Tuesday, March 31, 2015

Replies to Comments, pt. 1

Kenneth Duda asked me for some additional graphs and comparisons.  I think I've touched on some of them in recent posts.  I hope to keep looking at new ways to think about housing returns as I finish the series.  In the meantime, one graph I haven't done is the one Kenneth asked for with NGDP alongside delinquencies, home prices, etc.  I have added it here.  We can only wonder what NGDP level targeting would have done.  NGDP growth did collapse along with the other measures.  It is pretty easy to believe that, if NGDP hadn't collapsed, home prices would never have dropped more than 10% and delinquencies and unemployment would have remained under 5% or 6%.

I'm becoming cynical.  If that had been the counterfactual, the papers today would probably be complaining about how high house prices and the stock market are, and how economic stability is lining the pockets of the wealthy and connected.  Most people I talk to seem very satisfied about the drop in home prices, and are put off by their current recovery.  I suppose a firm NGDPLT rule would immunize the Fed from the mood of collective self-flagellation, but I still worry what other means we would resort to if we were politically determined to destroy nominal asset values.  On the other hand, I would expect NGDP level targeting to pull real interest rates up and equity premiums down, and that itself should cause home prices to moderate.  So, maybe NGDPLT would actually quell some of those concerns.

I should probably clarify my comments about home prices.  I don't care whether they are high or low.  I care that they reflect a functioning marketplace of assets where households have relatively open access to assets with efficient prices, relative to other assets.  It's important to a functioning, coherent economy with widespread opportunity.  Given current tax laws, etc., home prices are not efficient.  I would love to see tax laws changed, which would probably pull home values back to about where home prices are now.  That would be great.  But, giving tax breaks to households who have the means to access assets returning 4-5% in real returns when their efficient returns compared to other assets would be more like 2-3% is not functional.  This is the case because mortgage financing is the only widespread avenue we have to home ownership, and it's basically been shut down for nearly a decade.  I think there might be better pathways to home ownership than a highly leveraged mortgage, but given that's what we have, it is very distortionary to be stuck in this place where the market is not functioning.

Travis V also had a request.  I always start babbling on when I try to reply to these comments from Travis.  Travis, did I come close to coherence, or do you feel I left something, or everything, unaddressed?


  1. wow. Thanks Kevin. Many people just assume that the collapse in home prices was because they were overvalued, and the spike in delinquencies was because people received loans they should not have received. It looks like the conventional wisdom is near-100% wrong.

    1. And to think that in Sept. 2008, the Fed held the Fed Funds Rate above market expectations to ward off inflation. Surely, NGDP futures could do better than that.

  2. TravisV here.

    That you very very very much. I will get to this when I have a bit more sleep.