Archive for the Category housing market


The CPI and housing prices

Nine years ago I did a post discussing how the CPI was distorted by mis-measurement of housing prices:

Good News! There was no housing crash.

At least according to the US government.

The BLS claims that housing prices are up 2.1% in the last 12 months.  Why does this matter?  For all sorts or reasons, but first let’s try to figure out what really happened.  According to the BLS, housing makes up nearly 40% of the core basket of goods and services.

Category    weight     inflation

Housing     39 %             2.1%

Other         61%              1.4%

Overall      100%             1.7%

Suppose that instead of rising 2.1%, housing costs have actually fallen 2.1% over the past 12 months?  In that case the core rate would be zero.  Which number seems more likely?  For much of the past year house prices have been falling at more than 2% a month.

Bloomberg reports a new academic study that reached similar conclusions:

New research shows that the CPI is slow to reflect changes in prices—and, equally important, understates the degree to which prices move up and down. The problem stems from the way the government calculates the price of shelter, a category that makes up one-third of the index.

Three economists have developed an alternative measure that captures price moves as soon as they occur and shows the full range of changes. If it had existed in 2008-09, when the economy was in the deepest recession since the Great Depression, it would have shown far deeper deflation than the Bureau of Labor Statistics registered. The official CPI, they write in a new paper, was overstating inflation by 1.7 percentage points to 4.2 percentage points annually during the Great Recession. More recently, they write, the problem has been the opposite: Annual readings have understated inflation by 0.3 to 0.9 percentage points. Those are huge disparities given that forecasters make a big deal of fluctuations of just one or two tenths of a percentage point in the official rate.

Here’s a graph that shows how big a difference it makes:

Screen Shot 2018-05-10 at 8.33.59 PM

That correction is actually a bit larger than even I would have expected.  But even if their method is not perfect, I have little doubt that the basic point is correct; the CPI is less volatile than an alternative price index that reflects actual market prices in the economy.

The problem they point to is similar to the one I mentioned back in 2009. The BLS uses rent payments on existing contracts that do not reflect the market rent on apartments currently on the market.  During a slump, it’s not unusual for a new tenant to get one or two months free rent:

The economists behind it are Brent Ambrose and Jiro Yoshida of Pennsylvania State University’s Smeal College of Business and Edward Coulson of the Merage School of Business at the University of California at Irvine. Their latest version is described in an April 20 academic paper titled “Housing Rents and Inflation Rates.” The key difference from the CPI is that their measure factors in only new rental leases, including those of new tenants and old ones who recently renewed. The BLS, in contrast, also includes rent paid by tenants whose leases weren’t up for renewal in the latest month, which means it’s slower to pick up on changes in market conditions.

Kudos to Ambrose, Yoshida and Coulson for putting a spotlight on a very important flaw in the CPI, which many professional economists use too uncritically.

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.