Thursday, March 21, 2019

Writing and talking

Garrett Peterson kindly asked me back on the Economics Detective podcast.  It's always a pleasure to chat with Garrett.  The podcast is here:






And, here is an op-ed in the Los Angeles Daily News:

Claiming that building more L.A. housing would only benefit newcomers misses the point. The newcomers are coming already, and they aren’t waiting for L.A. to build them homes. Rest assured, until the rate of new building is increased, the homes that those newcomers will take will still be provided, quietly and sadly, one unit at a time.

Tuesday, March 19, 2019

Housing: Part 346 - Making the Crisis Inevitable

My new policy brief is up at Mercatus.  The important part:
This means that a collapse in prices was not inevitable. But more importantly, this means that calls for tighter monetary policy during the boom were calamitous. Loose monetary policy has been widely blamed for high home prices and for the debt-fueled consumption that they funded. Critics, and even Federal Reserve policymakers, generally agree that monetary policy should have been tightened sooner. But this is the wrong conclusion. In fact, monetary policy was powerless to counteract the debt-fueled consumption of the boom period, and the bust was only inevitable because the Fed tried to solve a problem that it could not functionally solve with tighter monetary policy.

and:
As in 2005, the primary stresses that characterize the American economy do not have a monetary source or solution, but mistaken monetary attempts at solutions are capable of adding to those stresses. Certainly, there is no reason to tighten policy today as a reaction to high home prices. 

Monday, March 18, 2019

Housing: Part 345 - Come on in. The water's fine.

Via Tyler Cowen:



Between 2003 and 2006, the Fed raised rates by 4.25%. This tightening induced a large contraction in deposits, leading banks to substantially reduce their portfolio mortgage lending. Yet, this contraction did not translate into a substantial reduction in total mortgage lending. Rather, an unprecedented expansion in private-label securitization (PLS), led by nonbank mortgage originators, substituted for most of the reduction in bank portfolio lending and thus largely undid the impact of Fed tightening on the mortgage lending boom.

Edit: it isn't so clear in my excerpt, but what is interesting in this paper is how they isolated the sensitivity of bank deposit rates to the fed target rate to show that banks systematically substituted securitized lending for portfolio lending. In other words, tightening monetary policy was a key factor leading to the growth of private securitizations. The Fed was tightening, in part, to slow down mortgage lending, but what they ended up doing was slowing down everything else.  I have a brief coming out soon explaining how it was unlikely to be any other way.


Tuesday, March 12, 2019

February 2019 CPI

Inflation took a step down this month.  There is little need to repeat my monthly mantra.  This takes us a step further to a situation where consumption may be waning, but the Fed thinks inflation is near their target because of high imputed rent inflation.  And, they think the risk is toward more inflation because of the low unemployment rate and Phillips Curve thinking.

Trailing 12 month core inflation is at 2.1%.  But, core-non-shelter inflation is down to 1.2%.  (Sorry, not shown.  I'll update when I can.)  TIPS forward inflation is also below 2%, although it has recovered from its recent lows, but that is also a bad sign, since that suggests expected non-shelter inflation is below 1% for the next 5 years, unless there is a building boom around the corner.

Monday, March 4, 2019

Housing: Part 344 - Square Footage over time

Here is an interesting piece on housing supply in England. (HT: TC)

There are two graphs in the piece, shown here.  And, the author, Ian Mulheirn, argues that data on home size shows that there isn't a supply shortage.

I have posted on a previous post of Mulheirn's where he makes a similar argument.  His previous post was somewhat persuasive to me, although astute readers pushed back in the comments on my post.  On this new post, I think Mulheirn might be betraying a bias toward his conclusion a little more clearly (at least for me to see).

The charts show that in England as a whole, floor space per person has increased by about 4% since 1996, although that all came in the late 1990s, from one data point.  For London, floor space has been level since 1996, and has declined since 2000.  He interprets this as evidence that there is not a supply constraint nationwide, and only a small constraint in London.

There is a similar story in Manhattan.  Population in Manhattan is about 25% lower than it was in 1910.  But, over that century, a lot of square footage has been added in Manhattan.  So, two things are going on at the same time.  We are getting richer, so we don't sleep 6 to a room in tenements anymore.  And, building hasn't been able to keep up with that change in standards.

So, benchmarking to an unchanging floor space size is not a neutral way to benchmark.  This is obvious looking at the very long term in Manhattan.  The irony is, units could have been added vertically to provide that extra space in Manhattan to maintain a stable population.  All that building wouldn't have added any new strains to the things like the city's transportation infrastructure.  One would hope that, over a century, the transportation infrastructure would have become more efficient so that the population could have even grown.

But, even over the shorter timeframe to the mid 1990s, one can imagine changes in norms, such as siblings being less likely to share bedrooms or households having fewer members, on average.  Since 1996, per capita real GDP in the UK is up 36%.  Now, I don't expect floor space to increase 1:1 with real incomes.  But, even there, some of the reasons we wouldn't expect floor space to increase would be because of local supply constraints that make it difficult and also because richer households might spend less of their incomes on shelter.  So, there is some combination of factors at work.  Either floor space should have increased by 36%, or there are supply constraints, or rents should have declined as a portion of household income.

Outside of London, according to Mulheirn's previous post, rents have declined as a portion of incomes, and here he shows that floor space is up slightly.  That does suggest that supply is not particularly constrained in those areas.  This could be because of looser building policies or because of less demand for living in those places.

In London, it appears that the 36% growth in real incomes has led to about 36% growth in rental costs for slightly smaller units.  That suggests that rent inflation is significantly higher than general inflation in London, which is similar to what is going on in American Closed Access cities.  That seems like the sign of a constrained asset class that collects economic rents for exclusive ownership rights.  I'm not sure that supports Mulheirn's position that there isn't a supply problem as much as he thinks it does.

Friday, March 1, 2019

February 2019 Yield Curve Update

Well, could the Fed end up with a soft landing here?  Interest rates have recovered somewhat.  We are basically at the same place we were a month ago, but it seems that sentiment has turned toward asking the Fed for more wage growth rather than worrying so much about inflation and asset prices.  And, the market seems to believe that the Fed is done hiking.  Forward inflation expectations are moving back up too.

In terms of my measure of inversion, it hasn't budged, and when inversion has happened in the past, it has always been uninverted by lowering short term rates, not by sitting tight while long term rates rise.  That doesn't mean it would be impossible.  My hunch is that we are still more likely to see an eventual contraction, where the Fed will hold to the current rate target for too long as conditions deteriorate.

It still seems like the best position is to be somewhat defensive - that the next big asset class move will be higher bond prices.

But, there does seem to be a change in the air.  Can positive sentiment be strong enough to push savers into risk-taking and push long term yields up while the Fed stays put?

Wednesday, February 27, 2019

Quick note on Interest on reserves and inflation expectations

I've been working on the follow up book to Shut Out.  Some version of this graph will probably be in it.  It shows that the deep drops in equity values didn't come from the disastrous September 2008 Fed meeting after the Lehman Brothers failure.  They came during the period when the Fed began paying interest on reserves.

The story in a nutshell is that the Fed had the target interest rate pegged at 2%, which was far too high at the time.  In order to maintain the peg, they would have had to sell every Treasury on their balance sheet.  So, in order to suck cash out of the economy and maintain their interest rate target, first they asked the Treasury to issue T-bills and deposit the proceeds at the Fed, to fund emergency loans they were making to panic-stricken financial firms so they wouldn't be inflationary.  Basically, the Treasury was selling T-bills so the Fed wouldn't have to.  Then, when the Treasury had deposited hundreds of billions of dollars at the Fed and was balking at borrowing more, the Fed began paying interest on reserves, so they could effectively borrow directly from the banks.

Now, the point of this was because they were afraid of creating inflation when they made emergency loans.

In this graph, I also have the implied expected 5 year inflation rate, from TIPS markets.  For much of the time they were sucking credit from the banking system, 5 year expected inflation was negative 1%-2%.

Saturday, February 16, 2019

Housing: Part 343 - New Homes and Vacancies During the Boom and Bust

There may be a similar post to this one back in the previous 342 housing posts, but something I happened upon today reminded me of it.  Price trends among sold homes, vacant homes for sale, and existing homes give a clue about what happened during the turn in housing.

I haven't shown it here, but the median existing home price didn't rise as much in 2004-2005 as the mean home price.  That is because expensive cities were getting more expensive, so the distribution of prices was becoming more skewed.  The rise of prices in the most expensive places caused the average to rise more than the median.

But, here we can see that the median new home was slightly declining in value relative to the median existing home, especially in 2005-2007.  That is because Americans were not adding more expensive homes to the housing stock.  They were adding less expensive homes to the housing stock, compared to past trends.  That is because the housing boom was facilitating a decline in housing expenditures the only way it could, by creating compositional shifts of population to less expensive places.  Having a building boom in less expensive cities is, in fact, the only way to reduce aggregate housing expenditures in a Closed Access context.  We can't have a building boom in the expensive cities, and rents aren't going to moderate if we slow down building.  A building boom is the only way to do it.  And, it was working.

Since the crisis, the median prices of new homes has moved much higher because we have used mortgage suppression to slow building down and to reduce ownership in low-tier markets.  Because building is the way to reduce housing expenditures, rental expense has remained level for homeowners while rent for non-owners has continued to take a larger portion of their incomes, since the crisis.

Also, note the measure of the median asking price compared to the median existing home price.  It started to rise in 2005.  This was during the mass exodus from the Closed Access cities.  At the same time, vacancies rose among non-rental homes, and inventory of homes for sale was also increasing, suggesting that sales were becoming more difficult to come by.  But, note that during that time, the average price of homes for sale was rising.  This suggests that the inventory was at the high end.  It also happens to be the case that during that time, rates of sales and prices were slowing more rapidly in high end markets within each metro area.

This continued to be the case through 2007 and 2008 when defaults started to rise.  That is because it wasn't low end borrowers defaulting that caused vacancies to rise.  It was a change in sentiment at the top end.  The top end fell first.

The median asking price of units for sale has remained elevated because of the mortgage suppression.  Today there aren't as many sales at the low end, and many low-end households are sort of grandfathered into their units, and can't readily sell and buy into another unit, either because credit is tight or because they lost equity in the crisis.

Friday, February 15, 2019

January 2019 CPI Inflation

Non-shelter inflation came in relatively close to the Fed target this month, preventing non-shelter Core CPI inflation from declining too far as the hot January 2018 figure dropped off the back end.  Core non-shelter inflation fell from 1.5% to 1.4%.  Shelter inflation is holding up at about 3.2%.

So, we continue along at low rates of non-shelter inflation that aren't disruptive, in and of themselves, but if they decline, will probably find accommodation to be tardy because of the supply-heightened shelter inflation.  The same story that has been the case for several years, really.

The inverted Eurodollar futures yield curve between now and 2021 and the leveling off of mortgage lending and home sales suggest we are moving in that direction, but of course some indicators continue to be strong.

Thursday, February 7, 2019

Upside Down CAPM: Part 9 - The mystery of long term returns

Timothy Taylor has a post up about long term returns.

There is this:
In real terms, the "safe" rate doesn't look all that safe.
Indeed, if you look at the "risky" assets like housing and corporate stock, but focus on moving averages over any given ten-year period rather than annual returns, the returns on the "risky" assets actually look rather stable.

May I suggest the upside down CAPM model?  "Risky" assets earn a relatively stable *expected* return, which is whipsawed by real shocks to cash flows.  Over longer time frames, the shocks tend to wash out, and the expected return approximates the realized return.  (Mainly here I'm talking about equities.) "Riskless" assets have an expected return that is more volatile, and reflects a discount from the stable expected return on at-risk capital, which shifts with sentiment and on-the-ground reality.  They have more stable short term cash flows, but long term returns that can fluctuate.

There is basically a risk arbitrage between volatile cash flows and the expected return on stable cash flows.

He discusses the r>g issue.  Upside down CAPM says that (at-risk) r is relatively stable.  When g is higher, then r and g tend to converge, and risk-free r rises with g and converges with at-risk r.  If we're worried about r>g, upside down CAPM says to increase g.  Mostly, that can be achieved with something like NGDP level targeting that minimizes nominal income volatility, reducing the discount that must be taken to avoid it.  I predict that under NGDP level targeting, debt levels would decline, real long term interest rates would rise, and average income growth would rise.