Thursday, May 5, 2016

Housing: Part 145 - Deconstructing Home Prices

When we look at home price appreciation by city and by income, we can estimate the different factors behind price changes.  Here are three:

1) Broad based price increases.  These reflect changes in real interest rates and the general level of inflation.  Price increases across incomes in the Open Access cities can be our estimate of this factor.

2) Localized changes across incomes.  These reflect local rent inflation and expected local rent inflation.  Or, if one believes in such things, local irrational bubble behavior.

3) Changing prices that differ across incomes.  Since low income households are more dependent on lenient credit markets, home prices in low-income areas might rise more sharply than in high income areas when credit is flowing generously and might fall relative to high income areas when credit is tight.

In these graphs, the green bars (Open Access cities) can be our estimates of real interest rate effects and general inflation.

The various levels of the red (Closed), orange (Contagion), and blue (Other) bars can be our estimate of differing local rent inflation trends.  Some may attribute some of the rise in the Contagion cities (Phoenix, Las Vegas, Miami, Tampa) to an unsustainable bubble, but if the rise is across incomes, this is most accurately thought of as a rent or value expectations bubble, not a credit bubble.

The slope of the bars across incomes reflects credit access.  Outside the Closed Access cities, this generally amounts to about 6% from the lowest to the highest income zip codes, in the period up to 2006.  This is the portion of the boom that we might attribute to credit.

In the Closed Access cities, the slope is more like 25% before 2006.  So, is this due to freely flowing credit?  This is the central factor in the great error of our time.  It has been largely attributed to lenient credit.  Certainly, when fighting over arbitrarily rationed necessities in a Closed Access world, credit is helpful.  But, two clues suggest that it is not a signal of lenient credit.  First, the fact that this pattern only shows up in these cities.  Second, in the credit constrained period after 2006, where the slope of price changes in the Open and Contagion cities is in the negative 30%+ range, the slope in the Closed Access cities is similar to the other cities, closer to negative 20%.

The one set of cities that appears to have had the most positive effect from generous credit has among the least effect from constrained credit.  That is because credit wasn't the causal factor.  The causal factor was the great migration flow of high income households into the Closed Access cities and the forced displacement of low income households.

The third graph, which includes the entire period, makes the odd pattern of the Closed Access cities clear.  While we have hobbled low income housing markets everywhere else, in the Closed Access cities, the inevitable march of rising housing expenses just keeps going.  This will probably worsen as the economy continues to recover.

In the meantime, we have put a stop to all those predatory lenders in Texas funding $80,000 two-bedroom bungalows for school teachers and factory workers, priced at 8 times gross rent.  Good for you, America!  Who says we can't accomplish something big when we all come together for a cause?  Who the hell do those people thing they are, anyway?  People do stuff like that unless you pass rules to stop them.  And, the bankers just have dollar signs in their eyes.  They're not going to stop unless we make them stop.

Isn't it funny, too, how on the right wing end of this erroneous attitude, you tend to hear about how this was a bubble caused by Fed accommodation, federal subsidies to the housing industry, and the GSEs.  Yet, by 2005, the GSEs had been pulled back so much that the family buying a $80,000 bungalow in Texas was likely utilizing completely privatized financing at a time when the Federal Reserve had rates pinned up at 5.25% with an inverted yield curve.

Can someone please clarify for me exactly why we needed to knock 30% off the price of homes at the low end of the market in Texas, Georgia, and a good portion of the rest of the country that looked similar?  If your answer to this is that this was just a side effect of the crisis created by the places with housing bubbles, then please refer me to a single article or book written by anybody in the last decade pleading for more generous credit policies in the majority of the country that never, by any stretch of the imagination, had elevated home prices, so that this home price collapse wouldn't have had to happen to them.  Please show me a single piece of legislation that wasn't some mood affiliation tool about extracting equity from banks on underwater mortgages or some cramdown or mortgage support, but that simply supported new buyers at market prices in the large sections of the country where clearly home prices had fallen below efficient levels because of credit constraints.  Is there any?

Sorry.  I'm trying to stay civil in the book.  I come here to blow off steam.


  1. Great post. You are really nailing this topic.

    Print more money, build more housing.

    1. Thanks! The zip code level data certainly has been invigorating.

  2. Question. Nominal house prices averaged 150k in 2000 in Las Vegas, and 350k in 2005/2006 according to JP's charts. It is now around 200k. How does that compare to your chart 1 for contagion cities? It doesn't seem to add up. Can you explain the discrepancy?

  3. The charts are in natural log terms (IOW, continuously compounded), so in chart 1, a rise of just over 1.0 is just under a 200% growth - pretty close to the difference between 150k and 350k.

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