Wednesday, May 16, 2018

Housing: Part 297 - A Review of the Soon-To-Be New View on Housing

As I prepare parts of this project for wider dissemination later this year, it is nice to see several schools of thought which inform this new view gaining favor. My project is the puzzle piece that solves some of the remaining mysteries and pulls these schools of thought into a coherent whole.

There are three movements or focal points of research that have become building blocks for this new view:
  • Market Monetarism:  This is a school of thought based on the idea that central banks should focus on stabilizing nominal incomes rather than focusing on inflation and unemployment. This seems to be gaining momentum, and it seems like it would lead to better central bank policy outcomes. The important point for my project is that, since market monetarists tend to measure de facto central bank outcomes with nominal income growth, they tend to conclude that the financial crisis was created by tight monetary policy in 2008, the crisis was not inevitable, and there was no direct, inevitable link between the housing bust that had been building in 2006 and 2007 and the recession in 2008 and 2009.

  • The Passive Credit School: Researchers like Demyanyk or Adelino, Schoar, & Severino, or Albanesi, De Giorgi, & Nosal, or Foote, Loewenstein, & Willen have been building a set of research that questions some of the presumptions of the popular accounts of the housing bubble. Borrowers during the boom didn't have particularly low incomes, low credit scores, or less education than usual, the crisis wasn't triggered by defaults that followed rate resets (as many had predicted), systemically destabilizing mortgage products were mostly being used by sophisticated borrowers who defaulted because home prices collapsed rather than because of affordability problems. Etc.

  • The New Urbanization:  Richard Florida has been describing this phenomenon for years. Hsieh & Moretti have done some interesting work. I would put the work of Autor, Dorn, & Hanson in this category. The YIMBY movement is building steam. Even though many urban housing activists tend to seek regulatory solutions rather than focusing on supply, there is a budding consensus that a lack of affordable urban housing is a really big problem

There are several blind spots and false premises which keep these movements from seeing that an endemic shortage of urban housing is the connective tissue that binds them all together.
The broad consensus that the housing boom was, fundamentally, a credit bubble prevents market monetarists from taking the leap to realizing that even the housing crisis was caused by destabilizing tight monetary and credit policies, which date back to as early as 2006 and continue in many ways to today. It's hard enough to try to claim that the housing bubble and bust didn't cause the recession. It would be crazy to try to argue that a recession caused the housing bust, but that is essentially what happened.

That broad consensus also prevents the passive credit school from pushing to a strong conclusion, because since they still tend to believe what happened can be described as a bubble, that there has to be some ad hoc explanation for why a bubble developed. This increases the confidence that the credit supply school has in the competing theory that unsustainable credit supply was the causal factor in the housing bubble and bust. The passive credit school would be on much firmer ground to conclude that there was no (or only an isolated) housing bubble. But, they cannot reach that conclusion based on currently accepted presumptions.

The new urban movement also is limited by the consensus presumptions about the housing boom. If your motivating principle is that we need more housing, it's a pretty big obstacle to have this idea that only a dozen years ago our big problem was that we had too much housing. So, again, their voices are weakened whenever policies that would solve the problem would seem, as a first order effect, to increase lending, home prices, or building development. All of their work is much more coherent once that false presumption is removed.

New evidence, which help to see that the consensus presumptions are wrong, include:
  • The flight from homeownership, and from living in the urban centers with constrained housing markets developed before the most aggressive price inflation happened, before the private securitization markets boomed, well before the CDO market that started the series of financial panics.  First time home buyers were declining as a portion of all households by 2005.  The private securitization boom was not associated with any increase in lending to first time buyers.
  • The peak bubble period was associated with a massive migration event from cities with high home prices to cities with lower home prices.
  • Taking all types of units into account, there was never an oversupply of housing in any city with a strong housing market. The rise in construction employment was not unsustainable.
  • The cities where low tier home prices rose more sharply than prices in high tier markets were an anomaly, and the source of that price differential was not credit supply.
  • The anomalous collapse in low tier home prices was universal across cities, and it happened after late 2008. It was not due to a supply overhang or to a lack of qualified borrowers. It was due to the regulatory imposition of extremely tight lending standards through the federally controlled GSEs and standards set by Dodd-Frank.
  • The time after the extreme tightening in credit standards is the time when the US market deviates from international comparisons. US-specific monetary and credit policies aren't likely explanations of boom period home prices because boom period prices followed international patterns.
  • The primary factor influencing home prices during the boom was location, and when comparing locations, changing rent levels explains nearly all rising prices.
In sum, rising prices during the boom were due to deprivation of supply, not excess credit and money. Once this realization is allowed to inform our presumptions about the market, the importance of the three schools of thought above, and the over-riding problem that connects them - an endemic shortage of housing - becomes clear.

Increased housing supply is what would have fixed the housing bubble. The myth that there was an oversupply overwhelmed our collective sense about what was happening. The Fed was never too accommodative. Home buyers, for the most part, were never too optimistic or speculative. There were never too many homes.

Once those conditions are accepted, the bold conclusions that the three movements above should lead to become obvious, and those seemingly unrelated movements reinforce each other.

1 comment:

  1. There are several blind spots and false premises which keep these movements from seeing that an endemic shortage of urban housing is the connective tissue that binds them all together.---KE

    I am genuflecting to The Idiosyncratic Whisk. Bravo.