the spending component responsible for the largest share of the missing jobs is not residential investment but consumer spending on services.

This is not the place to talk about remedies.

  • The spending decomposition shows that fiscal policy has failed in that the government spending sector has made the output gap shortfall worse, not better.
  • The double-hangover theory helps to explain why monetary policy is impotent, no matter how much quantitative easing is attempted.

Authors including Hall (2011) focus on the zero lower bound as the crux of the Fed’s problem and ignore the complementary problem of low interest-insensitivity of consumers who are trying to pay off old debt instead of taking on new debt.

The failure of consumer and investment spending (IS) to respond to an ever-lower 10-year government bond rate, which fell below 2.3% this past week, demonstrates that the problem is an IS curve that is very steep if not vertical at an output level far below that necessary to generate a normal level of employment. The vertical IS curve is just as relevant for understanding today’s economy as that of the 1930s, and it plays an essential role in the twelfth edition of my macro textbook (2012) in explaining why monetary policy may at times be impotent, just as it did in the first edition more than three decades ago.

References

Estevão, Marcello and Evridiki Tsounta (2011), ‘Has the Great Recession Raised US Structural Unemployment?’, IMF Working Paper, WP/11/105, May.

Gordon, Robert J (2003), ‘Exploding Productivity Growth: Context, Causes, and Implications’, Brookings Papers on Economic Activity. 2:207-279.

Gordon, Robert J (2010), ‘Okun’s Law and Productivity Innovations’, American Economic Review Papers and Proceedings,100(2):11-15.

Gordon, Robert J (2012), Macroeconomics, 12th edition. Pearson/Addison-Wesley.

Hall, Robert E (2011), ‘The Long Slump’, American Economic Review,101(2):431-469.

Okun, Arthur M (1962), ‘The Gap between Actual and Potential Output’, Proceedings of the American Statistical Association, in Edmund S Phelps (ed.), Problems of the Modern Economy. Norton, 1965.

Oliner, Stephen D, Daniel E Sichel, and Kevin J Stiroh (2007), ‘Explaining a Productive Decade’, Brookings Papers on Economic Activity, 1:81-137.

Footnotes

1 This is defined as the employment rate (ratio of employment to the labour force) times the labour-force participation rate.

2 Compared to the jobs that would be available if the economy were operating at potential real GDP as in 2007:Q4

Thursday, July 28, 2011

SF Fed: Residential Construction Won't Fully Recover Until 2014

There's a new paper from the San Francisco Fed discussing how long it will take for residential construction to rebound to normal levels. Here's the abstract:

When Will Residential Construction Rebound?, by William Hedberg and John Krainer, FRBSF Economic Letter: Over the past several years, U.S. housing starts have dropped to around 400,000 units at an annualized rate, the lowest level in decades. A simple model of housing supply that takes into account residential mortgage foreclosures suggests that housing starts will return to their long-run average by about 2014 if house prices first stabilize and then begin appreciating, and the bloated inventory of foreclosed properties declines.

The paper notes that price adjustment alone is not enough, "a significant easing of the drag on housing stemming from the inventory of foreclosed homes is also needed." For example, in this graph showing the predicted path for housing starts, the red line assumes a 50,000 per quarter decline in the inventory of foreclosed homes starting in 2012, which as the paper notes is an optimistic assumption. The black line assumes no decline at all. When foreclosures decline as assumed for the red line, the recovery time improves substantially (but note that the prediction of a recovery by 2014 depends upon the optimistic assumption about how fast foreclosures will drop):

An implication of this research is that polices that help homeowners escape foreclosure would speed the recovery of the housing market.

Monday, July 18, 2011

Paul Krugman: Letting Bankers Walk

There's no good reason to go easy on the bankers:

Letting Bankers Walk, by Paul Krugman, Commentary, NY Times: Ever since the current economic crisis began, it has seemed that five words sum up the central principle of United States financial policy: go easy on the bankers. ...
Why the kid-gloves treatment? Money and influence no doubt play their part... But officials have also argued at each point of the process that letting banks off the hook serves the interests of the economy as a whole.
It doesn’t. ... And right now, the arguments that officials are reportedly making for a quick, bank-friendly settlement of the mortgage-abuse scandal don’t make sense. ...
As far as I can tell, there are two principal arguments being made for letting the banks off easy. The first is the claim that resolving the mortgage mess quickly is the key to getting the housing market back on its feet. The second ... is the claim that getting tough with the banks would undermine broader prospects for recovery. ...
The claim that removing the legal cloud over foreclosure would ... help support housing prices ... leaves me scratching my head. It would just accelerate foreclosures, and ... that would mean more homes offered for sale... An increase in the supply of a good usually pushes that good’s price down, not up. ...
You might point to the mortgage relief that would supposedly be extracted as part of the settlement. But if mortgage relief is that crucial, why isn’t the administration making a major push to reinvigorate its own Home Affordable Modification Program, which has spent only a small fraction of its money? Or if making that program actually work is hard, why should we believe that any program instituted as part of a mortgage-abuse settlement would work any better?
Sorry, but the case that letting banks off the hook would help the housing market just doesn’t hold together.
What about the argument that getting tough with the banks would threaten the overall economy? Here the question is: What’s holding the economy back?
It’s not the state of the banks..., those markets have ... returned to normal, in large part because everyone now knows that banks will be bailed out if they get in trouble.
The big drag on the economy now is the overhang of household debt, largely created by the $5.6 trillion in mortgage debt that households took on during the bubble years. Serious mortgage relief could make a dent in that problem; a $30 billion settlement from the banks ... would not.
So when officials tell you that we must rush to settle with the banks for the sake of the economy, don’t believe them. We should do this right, and hold bankers accountable for their actions.

Sunday, July 10, 2011

Bubble Illusion

A couple of recent conversations have convinced me that many people have "bubble illusion." When they talk about how much they have lost on their houses and in the stock market, and how that has affected their feelings of economic certainty, etc., the losses are almost always expressed relative to the peak bubble value rather than to a realistic assessment of what the house or stock was actually worth during the bubble years.

I'm not sure how much the additional pessimism that "bubble illusion" causes matters for people's outlook about their current situation, and thus how much it affects the willingness to spend -- that seems to be related more to actual values today than to how much was lost. But it may affect the goals people set for when they will feel "whole" once again, and thus have an effect on spending through that channel. In any case, the illusion does seem to be present.

Tuesday, July 05, 2011

"We Do Not Blame CRA"

An email from one of the authors of Reckless Endangerment, Josh Rosner, pushes back against my post on the book and how it is being used by conservatives to try to blame the financial crisis on Fannie, Freddie, the CRA, and Democrats:

I was a little disappointed to read your blog. Having been a housing and mortgage finance analyst since the early 1990's I have lived through build-up and crisis, having made warnings all along the way.
If you read my book with Gretchen you will realize we do not blame CRA. Also, if you read the book you might have a different view than you would by reading partisan reviews of it.
It is not a partisan book, rather the Dems want to pretend the GSE's had no part of it just as Repubs want to say it was all the GSE's. We don't take either stance.

Let me make several points in response.

First, I didn't mention the CRA when I was talking about the book -- I was careful not to. When the book is discussed, I only talk about Fannie, Freddie, and Democrats (see the quote below, for example). I did bring up the CRA and discussed why the notion that the CRA caused the crisis is at odds with the evidence, but only after trying to turn the discussion toward the more general story the right is trying to sell to the public. It wasn't meant to be connected to the book.

Second, with that said, I think I could have done a better job of introducing the topic. I wrote:

That’s why I was so disappointed to see the new book by Gretchen Morgenson and Josh Rosner, Reckless Endangerment, being blaming the financial crisis on Fannie, Freddie, and Democrats. The book has been highlighted recently by George Will and David Brooks, and it joins a chorus of conservative voices promoting the idea that government policies to encourage home ownership among middle and low income households is at the heart of the financial crisis.

I might have said:

That’s why I was so disappointed to see the new book by Gretchen Morgenson and Josh Rosner, Reckless Endangerment, being used by George Will, David Brooks, and others to revive the argument that government policies to encourage home ownership among middle and low income households is at the heart of the financial crisis. This argument, in essence, blames the crisis on "low-income families, who just happened to be disproportionately non-white and immigrant".

Third, and most importantly, if they "don't take either stance," then I hope that the authors are pushing back just as hard, or harder, against the way the book is being used by those on the right trying to sell the idea that Fannie and Freddie, and yes, the CRA, caused the crisis. When George Will wrote:

The book’s subtitle could be: “Cry ‘Compassion’ and Let Slip the Dogs of Cupidity.” Or: “How James Johnson and Others (Mostly Democrats) Made the Great Recession.” The book is another cautionary tale about government’s terrifying self-confidence. It is, the authors say, “a story of what happens when Washington decides, in its infinite wisdom, that every living, breathing citizen should own a home.”
The 1977 Community Reinvestment Act pressured banks to relax lending standards to dispense mortgages more broadly across communities. In 1992, the Federal Reserve Bank of Boston purported to identify racial discrimination in the application of traditional lending standards to those, Morgenson and Rosner write, “whose incomes, assets, or abilities to pay fell far below the traditional homeowner spectrum.”

Did he get an email? I was careful not to say the authors blamed the CRA, but I don't see the same care in the two paragraphs above. The CRA and the authors are discussed as though the authors are making this argument. Have they asked for a correction from the Washington Post? Have they demanded that others pulling the same tricks rescind their words? I don't know if they have or not, if they have, great -- I encourage you to get more aggressive and public in your protests against the book being used for these purposes. But if not, I would ask why I got an email, but others didn't.

Finally, we seem to agree that it wasn't the CRA. What we disagree about is the role of Fannie and Freddie. I expected the authors would disagree with my view that Fannie and Freddie did not play an important role in causing the crisis. After all, as noted above, the book disagrees with Democrats who "pretend" that the GSEs did not play an important role. That's why I presented a fact based argument (as opposed to pretending) as to why I think this points a finger in the wrong direction.

Update: Here are a few more recent references on this:

Joe Stiglitz and Barney Frank respond to the book's "allegations" (this is one of the reasons I said the book blames Democrats):

Joseph Stiglitz, Barney Frank Respond to 'Reckless Endangerment' Allegations

And here are two posts from Richard Green, the Director of the USC Lusk Center for Real Estate. Richard holds the Lusk Chair in Real Estate in the School of Policy, Planning, and Development and the Marshall School of Business, and he is the former principal economist and director of financial strategy and policy analysis at Freddie Mac (along with his other credentials):

Mark Thoma and Dean Baker are correct: Fannie Mae and Freddie Mac did not start the crisis
Kurt Paulson adds more evidence that FF were not leaders into the crisis

The last link addresses the charge made in the book and elsewhere that Fannie and Freddie led a decline in lending standards.

Wednesday, June 15, 2011

Kash Mansori: Has the Bad Housing Market Reduced Labor Mobility?

Kash Mansori:

Has the Bad Housing Market Reduced Labor Mobility?, by Kash Mansori: Economists Colleen Donovan and Calvin Schnure have written an interesting new paper examining whether the fall in house prices since 2007 in the US -- which has left many home-owners owing more on their house than it is worth -- created a lock-in effect that depressed labor mobility. ...

The evidence presented in this paper indicates that the fall in house prices has indeed caused a "lock-in" effect, but has not significantly impacted labor market efficiency. Here's the abstract:

Locked in the House: Do Underwater Mortgages Reduce Labor Mobility?: The collapse of the housing boom led to an unprecedented number of homeowners who are “underwater”... These homeowners cannot move without incurring significant losses on their homes, possibly causing a “lock-in” effect reducing geographic mobility. This raises concerns that a reduction in labor market mobility may hamper the ability to move to accept employment in another geographic market, degrading labor market efficiency and contributing to higher structural unemployment.

This paper ... finds significant evidence of a lock-in effect. The lock-in, however, results almost entirely from a decline in within-county moves. As local moves are generally within the same geographic job market, this decline is not likely to affect labor market matching. In contrast, moves out-of-state, which are more likely to be in response to new employment opportunities, show no decline, and in fact are higher in counties with greater house price declines. Housing market lock-in does not appear to have degraded the efficiency of the labor market and does not appear to have contributed to a higher unemployment rate.

This is a significant piece of evidence against the "structural unemployment" explanation for the US's high and persistent unemployment rate... [T]he underwater mortgage "lock-in" phenomenon that has been cited as the primary reason why the US's labor market suddenly got so much worse starting in 2008 simply does not match the evidence. As a result, if we want to understand why unemployment has been so persistently high in the US since 2008, we have to look beyond "structural" or supply-side explanations. Once again, the far simpler explanation seems to better match the evidence: there's just not enough demand, so businesses aren't hiring, and people remain unemployed.

If the problem is structural, there's not a lot that policy can do to help in the short-run. Social insurance can ease the pain. Government can provide short-term employment to tide workers over, create incentives for both workers and firms to relocate, provide retraining, etc., but these problems take time to work themselves out. However, if the problem is lack of demand, then there is much more that policymakers can do to help the economy get back on its feet. The key is to offset the fall in demand through monetary and fiscal policy measures so that businesses will be willing to hire people again.

Wednesday, May 25, 2011

Brad Delong: Built to Bust

Brad Delong:

Built to Bust, by J. Bradford DeLong, Commentary, Project Syndicate: In the mid-2000’s, the United States had a construction boom. From 2003-2006, annual construction spending rose to a level well above its long-run trend. Thus, by the start of 2007, the US was, in essence, overbuilt: about $300 billion in excess of the long-run trend in construction spending.
When these buildings were constructed, they were expected to more than pay for themselves. But their profitability depended on two shaky foundations: a permanent fall in long-term risky real interest rates, and permanent optimism about real estate as an asset class. Both foundations collapsed.
By 2007, therefore, it was reasonable to expect that construction spending in the US would be depressed for some time to come. Since cumulative construction spending was $300 billion above trend, it would have to run $300 billion below trend over a number of years in order to return to balance.
So, in 2007, everyone expected a construction-led slowdown. And, starting that year, construction spending did indeed fall below trend. But we were expecting a minor decline: a fall in construction spending below trend of $150 billion a year for two years or $100 billion a year for three years or $75 billion a year for four years. Instead, spending fell $300 billion below trend in 2007 alone, and has remained depressed for four years. Moreover, there is no prospect of anything like a rapid return to normal levels. ...[continue reading]...

Thursday, April 28, 2011

Joe Stiglitz and Joe Gagnon Debate QEII

This comes via Mike Konczal (who has additional comments):

Mike adds:

Side note: Gagnon earlier in his talk said that “one of the biggest goals of QEI was to push down the mortgage rate to spark a refinancing boom to encourage households and enable households to reduce their expenditures and repair their balance sheets and be able to spend again. That worked not quite as well as we hoped because the administration’s program for getting underwater borrowers to borrow didn’t work and I think that’s a true disaster that has no excuse. I have nothing but incredible, there’s just, the blame the administration on not doing this is just incredible. This could have been a huge success. We got the lowest 30-year mortgage rates in history and we couldn’t take advantage of them to the extent that we could. We got about a trillion dollars in refinancing when we should have gotten two or three trillion dollars in refinancing.” I haven’t heard this critique before and I thought it was really interesting.

Tuesday, April 26, 2011

The Fed Should Have Taken More Responsibility for the Housing Bubble

As I was searching for something else, I came across this post from July 2005 that I completely forgot I had written:

The Fed Should Take More Responsibility for the Housing Bubble: I didn’t find much in Greenspan’s testimony over and above what has already been noted here previously.  ...
The acknowledgment that incoming data have indicated some downside risk is fairly new. ...  The uncertainties he's referring to are rising input costs, particularly labor and oil, an increase in long-term interest rates, and the potential problems that could cause in the housing market.
It’s interesting to me that the Fed is not taking responsibility for the housing bubble even though monetary policy causing low interest rates had a hand in creating it.  If, in fact, low interest rates have caused a misallocation of resources towards the housing sector such that there are now risks, and there's a case to be made that it has, then the Fed should be more active and forceful in dealing with and forestalling the potential consequences.  That is, if Fed policy has enticed households to make decisions that put them at risk over the long-run, decisions they would not have made if the interest rate were at its natural level, then the Fed has a responsibility to do more than wash its hands of this sector of the economy and say its only role is to clean up after any crash that might occur. ...
Update #1:  Clarifying a bit, I am ready to believe those who say there is no significant deviation from fundamentals and hence less to worry about than if it were a true bubble (except for some areas such as coastal regions), though there are risks and it is the Fed's hand in creating those risks that I am addressing.  Nobody knows for sure how vulnerable this sector is so it is good policy to attenuate such risks to the extent possible.

My complaint is the way in which the Fed has disassociated itself from any responsibility for creating the environment that caused risks to emerge.  For example, the Fed could be more aggressive on the regulatory front in an attempt to ensure that low interest rates do not induce excessive risk taking by households, especially those living near the margin that will be most vulnerable to increases in interest rates.  It's really nice to get people into houses - I'm all for that, one hundred percent - but not if it causes financial distress and years of cleanup afterward (there's that bankruptcy bill thing as well) as households are induced to assume more risk than they can handle.

I suppose in the end we can say it's a free market and people should have known better, that they should have been more forward looking, but when prices are set below equilibrium in an attempt to stimulate the economy, market intervention to manipulate interest rates is present making the fundamentals themselves a result of policy intervention, and that has consequences. ...

Can't say I called the bubble, but I can say I called for caution and 'just in case' action.