Wednesday, September 2, 2020

August 2020 Yield Curve

Inflation breakevens continue to rise, slowly.  After really flattening out last month, the yield curve perked up in August, somewhat, especially helped by recent Fed discussion about allowing for more catch-up inflation and a more of a symmetrical 2% inflation target.

The move up is a good sign, but higher would be better.  (Sorry, the graphs a bit of a mess.  Sept. 2 is the light blue line in the group of curves toward the bottom.)

The date of the first expected rate hike is displaying a good trend.  Last month, the expectation had moved all the way toward 2022.  Now, it's moved back to June 2021.  It looks like it might have some staying power.  Of course, the Fed communicates loose policy intentions by saying they are committed to keeping rates low for longer.  It is staggering to think such a useless communication policy is the norm, but it is what it is.  The better (more accommodating) they are the faster they will get to the first hike.

Wednesday, August 26, 2020

Housing Policy, Monetary Policy, and the Great Recession

Here's a link to a research paper the Mercatus Center has published by me and Scott Sumner.

Housing Policy, Monetary Policy, and the Great Recession

It's a combination of Scott's work on Federal Reserve policy and my work on the housing bust.  Here is our takeaway:

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Policymakers should not slow the economy in an attempt to prevent bubbles, which are not easy to identify in real time. Such efforts to reduce demand in 2007–08 were not only unnecessary but were also responsible for the reces­sion and financial crisis. 

Instead, US policymakers should adopt regulatory, credit, and monetary policies that can help stabilize the econ­omy, allowing the creation of an environment for healthy growth in living standards. Such an approach involves three components:

  1. Reform zoning regulations in urban areas. This would allow for more construction of new housing, espe­cially in closed-access cities such as Boston, Los Angeles, New York City, and San Francisco, where con­strained growth is currently resulting in high housing prices. The United States could sustainably employ many more workers in home construction if restrictions on building were removed. 
  2. Avoid a situation where lending regulations are most lax during booms and tightest during recessions. It was this sort of regulatory pattern that almost certainly exacerbated the severity of the Great Recession. 
  3. Monetary policy should seek stable growth in nominal gross domestic product (NGDP). Rather than target­ing inflation and unemployment, policymakers should aim for a relatively stable rate of growth in NGDP, the dollar value of all goods and services produced within a nation’s borders. Attempts to use monetary policy to pop bubbles in individual asset markets such as real estate often end up destabilizing the overall economy. A stable NGDP growth rate, however, will provide an environment that is conducive to a stable labor market and a stable financial system.

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If you're interested, at the link there is a link with a pdf download.  We address a wide range of evidence, some of which I am certain you have not seen before.

Sunday, August 2, 2020

Trends in Housing Supply

Here's a little sneak peak into some work I've been finishing up.   This graph shows the number of permits issued for single family homes and multi-unit projects (duplexes on up to high rise condos).  The measure is the number of units as a percentage of existing homes.  In other words, what is the gross percentage growth in the housing stock, due to single unit and multi unit building.  The black lines are the averages among all large metros.  The red lines are the averages among the "Closed Access" cities - New York City, Los Angeles, Boston, San Francisco, San Diego, and San Jose.

I find several interesting items to note here:

1) Of course, the Closed Access cities build single family homes at much lower rates than anywhere else.  Also, there was absolutely no supply response in the Closed Access cities in the single family market due to the subprime lending boom.  The rate of single family building was lower in 2005 than it had been in any year since 1996.  I have heard anecdotal defenses of the housing bust, claiming that even cities like LA had excess supply where single family homes were being built in the suburbs, where there wasn't really demand for them.  That idea is belied by the data.

2) However, as prices increased, there was a tremendous supply response in the Closed Access cities in multi-unit projects.  In spite of the horror stories of the local hoops one must jump through to build apartments, the Closed Access cities really are building many more apartments than they had before 2003.

3) Since 2004, in fact, the rate of multi-unit building in the Closed Access cities has matched the national average.  In the end, the regulatory obstacles create higher prices.  Potential residents push prices up until it is worth the trouble to build units.  The regulatory obstacles now are raising prices rather than pushing down new supply, relative to other cities.  This suggests that demand is inelastic.  Agglomeration effects, etc. are strong.  This is, in fact, bad news.  This suggests that the regulatory limits to multi-unit housing are more widespread than just the Closed Access cities.  As bad as the regulatory environment is in the Closed Access cities, other cities are not building multi-unit housing at a rate significantly higher than they are.

4) The deep cuts to mortgage lending since 2007 have cut into single family building in the Closed Access cities just as much as they have in other cities.  Building in the Closed Access cities has nearly recovered to pre-crisis levels, but that's all multi-unit.  In the 1970s and 1980s, it was common for multi-unit building to be double or triple what it is today.  To get anywhere close to that today would require a wholesale regulatory overhaul across the country.

Fortunately, the political center seems to be moving in that direction.  We have a long way to go.

I am finishing up a paper with much more detail on housing supply before the crisis, and another with much more detail on the influences on home prices.

Saturday, August 1, 2020

July 2020 Yield Curve Update

The Fed is failing us.  It started out great.  The initial reaction to the pandemic was timely and forceful.  The yield curve on March 18 was signaling confidence.  But, since then, we have been slowly sinking into stagnation.  The long end of the Eurodollar curve is barely over 1% now.  It is true that forward inflation expectations have continued to slowly rise, though they are still well under 2%.

Here are two graphs of yields.  The first shows the Eurodollar curve at several points in time.  It is now at a new low.  The second shows the expected date of the bottom in short term yields.  The yield curve bottom is now settling in on March 2022.  The date is moving away from us over time, not toward us.  This was the pattern during QE1-3, when QEs were on, the date of the first rate increase would stabilize, but the Fed always cut the QEs off before we actually arrived at the date, and when they would stop the QEs, the date would move off into the future again.

When the yield curve inverted in 2019, the Fed reacted moderately well to it, and at least the expected date of the next rate hike was relatively stable, ranging around June 2021 for all of 2019.  Then, their aggressive moves in March actually briefly moved the date closer.  I thought that the pandemic might have actually kicked them into gear a bit to focus more on nominal economic recovery.  Briefly, in March, the expected first rate hike had moved as far as September - next month.  But that didn't last.

This is not a comment on all the emergency lending programs.  They simply should be buying a lot more Treasuries until nominal income or inflation expectations recover more.

Tuesday, July 28, 2020

A miracle homeownership boom!

According to the Census Bureau, homeownership shot up by 2.6% just this quarter!  Normally, that amount of change would take a decade or more.

Vacancies also declined sharply.

According to the estimate of total housing inventory, there were 4.8 million more homeowners in the second quarter than there were in the first quarter.  To put that in perspective, the National Association of Realtors estimates that there were a bit over a million homes sold in the second quarter.

The Census report on homeownership and vacancy includes a warning about changes in their methods of data collection due to the coronavirus.  It seems likely that a lot of renters did not respond to phone interview requests, and somewhere along the lines, the statistical methods for estimating total population went haywire, and we basically don't know anything about how homeownership and vacancies changed during the quarter.

There is a lot about the country we really don't know.  It is hard to know exactly how many people are in a real financial bind and what they are doing about it.  We are flying blind, which is why we need to err on the side of generosity in public safety net provisions right now, and do everything we can to reduce the contagion risks ASAP.

Tuesday, July 7, 2020

June 2020 Yield Curve Update

The yield curve remains at about the same place it was a month ago.

Since the mid-March peak of optimism after the initial reactions to COVID-19, yields have declined, which would suggest that the Fed could do more in terms of basic nominal stimulus.  But, the decline in long-term yields has been real.  Inflation expectations have inched upward, though tepidly.

I don't have an opinion about the various lending programs in place, but it seems like there is plenty of room for the Fed to simply buy Treasuries until inflation expectations move above 2%.  A steeper yield curve would be a good sign.

In the meantime, the low point of the inversion looks like it's moving ahead in time, which is not a good sign.  Along with a steeper yield curve, it would be nice to see market expectations of sooner increases in short term rates.  The Fed can't cure COVID-19, but it can minimize the costs and dislocations caused by nominal decreases in incomes.  There is no reason for the Fed to let the market expect the yield curve to be inverted until 2022, but we might be headed there.

That being said, the Fed has been more active than what I would have expected.  I appreciate the new direction.  They aren't creating nominal economic crises like they did back in 2008.  But, there are parallels, still.  In 2008, during the month after Lehman Brothers failed, when markets were being tossed to and fro, and intensive debates raged about bailouts, TARP, and all the rest, the Fed sat on a 2% Fed Funds target rate - a target rate that was so disastrously high they never really managed to hit it.  In the midst of all the debates about unconventional policy efforts, it seems that it didn't occur to anyone to do conventional monetary policy and lower the rate.

We have sort of a similar issue now, with all the special lending programs, all the kvetching online about who got it and who didn't, etc., and in the meantime, the Fed could be purchasing many more Treasuries than they currently are.

Monday, June 8, 2020

May 2020 Yield Curve Update

 The yield curve (using Eurodollar futures) has undergone a series of shifts with the coronavirus pandemic.  In the first graph, we can see that starting from the end of January, the whole curve shifted down by early March.  It shifted down more by March 10, as the extent of the pandemic became worse.  Then, it steepened over the next week as, across the US, cities, states, and citizens took action.

Then it shifted down again in late March as the pandemic worsened in the early weeks of the lockdown.  Then it steepened again over the course of April and May.

The result of these shifts is that short term rates are much lower than they were at the beginning of March but long term rates are about the same as they were.

I would say that we have encountered a pretty hairy real economic shock, but the Fed has done a decent job of countering that shock so that the nominal shock is lower than it could be.  (Five year inflation is still under 1%, so there is room for more, but obviously the Fed has been very active.)

The second chart here is an estimate of the first month when short term rates are expected to rise.  Before the pandemic, rates were not expected to bottom until September 2021, and that date was potentially moving out in time, just like it did after the GFC when the Fed would prematurely stop doing quantitative easing.

That was the main danger of the pre-COVID economy, that the Fed was pulling back on nominal growth just a little too much.  That, by itself, is unlikely to cause a crisis or an intense contraction, but it does put the economy in more danger of running into problems, especially, as the past 3 months have made clear, we never know what's around the corner.

The shock we did get was strong enough to kick the Fed into recovery mode, so I think the stock market has basically reacted to an exchange of risks.  We got a real shock, but now we are less likely to have whatever low-level monetary stagnation we were going to get otherwise.  If the expected future date of the first rate increase continues to push back to us in time (it's now at June 2021), then that might be evidence that the Fed has mitigated some of the real shock by moving into recovery mode.  Basically, this would create a deeper but shorter recession.

The next graph is my modified inversion measure.  Any spot below the trendlines is effectively yield curve inversion.  We are still technically inverted, but now the Fed has so many programs in place to provide liquidity there might be hope for recovery even if long-term yields remain low.  Understanding that is above my pay grade.  In either case, if 10 year yields can rise above, say, 1.5%, that would definitely be bullish.  Even moreso if the Fed misinterprets buoyant yields as some sort of headwind that calls for more stimulus.

In the meantime, it's a trader's market.  There are a lot of stocks still well below their previous highs and many stocks at all-time highs.  Their relative outcomes will depend on real developments.  A lot of people are talking about where the "stock market" is, but now really is a time where prices on individual stocks can present opportunities for acting on particular knowledge or simply for having the guts to take on potentially embarrassing positions that, nonetheless, have potential.

Friday, May 8, 2020

April 2020 Yield Curve Update

The Eurodollar charts are updated through today.  The Treasuries chart is monthly.

The Treasuries chart suggests that the yield curve is functionally inverted.  (The 10 year yield needs to get above the trendline.) Forward 5 year inflation expectations are below 1%.  There is a lot of focus on the targeted lending facilities, etc., but, as in 2008, the Fed could really just do more standard stimulus.  Just buy a bunch of Treasuries.  If the cash just ends up in excess reserves with no increase in forward nominal spending and inflation expectations, then buy more.

The Eurodollar curves provide a little more optimism.  It is good that in recent days, the long end of the curve has held up and lower rates are mostly from declining rates at the short end.  The Fed could do more, but it could have done less, too.

The last chart, which is the market estimate of the first rise in Eurodollar rates, suggests also that the Fed has stimulated somewhat, but could do more.  Before the coronavirus outbreak, I was worried that the Fed was just keeping monetary policy below neutral, so that the expected first date of an eventual rate increase was slowly moving back in time, similar to what had happened after 2008 each time they suspended Quantitative Easing operations.  I was looking for the expected first date of a rate increase to move back to December 2021, which would have been bearish.

I thought that the pandemic might trigger a response from the Fed that was less complacent, and actually shorten the length of a coming contraction, even if the contraction was deeper.  At first, this seemed to be the case, with the expected first date of a rate hike moving briefly all the way up to September 2020.  Since then, it has moved back to September 2021.

At this point, a lot depends on near term real shocks related to the pandemic.  But, higher inflation expectations would help, on the margin, I think.





Disclosure: I do not have a position in UBT any more.

Wednesday, April 29, 2020

Housing: Part 364 - Rising homeownership rates

This graph from Len Kiefer at Freddie Mac shows the latest movements in homeownership rates.  The Census Bureau reported updated homeownership rates, and the trend continues to be relatively positive.

Now, you can see from the graph that homeownership rates are still very low, when accounting for age.  The best looking group in terms of recent trends is the under 35 group, which has managed to just touch the bottom end of historical norms.  That age group was largely not in the housing market when the crisis struck, so they benefit from having less damaged balance sheets.

In the other age groups, the scars from the crisis are still quite large.  Yet, even though there is a long way to go, it is nice to see movement in the right direction.
However, there is limit to this movement, and I think really what we are seeing here is the continued settlement of American households into the "new normal".  According to the New York Fed, the median FICO score of mortgage borrowers before the crisis tended to float around 715.  During the crisis it moved to as high as 780, and has generally stayed high - 770 as of the end of 2019.
Source: https://www.newyorkfed.org/microeconomics/hhdc.html
It is difficult to imagine homeownership rates increasing much further without further loosening in lending standards.

In fact, an important source of rising homeownership now is probably the work American households are doing to improve their credit.  The  Fair Isaac Corporation estimates that the average FICO score for the entire market (not just mortgage originations), has moved up from the low in 2009 of under 690 to 706.

Source: https://www.fico.com/blogs/age-beauty-credit-worthiness-youth
That sounds great.  Macroprudential regulations are pressing Americans to be more prudent.  But, there is really only so much Americans can do.  As much as anything, credit scores are a measure of how old you are.  Are you young, with student loans or a bare bones credit card?  Or are you a retired couple with the remains of a mortgage you took out in 1995, living off of a pension and an IRA?

The thing is, you know what was an important factor for that retired couple with the 830 FICO score, paying off the last few years of their mortgage?  In 1995.....they were able to get a mortgage.
The average rising FICO score and the tentatively rising homeownership rate reflect the attempts by some Americans to meet the new more strict norms for owning a home.  All else equal, maybe that is a good thing.  It seems like it must be.  But, we should keep in mind that the way we are creating this trend - really the only way to - is through policies of exclusion.  Rules and regulations that put an extra gatekeeper on the path of the household credit lifecycle.

For some number of households on the margin, the new standards are within reach, and they have made the effort to adjust.  According to Ethan Dornhelm at Fair Isaac, this group has driven the increase in FICO scores.  Many households have been intermittently locked out of credit markets.  But, analysis of households that have had continuous use of credit since 2009 shows that those households have increased their average FICO scores by 29 points.

Account-level delinquencies down double-digit percentages, substantially lower credit card utilization, lengthier credit histories, and less credit seeking activity — it is no surprise that this population has experienced a major improvement in their FICO® Score.

Those households have delayed homeownership a bit, but their balance sheets are healthier.  And, the reason that they are engaging in this adjustment is that exclusion makes returns better.  Locking a lot of households out of entry level homebuyer markets means that entry level homes are a much better deal for those who can get them.

That is one price of "macroprudence".  It creates a rift between the haves and the have nots.  Marginally better-off Americans get an even better deal as homeowners, but they have to work at it a bit harder to be "qualified".  Other Americans will be unlikely to clear that bar, and they end up paying higher rents because when homeownership becomes a better deal for families, it also becomes a better deal for landlords.  Exclusion raises their rental income.

If this is the new normal, then in the long-term, homeownership will rise a bit from here, but not back to earlier norms.  Maybe really just a few percentage points lower than they used to be.  Americans that are homeowners will live in somewhat nicer or larger homes.  Or maybe they will bid up the prices of homes in favored locations.  Americans that aren't homeowners will live in somewhat less nice units, rents will go up over time, and will take a slightly larger portion of their incomes.  This won't be noticeable.  It's not like you could visit a $600,000 home today and then go to an apartment renting for $800 a month, and then revisit similar places again in 10 years and be hit with the realization, "Huh, it really seems like the relative amenities of that apartment have declined by 20% or so compared to the amenities and the rental value of that nice home."  It will just happen, and the newspapers will just keep printing columns about how awful it is when "Wall Street is your landlord."  We will notice, vaguely, that things just seem harder for the tenant in that apartment.
There is no magical resting place where we know we have made the correct set of compromises between prudence and access.  But, one thing to keep in mind when reading those articles about greedy Wall Street landlords is that access to homeownership isn't important because of the financial speculation ownership entails.  That's as least as much a cost as an opportunity.  What is important about it is that homeowners are never in those angry articles about greedy landlords.  What is important about it is that our homes have a sacred quality about them, and when a home has a landlord and a tenant, that sanctity is split.  It has an inherent conflict that cannot be cured.
Set aside those bromides about the American Dream.  Not everyone should be or wants to be a homeowner.  In many dense urban settings, in high-rise apartment buildings, the inherent conflicts of ownership might even outweigh the inherent conflicts of tenancy.  We shouldn't thrust this choice on Americans.
In an age where some cities have political regimes that create extremely high home prices, it is easy to start to think that the important reason that the retired couple has an 830 FICO score is that they were speculators.  But, really, there are couples like that in St. Louis just as there are in San Francisco.  The couple in St. Louis may not have gotten the gains of speculation that the couple in San Francisco did, but they are likely to share a high FICO score.  The reason is that for the past 30 years, they have had the world’s best landlord, who never engaged in a sacred conflict with them, and who, furthermore, didn’t raise their rent in order to compensate for the landlord’s portion of that conflict.
As we continue along in the “new normal”, when you see articles about greedy Wall Street landlords, it is worth keeping in mind that the conflict they are engaged in isn't a product of "Wall Street".  It is an ageless conflict.  And, for households who must engage in it because, on some margin, we have decided, through public gatekeepers of credit access, that they must, their conflict was a public imposition.  We have taken something sacred from them.  Maybe, all told, for the best. But, even so, we should acknowledge our role in their travails.  We must attempt to account for these costs in the quest for public prudence.
If the major cities made it easier to build more dense housing in and near city centers over the next twenty years, then the homeownership rate might become even lower than it is now.  That would be fantastic, because it would reflect Americans engaging in voluntary tradeoffs – moving to the city because of the opportunities and lifestyle it provides, even if it comes with sacred compromises about control over personal space.  Today, public housing policy is making those voluntary trade-offs more difficult while simultaneously imposing other involuntary trade-offs.

Sunday, April 19, 2020

A Missed Prediction and A Couple of Articles

First, just to make it official, my bold coronavirus prediction in the previous post went up in flames.  I had hoped that widespread lockdowns would lead to a sharper decline in new cases, but the decline has been less pronounced.

Earlier in the month, I mapped out two trajectories.  Nothing particularly scientific about them, but at the time, either trend fit the earlier data.  It appears in the last two weeks that new case growth is following the less optimistic trend.

Second, I have seen a couple of recent articles that I figured I would comment on here.  First, here is an interesting article from Salim Furth at Market Urbanism where he comes to a counterintuitive conclusion - that coronavirus infections within the NYC metro area are negatively correlated with subway usage and density.  An interesting and thought-provoking finding that I'm not entirely sure I know what to do with.

Second, here is an article at Bloomberg: "Another U.S.-Wide Housing Slump Is Coming: The coronavirus pandemic will cause many cash-strapped Americans to sell their homes, flooding the market with excess supply." It makes many predictions about a coming housing bust due to the coronavirus.  It's hard to know exactly what will happen, so I will let you decide how much you should fear their predictions.

Obviously, in general, I will take a more optimistic view than the author.  One reason comes from this snippet at the end of the article:
It’s also impossible to quantify how Americans will perceive homeownership given the hardship so many will endure. If frugality is embraced as it was after the Great Depression, homes will once again be viewed as a utility. The McMansion mentality is at risk of extinction.
The reason why the collapse in the subprime mortgage market hit the housing market so hard was because the lead up was predicated on the fact that there had never been a nationwide decline in home prices. But now for the second time in a little more than a decade, Americans are poised to witness the impossible.    
The idea that the housing bust was fueled by the idea "that there had never been a nationwide decline in home prices" is ludicrous no matter how many times it is repeated.  It's the sort of unfalsifiable assertion that has filled in the many gaps in the bubble narrative that couldn't be filled in with data.  Even Case and Shiller didn't predict a nationwide decline in home prices. And the reason they didn't is because there was no reason for one. The reason there was a nationwide decline in home prices is because we made it effectively illegal to sell mortgages to millions of households who would have been homeowners for decades before.  We wiped out demand for housing in their neighborhoods, and prices cratered.  The bad news is that was tragic.  The good news is that you can only perform amputation once.  So, there is a lot of analysis that treats a housing collapse as a natural part of an economic downturn, based on data from the financial crisis, and it just doesn't reflect a natural response of a housing market.  Practically everyone will make that mistake, which is why I think there are potential bargains among the homebuilders.  Asset markets are usually efficient, but occasionally the humans that make them are universally wrong enough to make them inefficient.

Another myth about housing is the "McMansion mentality" as contrasted with the frugal post-depression generation.  This myth can be falsified, however.  Here is a graph that is an estimate of net residential investment.  It is residential investment (excluding brokers commissions) minus the BEA's estimate of the aging of the existing stock of housing.

The period that has been deemed the "housing bubble" period was the culmination of one or two decades of the slowest pace of residential investment since the Great Depression.  Those frugal post-Depression families were building homes like crazy - at a rate not seen since.

One reason they were building like crazy is because they built so little during the Depression.  The last decade - the decade this author associates with "the McMansion mentality" matches the Great Depression in the lack of residential investment.  Homes aren't viewed as a utility.  They are a banned substance.  Would that we were about to engage in a corrective decade like those frugal post-Depression families did.  But we won't. We can't. We're tied up in knots with ungenerous and untrue myths about our fellow countrymen.  So, we will struggle to do much better than a Depression. But it will be a Depression in real growth and consumer surplus, not a Depression in rents, prices, or landlord profits.  Coronavirus might create a brief contraction in prices, but unless we escape the real Depression, it won't be permanent.

Wednesday, April 8, 2020

Coronavirus

I haven't been writing about coronavirus here.  There are plenty of places to get coronavirus news. But, I have been posting daily updates on Facebook, just doing some basic data analysis, and people there seem to appreciate it, so I figured I'd add a post here.

My pathway on this subject has been thus: I basically wasn't paying too much attention, and was roughly in the "it's just a bad flu" camp in January and February.  But, I was increasingly nervous because people like Tyler Cowen and Robin Hanson were especially worried about it, in a conspicuous way that seemed unlike them.  Eventually, I looked closely enough to realize it was a potentially big problem.  By early March, I was wondering what we would need to do.  By mid-March most of the country had come to that realization, so I don't know that my path was much different than most people. By mid-March, I was watching exponential growth of the contagion, and worrying about the considerable damage that each new day's growth would bring.

By late March, though, I saw the first faint signs of a bending curve, and so I started tracking the numbers daily more carefully.  On March 30, I took to Twitter to predict that the high point in the national number of new daily cases would happen that week and that daily new cases would be below 5,000 by April 15.  I just barely made my first prediction.  It appears that Saturday, April 4 might be the high point for new cases.  My second prediction might be a little more difficult, though.

The first graph here is the US daily growth rates in the cumulative number of cases, hospitalizations, and deaths.  A lot is made of problems with the data.  Certainly they aren't perfect, but in terms of trends, I think it's more informative to work with it than it is to act like the data is extremely biased.  There are a lot of reasons to think that, which I'm not going to get into here.  But, one reason is that trends in all three of these measures are running parallel to each other in basically the fashion one would expect.  Also, the variation in outcomes limits the potential for the data to be too far off.  New York shows us what it looks like to have more cases.  Very few places look anything like that.  Also, we know that the death rate for older people is north of 10%.  If cases were much higher than what we think they are, there would be a lot more dying old people.  It is easy to come up with plausible reasons to doubt the data, but I just don't see the doubts standing up to the same level of scrutiny that the doubters are applying to the data.

Anyway, this is a lot like valuing equities.  You just have to be comfortable with quite a bit of unfalsifiable noise.  And, even with that, there are stories to discover.

The interesting thing about these growth rates is that they are declining in a pretty linear way.  The same is true generally of the individual states, too.  But with data this noisy and a time frame this short, it is difficult to see the difference between a linear trend and a convex trend.

Here is the national daily growth rate of cases since March 21, and I have fitted two trends to it, beginning on March 28. One is a linear decrease in the growth rate of 0.93% each day.  The other is a proportional change in the growth rate. Each days growth rate is the previous day x .93.  They both could describe the recent trend, and I would say they might serve as a decent estimate of the range of expectations going forward.

The last graph shows the results of each, in terms of daily new cases.  It makes a big difference. The linear change in the daily growth rate would have to be more or less right in order for my April 15 prediction to come true.  In the next few days, it should become clear what the actual trend is.

Exponential growth can come at you fast.  All in all, I think we did a pretty good job in most places of getting out in front of it.  But, the change in trend in the other direction can be just as surprising.  It could make a big difference for a lot of lives, a lot of jobs, and a lot of investments, if many states around the country can be mostly rid of new cases over the next couple of weeks. Then, the conversation can turn to how quickly we can get back to normal.  We'll see.

PS. The April 9 report shows more new cases than on April 4, so my first prediction failed also.

Monday, April 6, 2020

March 2020 Yield Curve Update

Well, so much has happened, I hardly need to update the yield curve.  Coronavirus has given us one big push into the recessionary outcome that we have been tentatively dancing around for some time.

The first graph here is the comparison of the 10 year yield and Fed Funds Rate.  The imminent recession has pushed the neutral rates of both down considerably.  But, the Fed has been very responsive.

There are so many moving parts moving in such extreme directions, I really don't have anything to say at this point.  Normally, I would suggest that we should be hoping for 10 year yields eventually to run up above 1.5% or 2% as a first step to recovery, but it is all so complicated now, and the Fed makes it even more complicated than it needs to be, so for now I'm just going to watch.


 Here is the yield curve at several points since the early days of the coronavirus development. Short term rates have steadily moved down but long term rates have bounced around a lot.  Again, I'm not sure I have much to say. A lot of the movement on the long end may have been related more to market disequilibrium than to any systematic trends or expectations.  Again, I am in waiting mode.

Inflation expectations have declined to less than 1%.  As long as that is the case, there is probably a pretty tight limit to how high long term rates will go.

The one thing that might be even slightly informative this month is the expected low point of the Federal Funds Rate.  It had been at September 21 for a while, suggesting that Fed policy was expected to allow some sort of economic contraction that would settle in for more than a year.

But, the coronavirus has made everything suddenly more acute and one interesting result of that is that the expected low point of the Fed Funds Rate is now March 2021. It had gone as early as September 2020, but that might have been related to short term market disequilibria.

If this holds up, it suggests that the Fed has been spurred into a more vigorous reaction, and even though the recession will be much deeper than whatever was going to happen, we might recover more quickly because the Fed has jumped from a "minding the store" approach to a "whatever it takes" approach.

We have suddenly switched from a set of fiscal and monetary approaches that were, mistakenly, aimed at making American household assets illiquid, to a new approach where the Treasury and Fed are creating liquidity wherever they can.  Because the bias for the past decade has been so far in the other direction, there is a lot to be gained by this.

But, of course, the virus creates many uncertainties.

Saturday, April 4, 2020

Investors, Gentrifiers, and Flippers, Oh My!

Last summer there was surge in the "Beware real estate investors!" genre.

Here is NPR, the Wall Street Journal, and the New York Times.  These are all quite similar in content and tone.  I will generally review the NYT piece here.

It starts with "This house in Atlanta was sold three times in one year, a sign of exploding investor interest in starter homes that is reshaping the nation’s housing market and driving up prices."  The house was in a neighborhood that had "fallen on hard times" and went from $85,000 to over $300,000 over the course of those transactions, which, according to the article, included extensive renovations and treatment for a termite infestation.

Here is some of the rhetoric in the article regarding this house:
A confluence of factors — rising construction costs, restrictive zoning rules and shifting consumer preferences, among others — has already led to a scarcity of affordably priced housing in many big cities. Investors, fueled by Wall Street capital, are snapping up much of what remains.
“If it weren’t bad enough out there for first-time home buyers, the additional competition from investors is increasingly pushing starter homes out of the reach of many households,” said Ralph McLaughlin, deputy chief economist at CoreLogic, a provider of real estate data.  
Mr. Makarovich, 34, arrived in 2016, part of a wave of young professionals moving into one of the last affordable parts of Atlanta.  
Ms. Ellis looks at the changes in her neighborhood — and her role in those changes — with some ambivalence. She once derided the out-of-towners moving into the area as carpetbaggers. Now, she is playing at least some role in that transformation. “I was like, what are we doing?” she said. “Are we doing the same thing, ultimately, bringing in people who are going to change the place?”  
Later, investors are described as “locusts (that) came down and bought everything up.”

idiosyncraticwhisk.com 2019
Source: Zillow Data
Here, I will just start with a graph comparing rent affordability and mortgage affordability for both the US and for Atlanta.  This is the portion of the median household income required to either buy a home with a conventional mortgage or to rent the same home.

idiosyncraticwhisk.com 2019
Source: Zillow Data
Beginning in 2007, there was a sharp divergence between rent and mortgage affordability.  The reason investors flooded the market, and are still active is because owning real estate suddenly became very profitable and that divergence has barely closed at all.  Even the recent small amount of reconvergence was mostly from rising mortgage rates, which have reversed since I produced these charts.  Starter homes are usually purchased with a significant amount of leverage.  Entry level buyers are absolutely not being priced out of the market.

If rising costs and zoning rules were the problem here, then both rent and mortgage affordability would be high, which is exactly what you see in a place like Los Angeles, where zoning restrictions and high costs are the actual reason for a lack of affordability.

Clearly, the problem in Atlanta isn't that investors are "snapping up" all the homes.  The problem is that homeowners aren't snapping them up.  As for young homeowners moving into the "last affordable parts of Atlanta", what can one say?  There are vast swathes of Atlanta where homes are available for less than $150,000.  In fact, there are several homes for less than $150,000 within a block of the house profiled in the story.  The reason the buyers didn't buy those houses was because they wanted a nicer house and they had the money to pay for it.  This is not a story about affordable housing.  The house that sold for over $300,000 sold to a relatively affluent couple expressing a preference.

Are all those sub-$150,000 neighborhoods suffering from too much residential investment and too many interlopers?  None of these reporters seem capable of imagining anything else. The article goes on to lament the struggles of another potential homebuyer who is shopping in the $300,000+ range in Atlanta.  Her real estate agent, who also represents investor buyers and who invests in properties himself, says, “If it is anybody’s fault, it’s probably mine, because I brought people in.”

A question one might ask here is, how can the same market provide good investment opportunities for the real estate broker while simultaneously being bereft of affordable units for the tenants?  These homes are affordable for the investor, but not potential home buyers?

One might also wonder why all that capital isn't funding new housing units.  The truth is, that capital is funding new units, but only for the "haves".  Sales of new homes with prices above $200,000 is back near the boom peak, but new homes under $200,000 are practically nowhere to be seen.  We suffer from a lack of affordable housing while mortgage affordability is fabulous, and yet home buyers just aren't interested in building new homes that sell for less than $200,000?

The truth is that there is great demand for affordable homes, but the families who would live in those homes have a very difficult time getting mortgages today.  Here is a graph comparing two measures.  The black line is the average FICO score of new mortgage borrowers.  After the crisis, loans to average American families dried up and the average FICO score of today's borrowers is much higher than it was before.  The orange line is a comparison of home prices in the most expensive 20% of Atlanta's zip codes compared to home prices in the least expensive 20% of zip codes.  When high end prices rise compared to low end prices, this line rises.  After lending standards were tightened, low end homes in Atlanta dropped by more than 30% compared to high end homes, even though there hadn't been much difference during the boom.

The real estate broker and investor is buying the homes whose tenants are blocked from getting mortgages.  Those homes are affordable, but unavailable to their tenants.  The brokers' clients are the types of buyers who can qualify for mortgages.  They aren't interested in living in $150,000 homes.  They are buying the homes above $200,000 that have risen in value and that have ample new supply coming on line.

There is no natural shortage of homes with affordable prices.  There is a shortage of Americans with permission to buy them.

It is the lack of lending that is creating this gentrification process.  Since lower tier homes have been underpriced, investors have incentives to buy those homes and fix them up so they are nice enough to attract high end buyers in the market that isn’t underpriced.  The way to stop this is to allow more working-class households in those neighborhoods to buy homes.  That will be associated with rising prices, until they are high enough that those investors aren’t attracted to the neighborhood anymore.  But, even with higher prices, those mortgages will be more affordable than rents are today.  Instead of bemoaning greedy landlords that jack up rents and evict working class tenants, why don’t we let those tenants solve their own problem?  Many of those tenants are capable of being their own landlords, and regulators today are preventing that from happening.

As the chart shows, low tier prices have been catching back up with high tier prices lately.  This makes it very tempting to point to low tier price increases since 2012 and react in fear that another credit-fueled bubble is on the way.  But, clearly, those rising prices are catch up growth.  It needs to happen.  It is a sign of a return to sustainability, not a return to unsustainable excess.  There should be more of it, and the demand should be coming from the tenants themselves rather than investors.

There is a shortage of homes with affordable rents because their tenants are denied other options and because the prices on those homes are too low to justify building more and increasing supply.  The investors are buying them because they are great deals, but they are only great deals if you can get funding.


Source
Rents have been on the rise, and the only way they will moderate is by increasing supply - bringing in capital.  Yet, these articles routinely paint capital as the enemy.  But the lack of capital is what is driving up rents.  Residential investment in new single family homes is well below any levels in the decades before the financial crisis.  The affordability problem certainly isn't due to too much investment.


Every home has to be owned by someone. If, as a matter of public policy, it can't be the tenant, then it's going to be an investor.  Presumably, New York could only have become such a great city because it was a place that welcomed change, that welcomed newcomers, and that welcomed the capital needed to house them.  How else could it become a metropolitan center with 20 million people?  Those days are in the past.  An early step in that trend was the implementation of zoning laws that led to the condemnation of tenements that housed the newcomers.  Today, these articles suggest that one is expected to apologize for fixing dilapidated units or for becoming a new resident in a long-growing city.  This is not a frame of mind that will help maintain affordability in Atlanta or regain it in New York.  A primary challenge for the twenty-first century economy is that many of our legacy economic centers now fail to perform the most basic function of an urban center – to attract and house people.  We can’t let New York spread that pathology to cities like Atlanta.

Saturday, March 21, 2020

An article at Politico about letting banks help pump some cash into the pandemic scarred economy

Here is the Mercatus Center version:

https://www.mercatus.org/publications/covid-19/get-cash-more-families-need-it-now-give-banks-more-discretion-make-home-equity

Here is the Politico.com version:
https://www.politico.com/news/agenda/2020/03/21/how-mortgages-can-ease-the-downturn-140317

An excerpt:
Certainly, the 2008 financial crisis has created some reasonable fear about mortgage lending. But the dangers that were present in 2008 are not present today. There aren’t millions of recently purchased homes in cities where prices have suddenly doubled in a short period of time. Most borrowers will be long-time homeowners who braved the worst housing market in nearly a century and managed to hold on. In other words, unlike the housing bubble, these borrowers won’t be na├»ve new buyers speculating on a frenzied market; they will be established homeowners seeking financial safety during a pandemic. If ever there was a time to suspend the post-crisis regulatory framework, that time is now.

Thursday, March 19, 2020

The current issue of the National Review focuses on housing.

I have the cover article in the current issue of the National Review.  The issue includes a few good articles on the housing affordability topic.


Here's the conclusion:
The best solution to the entire problem is greater access: freer and more-open markets, in both mortgage-funding and urban land use. 
The financial return on owning a house should come mainly from its rental value, not from excessive capital gains. That should be enough to make owning a home worthwhile. If it isn’t enough, more people will choose to rent, rents will rise, and so will the rental value of homes and the financial return on homeownership.
Today, families are not necessarily choosing to be renters. Many are renters even though it would be worthwhile to them to own their home if they could. Rents are rising just about everywhere today because we have eliminated choices. 
Solve the problem of access, and affordability will follow. Choices are the key to the goal of affordability and fairness. We need to make more of those choices legal again. 

Friday, March 13, 2020

Long Term Yields as a call option

A long time ago, I played around with the idea that when yields are near zero, forward yields act more like call options on future interest rates than unbiased market expectations of future rates.

The second half of this post.

And here I discuss the idea.


What this means is that there is an unreliable relationship between long term yields and uncertainty.  That is because there could be uncertainty about the business cycle, or rising concern about a contraction, which would normally cause rates to decline.  But, there could also be uncertainty about the various potential states of the future.  For instance, let's say that the marginal expectation for 5 year forward rates is 0.5%, with a standard deviation of 0.5%.  What if there is a change in uncertainty that, somehow, leaves the marginal expected rate the same, 0.5%, but increases the standard deviation of that expected rate.  Since all of the expected future rates that were already below zero would still all just be truncated at zero, this would actually raise the market rate, because in those future scenarios where rates are higher, they wouldn't be truncated at zero.

In the chart here, think of each forward rate as the expected value of a range of potential rates, shown here as normally distributed expectations.  But, those distributions are truncated at zero.  The expected value of all potential scenarios would be higher than the median value because every value below zero would only count as zero.

Basically, this is just like a call option.  Call options can rise in value because, either (1) the expected future price of the underlying security increases or (2) the variance of expectations about the future price increases, making expected positive outcomes more valuable.

Yields have had some strange behavior this week, and I wonder if this could be part of it.  In options speak, maybe long term expected rates have been falling but with higher implied volatility this week.

I have been wondering when the right time is to sell long bond positions.  Earlier this week might have been the best time.  But, I suspect, because of this effect, when there is a positive shock from a Fed announcement or something that signals optimism to the market, the initial effect may be that interest rates decline quite a bit because there will be more certainty about the future economy.  I doubt that there will be a strong force pushing actual rate expectations much higher in the near term.  The net effect may be that the first move in long term rates will be to settle at a lower level that is actually more in line with what expectations are now, but which market prices are now biased away from due to uncertainty.

Treasury markets seem a bit unable to perform price discovery this week, and I assert that that is evidence in favor of my hypothesis.  If the Fed can get Treasury markets to calm down, long rates might decline.

One side effect of this would be that, if the Fed announces some big stimulus that calms markets, that should trigger declining long-term rates, and that will make it look like the Fed creates stimulus by lowering rates all along the yield curve.  I think that is not a useful way to think about Fed policy.  Stimulative Fed policy should cause the long end of the yield curve to rise.  In this case, it could very well cause median expectations of future rates to rise from 0% to 0.4%, but simultaneously reduce uncertainty so that the market rate falls from 1% to 0.6%, or something.  That would give a false statistical signal about how Fed policy affects the yield curve.


Disclosure: long UBT

Monday, March 2, 2020

February 2020 Yield Curve Update

Well, this month appears to have presented the triggering event that will tip the Fed's hawkish bias over the tipping point.  It seems likely now that the Fed will chase the natural rate down to zero from here and there will be some sort of traditional contraction or recession related to the cycle.  In other words, in the second chart, we should have hoped for the dots to move up, but instead, they will likely move sharply to the left.  That chart uses monthly averages, so the 10-year yield is already well below the February point (in red).  The Fed is expected to announce an emergency rate cut.  Obviously, they should.  But, unless sub-1% short rates somehow leads to the 10 year moving up to 2% or 3%, there will likely be some period of economic contraction before rates increase again.

That means there probably still are some gains to be wrung out of a long bond position.  Regarding the other asset classes, however, housing looks increasingly bullish, and is relatively defensive in the current context, so I don't think there is much to fear in real estate.  And, equities certainly could decline, maybe even enough to become a legitimate bear market, but it is possible that they won't decline precipitously.  I think the jury is still out on that, though whatever the indexes do, this will likely be a trader's market for a while.  At some point, beaten down stocks will present long opportunities.

That relates to one bright spot in this month's update.  The yield curve has been inverted at the short end since early 2019.  The date of the expected rate low point had been September 2021 for a while.  As the last chart shows, we seem to have been moving toward that date, suggesting that there has been enough momentum in the economy to get back to a normal yield curve eventually.  But, the curve has been flattening lately, and it looked like it might tip back to December 2021 or even March 2022, which would suggest that we aren't really moving closer to a normal yield curve and that, as with the periods between QEs, more Fed loosening would be necessary to kick rates up over time.

But, with the corona virus dust up, even though yields have dropped down significantly, much of that has been at the short end.  In other words, markets expect the Fed to react.  So, even though most indicators in the past week have been negative, the yield curve has actually tilted up a little bit, and now the rate low point has moved to June 2021.  In other words, the negative thesis has probably been confirmed (We will proceed through a standard yield curve related contraction.) but as we proceed through the contraction, the market expects the Fed to be nimble enough to prevent it from being too deep or long-lasting.  I hope that's the case.






Disclosure: I have long positions in HOV, VNQ, and UBT.

Wednesday, February 26, 2020

Housing: Part 362 - All residential investment flows to consumer surplus

There is a hypothesis that I would like to dig deeper into in the long term.  Looking at the long-term data on residential investment and personal consumption expenditures on rent, I would argue that all residential investment flows to consumer surplus.  This makes real estate somewhat special as an asset class.

For example, if investment into communications technology increases, we would expect that to be related to a shift in more spending on communications tech.  More investment in railroads vs. airports would be related to more subsequent spending on rail travel vs. air travel, etc.  You build stuff and then people use it.

But, the odd thing with real estate is that our consumption of it is highly sensitive to our incomes.  We will tend to spend x% of our incomes, on average, on rent expenditures (both imputed and cash) regardless of whether, in our time and place, that spending gets us 3,000 square feet or 1,000 square feet.  In fact, spending on housing is a bit inelastic, so that, if anything, in times and places where x% gets us 1,000 square feet, we spend more for it than we do in times and places where x% gets us 3,000 square feet.

In terms of national accounting, residential investment and rental expenditures appear not to have much correlation at all.  For instance, we are spending more of our domestic incomes on rent than ever today, but we are at the end of a decade with basically no net residential investment after accounting for depreciation of the existing stock of homes.  We spend more because we invested less.

This has important implications for how we think of real estate vs. other assets.  All residential investment leads to consumer surplus.  That doesn't mean that new units are given away for free.  It means that when profitable new units are built, they reduce the rental value of the existing stock by at least as much as the added value of the new unit.

Take a look at San Francisco over the past 20 years or so.  Basically, compared to other areas, its real estate values have doubled.  This clearly is the result of restrained supply.  At some level of new supply, prices there could have been maintained at their 1997 levels, relative to other places.

Compare San Francisco to Austin. The population in Austin from 1997 to 2019 roughly doubled from about 1 million to 2 million.  San Francisco went from about six and a half million to just under eight million.  The relative median home price in Austin stayed about the same while San Francisco doubled.

How much building would it take in San Francisco to get rid of the excessive rents that are due to supply constraints?  What if we doubled the size of San Francisco?  What if it was now home to almost 16 million people?  That would have been a massively different 20 years.  That's building and growth at roughly 6 times the growth rate San Francisco allowed.  Would that be enough to eliminate the supply constraint and take two or three percentage points a year off of rent inflation?  Would it even take that much building?  Maybe only adding enough units to grow by 4 million would be enough to bring prices back down to the initial norm.

The simple math here is that if doubling the size of San Francisco would mean that prices drop back to normal, that means that trillions of dollars in residential investment would have no effect on the total value of all residential real estate in San Francisco.  They would have twice as many homes but they would all be worth half as much. So, the total value would be the same.  All those trillions of dollars would be claimed as consumer surplus in the form of lower rents.


In markets with elastic supply, there is a fairly steep decline in marginal utility.  The 3,500 square foot house just doesn't add that much value compared to the 3,000 square foot house. In those markets, that is probably the most important factor that creates an equilibrium between the cost of building and the willingness of buyers to build more.

This is a reason why real estate makes a useful tax base, and why property taxes have the potential to be an effective public revenue producer while homeowner income tax benefits are not very useful.  Those tax benefits basically induce homeowners to live in 3,500 square foot houses that they don't really value much more than they value 3,000 square foot houses, and property taxes leave total rent expenditures about the same, but those expenditures only buy 3,000 square feet instead of 3,500 square feet - again, a difference that doesn't amount to much for consumers with steeply diminishing marginal utility.

On the other hand, if the location of a unit in San Francisco makes it worth $5,000 per month, then tax effects that provide a 20% subsidy to that spending will just mean it is worth $6,000 per month.  Subsidies to housing in Austin would have to work through added residential investment while subsidies to housing in San Francisco simply flow to the bottom line of the real estate cartel members.

I am just spitballing here, thinking about this idea.  Input is welcome.

Monday, February 24, 2020

Housing Part 363 - Did increasing debt cause rising home prices?

I've been playing around with some data on home prices, debt, and construction employment, by state.  First, here is a graph covering 4 distinctive periods of time, comparing changes in home prices to changes in construction employment. (The construction employment measure I am using is the proportion of state employment that is in construction. So if at the start of the period, 5% of the state employee base is in construction, and at the end of the period it is 6%, that registers here as a 20% increase in construction employment.)

Note that there is a surprisingly stable relationship here, throughout the different phases of the boom and bust.  This includes states like California and states like Texas. (Here, I am using the 11 states for which the New York Fed publishes quarterly per capita debt statistics.) There is truly a supply response to rising prices that appears to be generally universal across geography and across time.  The problem, of course, is that in the Closed Access areas, the base level of construction employment is very low and prices are very high, so these relative changes unfortunately are heavy on price changes and light on construction changes.

Source
This is all well enough as it is.  What I would like to reconsider today is the role of debt in this relationship.  Generally, this relationship is taken to be obvious.  Here is a graph comparing home prices and mortgage levels.  Before the crisis the relationship seems unassailable.  Before moving on, I suppose I should point to the obvious divergence after 2011.  Should that give us pause regarding this relationship?

If I was to, say, suggest that, rather than having had a housing bubble, we had a moral panic about lending, which created a one-time 30% or so drop in home values because the new lending standard added a sort of liquidity premium to home equity investments, so there was a one-time price shock then prices continued upward reflecting fundamental value.  Wouldn't a graph of that event look exactly like this?  I have added Canadian data here for a counterexample.

One problem here is that there is no controversy about the potential for a lack of liquidity to push prices lower.  Home prices would go even lower if we made mortgage lending completely illegal. But that doesn't generalize to prices above a reasonable, liquid equilibrium.  The fact that more generous lending today would cause prices to rise (reducing the liquidity premium on the yield earned by real estate owners) doesn't mean that more generous lending would lead to an irrational increase in prices.

Given current interest rates, US home prices are clearly very cheap compared to rents in most places.  Here is a graph of construction employment, mortgage affordability, and rent affordability in Atlanta.  In 2008, a bunch of construction workers were laid off, and homes went on a 30%-off sale.  At the same time, the FICO score of the average borrower shot through the roof.  Lending tightened dramatically.  These market shifts are so extreme, the only reason that the shift toward affordable ownership vs. renting isn't the most talked about issue of our day is because when the body of canonized wisdom is incorrect, it literally blinds us to reality.  You can't see things that you can't look at.  An example I use is that we don't question gravity after watching a magician levitate.  Gravity is canonical. That's fine. Gravity appears to be a true concept. Making it canonical saves us loads of time and effort. But, if we believed that some people had special powers to call on angels to lift us into the air - if that was canonical - we would leave the magic show with a deeply confused and dangerous confidence about how the world works.  Why bother looking to see if there were ropes or hidden platforms? Obviously the guy called on some angels.  You could be like, "But, mom, I saw a cord attached to a harness.  That's how he did it." And your mom would get angry. "What an insulting thing to say about a man who has power over angels."

But, let's leave that all aside.  Let's look at the bubble period.  This graph compares rising debt levels and rising prices between states.  Similar to the first graph above, but the y-axis now is the change in debt rather than the change in construction employment.

Before the crisis, there was only one 2-year period (from the end of 2003 to the end of 2005) where there was any relationship at the state level between debt and home prices.  From 1999 to 2003, debt rose at about the same rate in all eleven states.

One intuition we might have about that correlation is to say, well, sure, we should expect that.  There was a mortgage bubble, and in places with inelastic supply, prices went up, and in places with elastic supply, they built too many homes.  But, remember the first graph.  The change in construction was positively correlated with rising prices, not negatively.  Debt in states like Ohio and Michigan was not related to a significant rise in construction or prices.  The only state that is an outlier from 1999-2003 was Texas, which saw debt rise at a lower rate than most other states, even though Texas had a healthy building market.

One problem is that the canonized narrative is a hodge-podge of different stories.  They all make sense as individual parts of a broader narrative that properly puts supply constraints and rising rents at the center of the story. But, they really don't fit together well within the canonized narrative.  The idea that households were both desperately cashing out housing ATMs and also engaging in a bidding war on entry level housing is a tough pair of assertions to pair up.  I think there is some truth to both stories, but the true version makes more sense if we remove the presumption that the "big story" here is debt leading to an unsustainable price bubble.  The price bubble was largely an equity bubble.  Where mortgage debt increased, it was generally where there was a combination of available home equity and declining rates of local economic growth that caused demand for liquid assets.  So, until the end of 2003, prices were unrelated to levels of debt.

From the late 1990s until 2008, mortgage debt increased from about 43% of GDP to 73%.  From the end of 2003 to the end of 2005, that figure increased by about 8%.  So, 8% out of 30% of the rise was associated with rising home prices, at the state level.  Even there, that doesn't mean that the entire increase in home prices during that time was caused by expanding mortgage issuance, but at least it's plausible that some of it could be.  Now, it could be that the 6% increase in mortgages/GDP after 2005 was recklessly underwritten and ultimately destabilizing, but it had nothing to do with rising home prices.  And, much of the 16% increase that happened before 2004 happened in places with neither unusually rising prices nor rising rates of construction.

It is likely that much of the correlation even in 2004 and 2005 between debt and price growth is a lagged reaction to the price growth of the previous few years.  Buyers requiring more debt to buy more expensive homes and homeowners having more access to home equity.  That makes debt a lagging factor.

That clearly is the case during the period from the end of 2005 to the end of 2008, which was characterized by declining prices while debt was still increasing.  During that period, the relationship between changes in prices and changes in debt became negative.  That is because both declining prices and increasing debts were largely the product of prices having been driven higher before.  Prices had more room to drop and homeowners had more equity to draw on during the early recession period.  At least, until prices collapsed so much and lenders pulled back, so that they didn't have access to equity any longer.

Then, after 2008, there really was a highly positive correlation between rising prices and rising debts, or, more to the point, declining prices and declining debts.

The subsequent events and the policy postures that they called for take on a much different hue if causation largely goes from rising prices to rising debts than if causation largely goes from rising debts to rising prices.  Unfortunately, we went all in on the latter when the case for it was not necessarily strong.