Archive for the Category housing market


Is another Great Recession just around the corner?

When I stated blogging in early 2009, people were incredulous when I blamed the recession on tight money.  Most people thought it was “obvious” that the recession was caused by the house price bubble.  (There was no housing construction bubble–Kevin Erdmann has lots of research showing that housing construction during the 2000s was at normal levels.)

OK, if was obvious that home prices were wildly excessive in 2006, why is that not also true today?  Nominal house prices are now far above 2006 levels, and even in real terms they are rapidly approaching the 2006 peak, as this graph shows (deflating by the PCE index):

So let’s see what these pundits say today.  Are they calling for investors to engage in “the big short”, as John Paulson did in 2008?  Are they predicting another Great Recession?  Are they predicting another crash in housing prices?  Are they predicting another banking crisis?  If not, why not?

Is it possible that the housing boom was not a bubble?  Is it possible that fundamentals (such as building restrictions and lower real interest rates) support much higher real housing prices during the 21st century than during the 20th century?  Is it possible that the real problem was nominal, a fall in NGDP engineered by a monetary policy that (during 2008) held the Fed’s target interest rate far above the equilibrium interest rates?  Is that why unemployment stayed low as housing construction fell in half between January 2006 and April 2008, and then soared when tight money pushed NGDP down in late 2008?

Lots of pundits were saying housing prices were excessive as far back as 2003; when even in real terms they were far lower than today.  Do these same pundits again predict a collapse?  If not, why not?

It’s rare that life gives us a second chance to test a theory.  Let’s not waste it; let’s follow this experiment quite closely over the next few years.  I plan to, and I’ll keep reminding people of the outcome.

Which country abolished the home mortgage deduction in 2001?

Update:  Commenter Brent pointed out that this post seems to be based on an error on my part.  Canada did not abolish the home mortgage deduction in 2001.  My apologies.  (I got this information from someone who may have confused Canada with the UK.)

The pink in line is Canada and the blue line is the US.

The proposed bill would only take away the deduction for the top 5% of US mortgages.

PS.  Our media has an ironclad rule that the middle class must always be described in glowing terms, or treated as victims.  Thus if they are talking about things that benefit the top 5%, this group is called “rich”.  After all, the government never does anything good for the middle class, only the rich.

But if they take away a benefit from the top 5%, suddenly that group is called the “middle class” and we are all supposed to shed tears for their suffering:

The 429-page GOP tax plan, called the “Tax Cuts and Jobs Act” was revealed on Thursday and is being billed as a boon for hard-working middle class Americans.

But Republicans have proposed paring down popular homeownership incentives, which would likely affect millennials and millions of people living in high-cost housing markets.

The tax plan cuts the $1 million limit for the home-mortgage-interest deduction in half. The deduction allows homeowners to write off the interest they pay on home loans, effectively reducing their taxable income. The bill would apply to new home purchases and make it so homeowners can only deduct interest payments on up to $500,000 worth of home loans.

In previous generations, that may have been a typical mortgage amount for a first-time homebuyer, but today’s young people are different. Millennials are “skipping starter homes,” Zillow CEO Spencer Rascoff said, and moving straight to the $1 million range when its time to buy their first house. . . .

“Eliminating or nullifying the tax incentives for homeownership puts home values and middle-class homeowners at risk, and from a cursory examination, this legislation appears to do just that,” William E. Brown, president of the National Association of Realtors (NAR), said in a statement.

So sad!

America’s surging export of homes

Ben Cole directed me to this interesting story:

The National Association of Realtors released a report Tuesday that said foreign buyers and recent immigrants spent an estimated $153 billion on American properties in the year ending March 2017. That was a 49% increase over the previous year and the highest level since record-keeping began in 2009.

The purchases accounted for 10% of the total value of existing home sales in the U.S. The report did not include new homes.

The breakdown of sales between foreigners and recent immigrants was about 50:50.

[I wish they had data on new homes, as that’s the sort of home that foreigners tend to prefer.]

Of course the sale of homes to immigrants is not an export, but it does have a similar economic impact.  However the sale of homes to foreigners does represent a US export, and creates lots of goods jobs for American blue collar workers.  (Note that it doesn’t really matter whether they buy new or existing homes; the net effect on the housing market is the same.)  So the protectionists should be rejoicing, right?

Actually, just the opposite.  The US government does not even count these as exports.  Instead they are treated the same as net borrowing.  They are considered a part of America’s current account deficit, leading to all sorts of silly hand-wringing about how America is borrowing too much and living beyond our means.  In fact, we do borrow too much (due to the tax advantage of doing so), but that has nothing to do with the current account deficit.

I have a solution.  Treat international trade the way that we treat trade between American states.  Stop collecting records on imports and exports.  We don’t have data on the CA deficit of Texas or the CA surplus of Massachusetts, and that lack of data doesn’t seem to cause any problems. So stop doing so for the US as a whole.

You can still collect data on America’s net debt position (good luck with that!), if you wish to.

PS.  I have a post on “The German Problem” over at Econlog.

Dodd/Frank, NIMBY and Trump—How America forgot how to build houses.

The housing market is strong:

Existing home sales jumped 3.3 percent to a seasonally adjusted annual rate of 5.69 million units last month, the highest level since February 2007, the NAR said.

Economists had forecast sales rising only 1.1 percent to a pace of 5.54 million units in January. Home resales were up 3.8 percent from January 2016.

Though the nation’s housing inventory increased from December, it remained near a record low. As a result, the median house price vaulted 7.1 percent from a year ago to $228,900 in January. That was the biggest increase since January 2016.

But housing construction is at relatively low levels.  It looks like the supply side is being hit by a triple whammy of adverse supply shocks:

Economists say homebuilders are struggling to plug the inventory gap because of difficulties securing funding as well as shortages of land and labor. The NAR estimates housing starts and completions should be in a range of 1.5 million to 1.6 million units to alleviate the chronic shortage.

Housing starts are running above a rate of 1.2 million units and completions around a pace of 1 million units.

Funding and land are no mystery (Dodd/Frank, NIMBY), but what about labor?

The tight supply in home construction results from a shortage in able construction workers. And, given President Donald Trump’s aggressive ambitions to crack down on undocumented immigrants, homebuilders may have an even tougher time finding workers in the future, according to Yun.

“It’s widely known but less discussed that there are many undocumented workers at construction sites. And with the border being much tighter, it may lead to a greater construction worker shortage unless America can crank out people with the skills in construction, plumbing, lumber framing, and welding,” he said.

The US has approximately 200,000 unfilled construction jobs, which represents an 81% increase over the last two years, according to estimates from the National Association of Homebuilders.

Homebuilders like Lennar (LEN) and Toll Brothers (TOL) have cited a shortage in construction workers as a major reason they’ve had to slow down home construction.

Whether through vocational schools or intensive training programs, the US needs to produce more workers who can start building homes. “Homebuilders keep delaying as to when they can dig the ground,” Yun said. “They’re actively looking for workers, but there just aren’t enough.”

Whenever I post on this issue, commenters tell me it’s “fake news”.  That’s because it doesn’t fit the fashionable narrative that there are no more jobs for blue-collar workers.  If so, it’s an 81% bigger fake problem than 2 years ago.

Of course an immigration crackdown could also hit housing demand:

“If Trump gets the immigration plan he wants, the housing market will get hit harder than any other,” said Alex Nowrasteh, a policy analyst for the libertarian Cato Institute. If “millions of people get deported and more people don’t come in to take their place, then you’ll have downward pressure on home prices, especially in urban areas.”

The immigrant housing market is often underappreciated, in part, because undocumented workers and the companies that cater to them sometimes like to fly below the radar.

Some smaller firms will make loans to the undocumented, with higher interest rates.

If you use Case-Shiller, then real home prices are back up to 2004 levels.  Of course construction was at a very high level in 2004 (nearly 2 million).  The fact that construction is at a low level today, with the same real housing prices, indicates a massive adverse supply shock has hit the home construction industry.  The buyers are there, the prices are good, the inventories are low—it’s just that America “forgot” how to build lots of single family homes.

America’s housing market increasingly reminds me of that old TV commercial:  “Help me, I’ve fallen and I can’t get up.”

PS.  Noah Smith has an excellent post on immigration.  A voice of reason.

PPS.  This is the best article I’ve ever read on Trump supporters.  One theme that comes up over and over again is that it’s counterproductive to ridicule Trump voters.

What Caused the Great Moderation? And was it sudden or gradual?

There’s a new Vox article by Lola Gadea, Ana Gomez-Loscos, and Gabriel Pérez-Quirós showing that the Great Moderation that began around 1984 is still intact, despite the Great Recession.  This got me thinking about the cause or causes of the Great Moderation.  In the end I’ll argue there were two causes, and that the moderation actually occurred in two steps, first in 1961 and then in 1984.  Here’s a RGDP growth rate graph that clearly shows a decline in volatility after 1984:

Screen Shot 2015-10-26 at 10.52.51 AMThe first idea that popped into my head was that industrial production is unusually volatile, and has been becoming a smaller share of our economy.  When did this start? I don’t have data on IP as a share of the economy, but this graph shows that manufacturing has been shrinking as a share of GDP, and manufacturing is the vast bulk of IP.

Screen Shot 2015-10-26 at 10.56.11 AMSo maybe the Great Moderation simply reflects the shrinking share of this highly cyclical industry. Unfortunately, further research disproved that theory, as even IP has been getting much less volatile over time:

Screen Shot 2015-10-26 at 10.58.51 AMNow you can begin to see why I hypothesized two stages in the Great Moderation. The five business cycles during the Truman/Eisenhower years saw especially volatile IP.  Most strikingly, the smallest peak of those 5 cycles (my birth year) is higher than the highest peak since 1960.  On the IP graph it looks like the Great Moderation began in 1961, and then got even more moderate after 1984.  So that made me wonder why other researchers don’t point to 1961 as the turning point.

Go back to the real GDP graph, and you’ll see why.  The moderation in real GDP during the Kennedy through early Reagan years (say 1961-84) is much less pronounced than for IP.  Not really statistically significant.

We’ve looked at IP, so what’s left?  Most of what’s left is consumption—was that becoming more volatile during 1961-84, offsetting the improvement in IP stability?

Screen Shot 2015-10-26 at 11.05.22 AMNot as far as I can tell. Indeed if it weren’t for the two severe oil shocks (1974 and 1980) consumption might well have become less volatile after 1961.  If those two oil shocks had occurred in the Truman/Eisenhower years, and not during 1961-84, then perhaps the Great Moderation would have been dated from 1961.

But we still have a mystery to explain.  The reduced volatility in IP after 1961 is quite clear, whereas consumption is about the same, or perhaps slightly less volatile.  So why doesn’t the real GDP graph show more improvement?  After all, consumption and IP are most of the economy (and yes I know I’m double counting a bit here, but my question remains.)

One thing that’s left is construction.  I could not find a real construction series going back that far, but did find residential investment:

Screen Shot 2015-10-26 at 11.10.58 AMNow we are getting somewhere!  Notice that residential investment is actually more volatile during 1966 to 1984 that during the preceding 14 years.  Yes, home building is a modest share of GDP, but look at the swings in those growth rates.  (I could only find nominal growth, but the swings are so large that they’d also show up in real growth.)

So now we seem to have a partial answer.  There was some tendency for the economy to moderate after 1961, but mostly if you exclude homebuilding.  If you include homebuilding, then 1984 looks like the year that the Great Moderation began.  The question is why?

Here’s the graph you have all been waiting for, monetary policy (er, I mean NGDP growth.)

Screen Shot 2015-10-26 at 11.16.12 AMNGDP growth volatility clearly fell after 1961, and then moderated further after 1984 (except for 2008-09, obviously.)

So why didn’t RGDP growth moderate as much as NGDP growth, during the 1961-84 period?  The easy answer is the two oil shocks.  (And I’d add the imposition and removal of price controls in 1971-75.)  Yes, that may be part of the story; the oil shocks hit consumption hard.  But let’s think about residential investment, which became more volatile during the middle period.  Why did that occur when NGDP growth was becoming more stable?

The answer seems clear, NGDP growth from one year to the next was becoming more stable, but the longer-term NGDP growth rate was becoming unanchored, as inflation soared from 1% to 13%.  With trend NGDP growth changing significantly, and unexpectedly, long-term nominal interest rates (on T-bonds and fixed rate mortgages) became highly unstable.  Yields on 30-year T-bills soared to roughly 15% in 1981.

Because of our peculiar residential mortgage system, these big swings in interest rates whipsawed residential investment, making it highly volatile during the Great Inflation. That’s why the Great Inflation had to end before the Great Moderation could begin.  It also implies that if the Great Inflation had been steady inflation/NGDP growth, which was predictable, then the Great Moderation would have begun in 1961, not 1984.  (And if my grandmother had wings . . . )

In this story there are two key milestones:

1. In 1961 the Fed figured out how to avoid the stop-go policies of the previous 15 years. But their technique left longer-term inflation/NGDP growth completely unanchored. After 1984 the Fed figured out how to walk and chew gum at the same time, how to keep inflation both low and stable.  Ditto for NGDP growth (except 2008-09)

If you look closely at the residential investment graph, you’ll see that homebuilding was more volatile in the 1990-91 recession than in the 2001 recession.  That may be because in the first of the two we were still working off the last bit of the Great Inflation. Inflation went into that recession at a 4.5% rate, and came out closer to 2%. In the 2001 recession we entered and left the recession with about the same (2%) inflation rate.  Of course there were other factors too, the 2001 recession was focused on business investment, and the resulting fall in interest rates helped homebuilding.  In 1990, homebuilding had been overextended by reckless S&L lending.  But even with all the craziness in homebuilding in the past few decades, the 1970s were even more unstable.

Obviously the Great Recession is sui generis (first time I’ve used that term), but in the recovery period we are back to eerily steady RGDP growth.  The 5 recessions in 15 years that we saw after WWII now seems like ancient history.  I can’t even imagine the US having 5 recessions in the next 15 years—although the one thing I’ve learned in macro is that just when you expect something will never return (like zero interest rates) it comes back.  So all forecasts are provisional.

PS.  IP involves domestic capital goods, domestic consumer goods and exports. The domestic consumer goods portion is double-counted in my analysis.  It might have been better to use services rather than consumption—but I doubt my conclusions would have changed.