Friday, November 30, 2018

Housing: Part 335 - Homebuyers are hedgers, not speculators

I did get a chance to look at the paper I wrote about in yesterday's post.  They do present reasons for why credit conditions were looser in 2005 than the raw SLOOS survey numbers would suggest, and they have other measures of credit markets that suggest a more symmetrical measure of credit conditions before and after the bubble and bust.  They do not show any regressions that I see that only include the boom time, which is the source of my dis-satisfaction.  But, there are probably some correlations in the paper that would still be statistically significant in the pre-2006 data.

So, I stand by my initial reaction, though I suspect the authors would have some responses that would require more detailed critiques than I offered in the post.

In any case, upon looking at the paper, I realized that there was another chart that offers some food for thought.  This is from the University of Michigan's Survey of Consumers.
One of my reactions to papers like this is that there is an extreme case of publication bias on these issues.  At some point, if there are 1,000 papers published on the question of whether credit was an important causal factor in changing home prices and 5 papers on whether supply constraints were, then the consensus is destined to settle on a conclusion that credit was the important causal element.  It's sort of a meta-level exercise in p-hacking.

Another area where the rhetorical presumptions lead to the conclusions is the choice of questions to ask in consumer surveys.  You can choose to survey home buyers or home sellers.  And you can choose to ask them whether they think rents are going up or whether they think prices are going up.  Without changing the actual beliefs of the respondents, the choice of questions and the set of responders can create a deterministic conclusion.

For instance, home buyers may bid prices up because they are seeking a rent hedge, but if surveyors only ask them if they think prices are going up, not if rents are going up, then those buyers will appear to be speculators rather than hedgers.

And, that is what is interesting about this U of M data.  It includes a question about expected home prices, and expected rising prices are never an important factor for potential buyers (the red line).  Furthermore, there is no relationship between whether home prices are seen as low (green line) and whether prices are expected to rise.  If anything, when potential buyers think it is a buyer's market because prices are low, they tend to expect prices to remain low.

In other words, potential buyers are clearly hedgers, not speculators.  They don't see low prices as an opportunity to capture capital gains.  They see low prices as an alternative to renting.  So many analyses of the housing market ignore rental value and treat the market as a purely cyclical and speculative activity.  Highly respected analysts and economists sometimes talk about housing as if the value of the investment is entirely a product of capital gains rather than rental income value.  In reality, in most locations, in real terms, rental income value is the overwhelming source of value for homeowners.  Actual households seem to understand that, even if only subconsciously.


  1. Interesting post.

    And ponder the reverse: if potential homebuyers were convinced that rents were in long-term decline, they would probably not buy at all.

    1. Well, cyclically you are probably right, but secularly, they do buy, but at lower prices. There are many places across the country where Price/Rent ratios are well below 10x because rents are expected to decline.

  2. Say what you want about the content of the paper, but that graph is a nice example of using simple measure to be friendly to colourblind people.