Archive for the Category housing market


You need to act right now! (Because we are too timid.)

From the Wall Street Journal:

For an institution that jealously guards its independence, the Federal Reserve is wading into treacherous political waters.

With the economic rebound still mediocre at best, the Fed is charging into the housing debate. But in doing so, it runs the risk of politicizing itself, while also sending mixed signals to banks still trying to find their postcrisis feet.

The latest effort was a housing “white paper” sent this week to Congress, along with a series of comments from Fed officials about the importance of housing to the economic recovery. In this, the Fed may be laying the groundwork for further quantitative easing, this time purchasing mortgage securities. But its paper went beyond even the Fed’s already unconventional policies. This included ideas that might require more taxpayer funding through Fannie Mae and Freddie Mac.

But having broached the thorny issue of using government entities to boost housing, the Fed didn’t touch on questions surrounding a needed long-term revamp of housing finance. This left the Fed implicitly endorsing the housing status quo: a market that is almost completely dependent on the government and, in particular, Fannie and Freddie. Whether the government should be involved in housing, or to what degree, is of course a highly contentious political question for Congress.

The Fed’s paper suggested it may be worth pursuing more aggressive actions in terms of loan modifications, mortgage refinancing and sales of foreclosed properties even if they cause greater short-term losses at Fannie and Freddie, and so by extension to taxpayers. And the paper may have led some in markets to believe a new, government housing effort was coming. The Fed’s paper said a possible policy option would be for the government to expand existing refinancing efforts “or introduce a new program.”

About those 4 million jobs

I see that Joe Gagnon’s new housing plan has garnered attention from Paul Krugman and Matt Yglesias.   You might wonder why I call it Gagnon’s plan, not Obama’s plan.  Here’s why:

Even more important, if the Federal Reserve supported the refinancing boom by purchasing $2 trillion of new MBS, for example, the existing MBS holders would have to find another market in which to invest $2 trillion. This avalanche of money would surely push up stock prices, push down bond yields, support real estate prices, and push up the value of foreign currencies. All of these financial developments would stimulate US economic activity. Based on a recent Fed study (Chung et al 2011) Fed purchases of this magnitude would increase US GDP by more than 2 percent after about two years, creating nearly 3 million additional jobs. This estimate includes only a small part of the effects operating through the mortgage refinance channel discussed above, so that the total effects on the economy would be even larger, perhaps creating 4 million extra jobs or more.

A few comments:

1.  I don’t want to get into any “how many angels . . .” arguments here.  The plan contemplates massive open market purchases by the Federal Reserve.  I’d call that “monetary policy,” you are free to call it whatever you like.  Whatever you call it, the decision is up to Bernanke, not Obama.

2.  My hunch is that the housing refinance angle wouldn’t create many jobs.  I say “hunch” because I’m not really qualified to judge.

3.  As you know I am a big fan of Gagnon, so this post shouldn’t be viewed as criticism.  I would strongly support a $2 trillion OMP.  I don’t really have any idea how many jobs it would create, but it would be worth a shot.

America’s rich because we have lots of big houses

Why do so many immigrants want to come to America?  Not because we have great infrastructure; I’ve seen better in many foreign countries.  Instead, it’s our high level of consumption.  And what makes our consumption so high?

Think about the basic necessities; food, clothing and shelter.  For several decades, almost all developed countries have met the needs of most citizens for food and clothing.   We can only eat so much, and elegant clothing has gone out of fashion.  Go to a football game and you might be sitting next to a millionaire or a plumber.  There’s no way to tell because either could be wearing blue jeans.  Indeed the plumber may well be a millionaire.

Houses are different.  People really like big houses in nice locations.  And that’s where America really shines.  When immigrants from Mexico or India or China see how much house you can buy in a Houston suburb for $350,000, they are blown away.  And not just a big house, but room to park your cars and boats.  All within the price range of a professional, upper middle-class salary.

This post was triggered by a very interesting Karl Smith post, which showed that about half of our entire capital stock is housing and home improvements:

Now this only includes private capital so roads and other government infrastructure are not in there. However, you can see that its overwhelmingly housing, then shopping.

So when you say, increase the size of the US capital stock to large extent what we mean are bigger and better homes and shopping centers.

And when we say increase the productivity of workers what we mean is that homeowners get more out of being their own landlords and that retail workers are serving customers in nicer facilities.

Matt Yglesias is a bit skeptical:

I’d say it’s a reminder that you need to treat government statistical categories with a grain of salt. The “residential investment” category should probably be thought of as a form of consumption. But that means it’s important to ask, when faced with a tax policy concept that’s allegedly pro-growth due to its investment properties, whether it’s not just really a proposal to shift consumption out of some sectors and into housing.

I can’t imagine how this could be right.  I admit that the line between consumption and investment is blurry.  But the borderline cases are things like cars and home appliances, not houses.  The longer an asset lasts, the more capital-like it is.  And well built houses last for a long time.  Admittedly I may be biased, as I live in a town full of old, well-built houses.  And in cities like Detroit lots of homes are being torn down.  But I don’t think Newton is that exceptional.  I visit Tucson every year, and see the sorts of new homes that are much more typical of 21st century America.  And the Tucson homes that sell for about $200,000 are clearly built to last for 100 years with little maintenance.  These are certainly “capital” by any reasonable definition.  Indeed many factories and other commercial structures become obsolete long before houses do.  The houses I lived in as a kid (in Wisconsin) were already very old.  Yet none have been torn down.  In contrast, sports stadiums built in the 1970s that I recall as new and futuristic, are already obsolete.

I often notice commenters who share Yglesias’s attitude toward houses, and sometimes I wonder if it represents a sort of prejudice.  We’ve all seen people who think that German export of cars or turbines is somehow more virtuous than Greece’s provision of tourism services, or London’s provision of advertising services.  Perhaps the attitude toward housing is somehow related to this deep-seated belief that some products are more worthy than others.  I’m not opposed to Veblen-like cynics arguing that the pleasure derived from a big house is shallow and superficial.  (Easy to do if you aren’t a Chinese or Indian immigrant who grew up 5 people to a room.)   But the same is true for most of the stuff churned out by our factories.  And no one denies that factories are “capital.”

PS.  I favor abolition of the tax deduction for mortgage interest.  And a minimum 20% down payment for any mortgage from a FDIC-insured institution.  And a carbon tax.  I like big houses, but not enough to subsidize them.

Housing, the CPI, and real wages

At times like these I’m glad I’m not in Paul Krugman’s shoes.  Here Krugman discusses the fact that inflation isn’t declining, even though NK models say it should decline when there’s lots of slack in the economy:

That said, is inflation running higher than I expected? Yes. Am I worried that this might be the beginning of a runaway inflation process? No. Do I sound like Donald Rumsfeld? Yes.

The IMF study of PLOGs “” prolonged large output gaps “” pretty much summarizes my own views. You expect a persistently depressed economy to have falling inflation, although it tends to level out at a small positive number. There can be episodes of rising inflation along the way, however, but these normally reflect special and temporary factors, usually oil prices and/or currency devaluation.

US experience mostly fits this pattern, although I now believe that there’s an additional special factor that isn’t typical: the prolonged slump in home construction has now created a bit of a shortage, so rents are rising “” and since implicit owners’ rent is a major part of core inflation, that’s causing a pickup over and above the effects of oil prices.

Sometimes people ask me why I focus on NGDP, rather than RGDP and inflation, like a normal economist.  From the beginning I’ve been arguing that inflation is a pretty meaningless number, or at least it doesn’t mean what we tend to assume it means–the change in the price of goods and services produced by American labor.  Most economists understand the imported oil bias, but housing is a much larger share of the CPI (roughly 1/3, and even higher for the core.)

Question:  What’s happened to American housing prices over the past 5 years?

Answer:  According to Case-Shiller they’ve fallen by 31.6%.

Question:  And what’s happened to housing construction over the past 10 years?

Answer:  According to this graph provided by Matt Yglesias, housing construction has been unusually low during the past 10 years, when compared to previous decades.

That sounds a lot like an adverse demand shock.  Yet many continue to insist we built too many homes, even though that would lead to quantity and prices moving in the opposite directions, not the same direction (never reason from a price change.)

So why is housing causing a problem for the Krugman model?  The answer is simple; the BLS doesn’t agree with Case-Shiller, they don’t agree that house prices fell 31.6%.  What kind of figure did the BLS come up with?

Answer:  7.7%

I can just imagine your reaction:  “What!?!?!?!?!  They claim housing costs only fell 7.7% over the past 5 years!  That’s insane.”

I’m afraid you’d better sit down for this.  The BLS doesn’t claim housing prices fell 7.7% since mid-2006, they claim they rose by 7.7%.  Just a minor 39.3% discrepancy with C-S.

Now I’m sure people will tell me that the BLS uses a different methodology.  They look at rental equivalent.  But that’s still a pretty big discrepancy.

Now let’s consider an argument frequently made by commenters; real wages are falling, whereas my sticky wage model (supposedly) predicts they should be rising.  (Actually it doesn’t.)   Consider two brothers, one who graduates from high school in 2006 and makes $40,000.  He buys a house for $150,000.  The younger brother graduates in 2011 and makes $43,000.  He buys a similar house for $100,000.  Who’s better off?  The BLS says the older brother, because real wages have fallen.  And that’s because the cost of living rose by more than the wage rate.  But whose shoes would you rather be in?

Now it’s quite possible that the younger generation is worse off than 5 years ago.  But not because real wages are falling, rather because they have worse jobs, fewer hours, or are completely unemployed.

The problem with new Keynesian economists is that they believe the government data for inflation, real wages, etc, actually measures the theoretical concepts that the model tries to address.  But they don’t.  Even NGDP is far from perfect, but at least it’s not as distorted as the CPI.

PS.  By the way, the minimum wage has increased 40% since 2006.

PPS.  Even the C-S index isn’t the theoretically appropriate price of housing, as it includes land.  We’d like to know the change in the price of stuff actually built with US labor, and land isn’t built.  Nor is “rental equivalents.”

PPPS.  Someone sent me a chart showing that 10 year TIPS spreads in Europe have fallen to 0.6%.  Can one of my European readers confirm this stunning data point?  Thanks.

From TheMoneyIllusion to conventional wisdom

When I began blogging in early 2009 I made a number of claims that seemed almost preposterous.  One of those was the claim that people had reversed causation; the housing crisis didn’t cause the recession, it was mostly a product of the recession.  This seemed crazy, as the housing crisis began well before the recession.

I distinguished between two phases of the housing crisis.  The first phase occurred during 2006-08, and was concentrated in the 4 subprime states.  It did lead to a modest slowdown in growth, and unemployment rose from 4.7% in January 2006 to 4.9% in April 2008.  But nothing severe.  The second phase of the housing collapse was much more severe.  When NGDP started falling rapidly due to tight money, housing prices fell all across America.  This triggered the severe banking crisis of late 2008, and was associated with a worsening of the recession—unemployment reached 10.1% by October 2009.

Day by day, month by month, opinion is imperceptably shifting in my direction.  Indeed so much so that a news article that basically proves my point seems to have elicited little surprise.  “Of course a severe recession would hurt the housing market.”

Let’s consider the original conventional wisdom, and then my heretical view of early 2009.

1.  The conventional wisdom was that we built way too many houses, and that the housing slump was a hangover from this effect.  If true, housing construction over the past 10 years ought to have been way above normal.  In fact, it has been way below normal.  Which leaves the puzzle of why we have so many empty houses.

2.  My view was that the severe recession greatly reduced the demand for housing.  Since very few Americans are homeless (in percentage terms), a reduction in demand for housing should imply an increase in average household size.  And that’s exactly what we’ve seen:

The number of people living under one roof is growing for the first time in more than a century, a fallout of the recession that could reduce demand for housing and slow the recovery.The Census Bureau had projected the average household size would continue to fall to 2.53 this year. Instead, the average is likely to hit 2.63, a small but significant increase because it is a turnabout.

“A funny thing happened on the way to the future” says Arthur C. Nelson, director of the Metropolitan Research Center at the University of Utah. “Household size increased.”

.  .  .

USA could end this decade with up to 4 million excess housing units because of the reversal in household size, he says.

A key factor: “The Great Recession has forced doubling up among both family and non-family members,” Nelson says.

Multi-generational households are on the rise: 49 million, or 16% of the population, live in a home that had at least two adult generations in 2008. In 1980, there were 28 million, or 12%.

According to a recent Pew Research Center report, the growth is due to demographics, cultural shifts and high unemployment.

“I think it’s the young adults,” says Dowell Myers, housing demographer at the University of Southern California. “Residential mobility has slowed down and when it slows down, they’re back in their parents’ houses or living with roommates.”

Household size began inching up in 2005, before the recession, a trend that might have been driven by the real estate boom that made housing unaffordable to many. Now, it’s more likely to be caused by the poor economy.

“There are a lot of trends going on,” Nelson says. Among them:

– Older Americans.They’re moving in with children and grandkids and vice versa. About 20% of people 65 and older live in multi-generational households

– High unemployment. It’s keeping young adults out of the job market and back home with their parents.

“Clearly, a lot of people are not forming households when they’re getting out of school,” says Karl Case, economics professor at Wellesley Collegewho helped create the Standard & Poor’s/Case-Shiller Home Price Index.

It’s not just that people are not buying homes. They’re not renting either, a sign that more people are squeezing into one unit.

“I can document this with my own students,” Case says. “Rental vacancy is the highest it’s ever been.”

– Immigrants. They have higher fertility rates and a cultural acceptance of extended families living together. Despite a decline in the influx of Hispanics since the economy soured, household size inched up.

“It’s going to have huge implications for the housing market,” Nelson says.

If it lasts. Many economists and demographers are convinced that as soon as the recession ends and jobs open up, Americans will return to their old ways. “I see it as temporary,” Myers says.

“The economy is the most important thing,” says Stephen Melman, director of economic services at the National Association of Home Builders. “Projecting lifestyles is a really tricky business.”

Hayek warned that if the Fed let NGDP fall you’d get a “secondary deflation.”  And that’s exactly what we got.   The first (small) part of the housing crash was a necessary adjustment.  The second much bigger part of the collapse was clearly the result of tight money reducing NGDP.  NGDP is the money people have to buy houses—it’s national income.  With less NGDP there will be less demand for housing.  You’ll have empty houses at the same time as people doubling up because they can’t afford houses.  Just as during the Great Depression you had farmers unable to sell their food, and hungry people who couldn’t afford to buy food.

We were a little poorer in 2008 than in 2006 because we misallocated resources into foolish housing construction.  We were a lot poorer in 2010 than 2008 because the Fed made us a lot poorer.

HT:  John Quiggin, Tyler Cowen.

PS.  The recession also reduced immigration, which reduced housing demand even further.

PPS.  Notice the headline of the USA Today article is still reversing causation.