Wednesday, October 29, 2014

CoreLogic Housing Analysis

Here is an interesting report on housing from CoreLogic.  (HT: @esoltas )  Several slides are brilliant, which is to say they corroborate my stated positions on housing  ;-) .

Here are three slides, in particular:

The first graph shows relative cyclical behaviors of several housing market factors.  This suggests that the remaining low home market values, relative to mortgages, remain a dampening factor.  Every other factor is well below normal levels.  The most important question I will be looking at over the next few months will be how much these other factors are improved after the FHFA rule changes are implemented.  Will it be enough to help homes recover while LTV remains so high?

The next graph shows the proportion of credit scores among home buyers.  First, the obvious issue here is that FICO scores are incredibly high right now.  Mortgage markets are extremely tight now.  There is tremendous weight on housing demand now due to limited credit.  But, I think FICO scores in the 2001-2005 period are just as interesting.  It would be nice to see this data farther back in time.  But, in the 2001-2005 period, there was no trend in FICO scores indicating looser lending standards - at least according to CoreLogic.  We've heard a lot of anecdotal evidence of poor credit buyers being prodded into expensive homes. And, I've seen CMOs in that period that were being purchased at low rates, despite being composed of loans with high and homogeneous risk profiles.  And, I've seen evidence of increases in sub-prime lending on an absolute basis during that time.  But, this data suggests that the profile of the typical home buyer was stable.

The next graph again shows how tight credit conditions are now.

But, again, I want to point to the 2001-2005 and to the 2006-2007 time periods.  Conditions were relatively stable through 2005.  Relative home prices topped out at the end of 2005, and from the end of 2005 to the middle of 2007, delinquencies remained slightly elevated, but not out of normal range.  Note that during this period, FICO scores were rising.  So, by these measures, the housing market was operating with a fairly normal, prudent set of trends.

Natural recoveries in long term real interest rates caused a pause in relative home prices, which created some cyclical risks in the housing market.  Lenders responded with slightly tighter lending standards.  And, the result of these adjustments was a slightly increased, but manageable delinquency rate.

But, by mid-2007 the narrative had taken hold of this country, that home prices must have been too high, and it must have been because bankers were driven by greed to prod us into a speculative frenzy, and so a policy regime that would have allowed for more possible gains in home prices would be unacceptable.  So, beginning in 2007, the Fed began flatlining their balance sheet, and currency in circulation followed suit.  As liquidity problems started to create crises, they were handled with extraordinary policies instead of with basic monetary expansion.  Even though our collective wisdom through the marketplace had been signaling for a decade that home prices should be higher, our conscious consensus view was that this couldn't possibly be the case.  So, we weren't going to let it happen.  And the Fed obliged.  The Fed could have lowered the Fed Funds Rate and increased its treasury holdings in early 2007.  In fact, because of the effect this would have on housing supply, this might have actually led to lower CPI inflation readings in 2007 and 2008.  It would probably have led to some resurgence in home prices.  Credit standards could have loosened back up to the previously stable levels.  But, the same 300 million people who would have been bidding those home prices up in practice couldn't believe that home prices should be bid up in theory.  So the Fed pissed in our soup bowl just like we wanted, and most people say "Thank you" to the Fed and then blame the soup cook.  I think it could be reasonably argued that Fed policy was too tight all the way back to mid 2006, when rent inflation started to rise strongly (because of a supply shock in housing credit markets) and Core minus Shelter inflation started to drop.  But, it was manageably tight.  Lower the Fed Funds Rate to 4%, and enjoy 4 more years of expansion.  In mid-to-late 2007 it went from slightly tight to recessionary.  Lower short term rates a little sooner or a little faster and maybe see unemployment peak at 6%.  And by September 2008, it was crisis-level tight.


  1. Excellent blogging.

    The housing market tumble was matched by a cmmercial property tumble...ergo residential underwriting standards were no worse than commercial...

    1. Thanks Benjamin. That's a good point about commercial property.