Maybe it was NGDP all along

Phoenix is growing again:

At the height of Phoenix’s excess, in 2005, homebuilders were constructing 4,000 homes a month, bulldozing one acre of land every hour. By 2008 the city was the epicenter of the country’s housing market crisis. Prices rose more precipitously and fell faster than most anywhere else. It was among the most overbuilt of the overbuilt sand cities, optimistic right up until the collapse. Home values fell by 55 percent from 2006 to 2011.

Today the city finds itself in a more encouraging situation, one that’s becoming more common around the U.S. Housing prices in metropolitan Phoenix climbed 22.9 percent in 2012, the highest in the nation, according to research firm CoreLogic. Homebuilders are rushing to buy land for new subdivisions or resume construction in ones they had abandoned.

Phoenix’s nascent boom has many causes. The city has long counted on jobs to lure home buyers: The population of the Valley of the Sun has nearly doubled since 1990 and is now close to 4.3 million. Job growth was 3 percent last year, almost twice the national rate. There’s another reason prices are going up: Inventory is low. During the bust, foreclosures went on the market quickly, and eventually prices fell enough that investors with cash came in. They turned many homes into rentals, which meant fewer for sale. Meanwhile, underwater owners are hoping for prices to rise before they sell.

The housing market in Phoenix presaged and magnified the collapse in real estate. Now its recovery could reveal much about the prospects for a nationwide turnaround. Mortgage rates are low everywhere. In many places, so too is inventory. Home prices increased in 88 percent of metropolitan areas around the country in the last three months of 2012, including Las Vegas, Miami, and even Detroit, according to the National Association of Realtors.

“Phoenix is the most advanced market,” says Stan Humphries, the chief economist at real estate website Zillow (Z). “It was one of the first to go into recession, and one of the first to emerge from recession. Phoenix has been a lab where we’ve gotten to see the effects of a high foreclosure rate and high negative equity,” which is when homeowners owe more on their mortgage than their houses are worth.

Of course the recession in Phoenix that began in early 2006 had little to do with the (severe phase of the) national recession, which began in mid-2008.  Indeed 2007 was a period of very low unemployment for the national economy.  And as long as NGDP keeps chugging along at 4%, a housing recovery in AZ will not produce a national recovery, as the problems are unrelated.  It’s the difference between microeconomics (allocation of resources for a given aggregate output) and macroeconomics (determination of nominal and real aggregate output.)

Starting last March, builders realized they had a problem: Demand was growing faster than their supply. That’s provided opportunities for land brokers such as Nate Nathan, who’s been handling land acquisitions for investors, developers, and homebuilders in Phoenix for 36 years. Nathan has sold 14,000 lots in the past eight months, a billion dollars’ worth of deals. An acre in the southeastern part of the valley, where Intel and other companies are based, sold for $35,000 in 2010. Now, he says optimistically, a prime acre can go for more than $200,000. “I’ve lived through five downturns, and this has been the best goddamned eight months of my life,” he says.

But wait, didn’t the bubble-mongers tell us Phoenix had to be a bubble?  After all, look at all that empty desert land in Arizona.  There was no “rational” reason for high land prices.   Yes, but try finding land in good locations (close to Tempe/Paradise Valley) that is not currently occupied by either Indian reservations or the federal government.  It’s expensive.  Arizona is not Texas.

PS.  This is interesting:

Group of 20 policy makers discussed a broad rethinking of monetary tools at their meeting in Moscow last week, including strategies to support growth by targeting nominal gross domestic product, Russia’s envoy to the G-20 said.

A proposal for the monetary authorities to adopt a target of nominal GDP, aired by Bank of England Governor-designate Mark Carney in December, was discussed on the sidelines of the G-20 meetings, said Russia’s G-20 sherpa, Ksenia Yudaeva. Russia holds the group’s rotating presidency this year.

“Maybe it’s an appropriate instrument for developed countries with reserve currencies, but for developing and small economies, it absolutely doesn’t answer their problems,”Yudaeva said in an interview in Moscow.

I agree that NGDPLT may not be appropriate for small and/or emerging economies that are relatively undiversified.

From market monetarist blogs to the G-20 in 4 years.  Not bad.


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20 Responses to “Maybe it was NGDP all along”

  1. Gravatar of Morgan Warstler Morgan Warstler
    22. February 2013 at 06:39

    The logic of the article says we should be much faster liquidating foreclosures.

    Then as a secondary point, there is an observation about NGDP.

    Its important not to let the icing pretend to be the cake.

  2. Gravatar of Maybe it was NGDP all along | Fifth Estate Maybe it was NGDP all along | Fifth Estate
    22. February 2013 at 06:49

    [...] See full story on themoneyillusion.com [...]

  3. Gravatar of nickik nickik
    22. February 2013 at 08:08

    Nice article.

    > I agree that NGDPLT may not be appropriate for small and/or emerging economies that are relatively undiversified.

    Im from Switzerland and while its not a emergin economy its small. What kind of policy would you advocate for a country like that?

    Over at marketmonetarist.com Lars Christensen advocated trageting the main export good of a economy but that does not seam to be a good idea for switzerland because there is no one main export product.

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. February 2013 at 08:17

    Since this post is Real Estate related, here’ something to ruin the Housing Cause Denialists’ day (from scholars with impeccable credentials–MIT, Harvard, NBER);

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2172549

    Did the Community Reinvestment Act (CRA) Lead to Risky Lending?

    ‘Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.’

    I.e., what textbooks say about incentives.

  5. Gravatar of ssumner ssumner
    22. February 2013 at 08:55

    Morgan, At the local level real estate is the cake, at the national level NGDP is the cake.

    nickik, I may do a post on that.

    Patrick. I’m not surprised.

  6. Gravatar of TravisV TravisV
    22. February 2013 at 09:25

    (Sigh)

    Roubini: ‘Short-Term Bullish, Long-Term Catastrophe’

    http://www.businessinsider.com/nouriel-roubini-turns-bullish-2013-2

  7. Gravatar of TravisV TravisV
    22. February 2013 at 09:31

    Is this why stocks are up today?

    “Fed’s Bullard: Policy to stay easy despite exit chatter”

    http://reut.rs/W7N0cR

  8. Gravatar of Felipe Felipe
    22. February 2013 at 09:33

    Patrick: May I point you to Noah Smith’s blog?

  9. Gravatar of Jason Jason
    22. February 2013 at 11:00

    http://research.stlouisfed.org/fred2/series/PHXRNSA

    I think they are talking about that tiny blip on the end of this graph. If we take that as a new “trend” (maybe just mean reversion?), housing prices will return to the 90s trend in about 2016 at which point it will achieve a level approximately equivalent to the peak of the bubble.

    Also a nit to pick on the statistics: rising 23% after falling 55% is only a claw back of 10% leaving you still 45% in the hole relative to the peak — they make it seem like more than it is.

    For example, the price quote, $35k for an acre rising to $200k for an acre is a 570% increase is wildly unrepresentative — the housing data says that the $35k should have risen 23% to $43k which is still a big increase, but it isn’t 570%.

  10. Gravatar of Cthorm Cthorm
    22. February 2013 at 11:09

    Re: Russia – I know Lars has spent some time there recently.

    As Nickick eluded to,
    Lars has some posts discussing an “export price norm” benchmark for open economies with strong dependence on a particular export (e.g. natural gas).

  11. Gravatar of Greg Ransom Greg Ransom
    22. February 2013 at 11:45

    Usually when Scott writes, “Didn’t so and so tell us … ” what comes next isn’t anything anyone ever said, but is something that comes out of Scott’s imagination.

  12. Gravatar of Petar Petar
    22. February 2013 at 12:11

    @Nickik Over at marketmonetarist.com Lars Christensen advocated trageting the main export good of a economy but that does not seam to be a good idea for switzerland because there is no one main export product.

    Also take a look at Frankels “PEPI” paper – peg the export price index, there are some interesting ideas that my interest you

    think its this one
    http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.152.1560

  13. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. February 2013 at 12:15

    Felipe, Noah Smith is wrong to say;

    ‘Does this mean that the CRA contributed to the financial crisis? No. Because the CRA existed since 1977, and the U.S. housing bubble only began in the 2000s.’

    Because, the CRA was not enforcable until the mid 90s–after the infamous Munnell et al, paper set in motion a spate of legislation and regulatory action; GSE Act 1992, HUD Best Practices Initiative, CRA Amended 1995–and that just happens to be when the housing bubble began. Not ‘in the 2000s’.

  14. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. February 2013 at 12:44

    Also, Noah Smith is really, really asking for it with;

    ‘What happened in the financial crisis was that risk was mispriced.’

    Yes, it was…because of the CRA (and the latter enforcement legislation and regulatory moves)!

    I hasten to add that this doesn’t mean Scott is wrong to say that the financial crisis was ’caused’ by mistaken monetary policy.

  15. Gravatar of Geoff Geoff
    22. February 2013 at 12:46

    Patrick:

    “Felipe, Noah Smith is wrong to say”

    “‘Does this mean that the CRA contributed to the financial crisis? No. Because the CRA existed since 1977, and the U.S. housing bubble only began in the 2000s.’”

    Yes, that logic is indeed flawed. It’s like saying that a previously unexploited accounting clause wasn’t to blame for a gradually increasing preponderance of firms altering their reported financials, because the accounting rule was technically put in place decades ago.

    Or, even more revealing, it is like saying the Fed wasn’t to blame for the recession of 2008, because the Fed was created in 1913 and we didn’t have the recession of 2008 in the year 1913.

  16. Gravatar of Saturos Saturos
    22. February 2013 at 13:19

    Congrats guys!

  17. Gravatar of marcus nunes marcus nunes
    22. February 2013 at 13:23

    You said: “From market monetarist blogs to the G-20 in 4 years. Not bad.”
    Makes me wonder what financial/economics reporters were writing four years ago. Some have surely changed. Matt O´brien may have been one:
    http://thefaintofheart.wordpress.com/2013/02/22/matt-obrien-nails-it/

  18. Gravatar of ssumner ssumner
    22. February 2013 at 14:36

    Jason, That doesn’t address my actual arguments, which related to rates of change, not levels.

    Felipe and Patrick, You quote Noah Smith as saying:

    ‘Does this mean that the CRA contributed to the financial crisis? No. Because the CRA existed since 1977, and the U.S. housing bubble only began in the 2000s.’

    How long have banks existed? Does that prove banks had nothing to do with the crisis? There are questions of enforcement, etc.

    In other words, like Patrick, I’m not persuaded by Smith. Of course I’ve never seen CRA as the major factor.

  19. Gravatar of Jason Jason
    23. February 2013 at 12:59

    Scott, you said:

    “That doesn’t address my actual arguments, which related to rates of change, not levels.”

    The rate today is only 30% of the rate at the fastest point of the bubble. If it were growing as fast as the bubble it would reach the peak level of the bubble a by the end of the year.

  20. Gravatar of ssumner ssumner
    24. February 2013 at 08:36

    Jason, I’m not claiming that you’d expect the sort of economic outcome we saw during the bubble. I’m saying that if the real estate market goes from declining (2009-2011) to growing rapidly, even if from a low level, you might expect some impact on GDP if it were an important factor in determining GDP—which it isn’t.

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