tag:blogger.com,1999:blog-11100148857789964592024-03-18T19:57:55.449-07:00 Idiosyncratic WhiskPulling yolks from the scramble.Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.comBlogger1078125tag:blogger.com,1999:blog-1110014885778996459.post-22890721123571308322023-03-19T12:29:00.002-07:002023-03-19T12:29:17.924-07:00The Erdmann Housing Tracker<p> For my latest work, please see my new substack newsletter:</p><p><br /></p><p><a href="https://kevinerdmann.substack.com/">The Erdmann Housing Tracker</a></p>Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com32tag:blogger.com,1999:blog-1110014885778996459.post-13950539725013163672022-04-24T18:56:00.002-07:002022-04-24T18:56:42.875-07:00Some Thoughts on Kevin Drum's Housing Supply Post<p> A few weeks ago, Kevin Drum wrote a <a href="https://jabberwocking.com/here-is-my-gripe-with-progressive-urbanists/">blog post</a> that expressed skepticism about "America’s housing crisis." He got quite a bit of pushback against that, so he has followed up with a <a href="https://jabberwocking.com/heres-a-long-boring-look-at-the-housing-market/">new post</a>, doubling down on his skepticism.</p><p>It is a very interesting post, mostly because Drum does such an impressive job at convincingly feeling the parts of the elephant that make his point. The post is a study in rhetoric and in the limits of empirical debate to inform a conversation. I would take some issue with most of the specific points of fact, but in a way that I suspect a skeptic would consider pedantic. And, those points of fact are wrapped in a broader assertion that is expressed as a generality - a feeling - that hampers pedantry, and so the whole argument is somewhat protected from criticism.</p><p>I suspect that for a reader, this comes across much like my own work does. My books are full of empirical reinforcement of a core idea, and so for the reader, they are either deeply argued concepts or Gish gallops, and the problem for those kinds of arguments is that they present a skeptic with a lot of work. The skeptic will require a deep engagement with the long line of points in order to have their mind changed, or to confirm their skepticism. The other choice is to write it off as a Gish gallop without doing that work. The problem is that that work is not free! Writing off the full argument can be a rational response! So, I find that with my work, many of the readers are in two categories: (1) those who weren't skeptical or for whom something about the work overcame their skepticism, and they either do deeply engage in it with a sense of self-directed discovery or they accept it as basically true, either in whole, or with some minor remaining potential caveats, and (2) skeptics who don't engage with it deeply. I'm not sure that there is a single skeptic that has deeply engaged with my work, and I can't blame them. It is necessarily a complex web that I have tackled and it would take a lot of work.</p><p>It's a bit of a paradox. If my work is worthwhile, it is essential. But, if it isn't worthwhile, then anyone who engages with it skeptically will find at the end that they wasted a lot of effort.</p><p>Anyway, back to Drum, the generality I take issue with is comments such as this:</p><blockquote><p>But beyond that there are always individual places that are popular and expensive, and there are individual neighborhoods within those places that are even more expensive. These areas change from decade to decade as different cities get hot, and there's really no way around this. This doesn't indicate a housing shortage any more than high prices for Gucci bags indicates a shortage of purses.</p></blockquote><p>It seems like folksy wisdom, and surely there is a basic truth to it. New generations tend to have it better than older generations, and frequently cry foul at conditions that their grandparents would have embraced or accepted. The current generation is no different than any other generation in this regard. But, this point is simply wrong. This is a new era in American housing. The most economically dynamic cities have been shedding domestic migrants by the hundreds of thousands for years now. That is anomalous. One can see this both within the history of those cities and in other cities. NYC and LA are dominant because when they originally were ascendant, they were magnets for the working class. Of course they grew so large because, given their economic draw, they were affordable! Looking elsewhere, the norm until recent decades was for metro areas to grow when they are economically ascendent and to stop growing when they struggle. During the early and mid-20th century, the Detroit metro population grew by nearly 3% annually. Back then there weren't individual cities with incomes far above the norm, like there are today. Over the early 20th century, people moved to opportunity and regional incomes were converging as a result. Today they can't, so some metro area incomes are skyrocketing away from the norm. This is new!</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEgvFoX2Ti16BwLJ1PBjqXEaRCH5Zb3f2hz5-Sub-QtotTK2t1ISKdXrW-6itIS-D66nn3dwNyQUwb4wRCmdBc9X8Sre2hhKFWzVbpe2m74cuj4aFyBnSx5Qtr3gpPd9oZAm4QgVxn9sA6FlkbXAzm8B3STJm6EqpK9nep6AlfvKFyjb_7Ko_Za-Lw" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="452" data-original-width="752" height="240" src="https://blogger.googleusercontent.com/img/a/AVvXsEgvFoX2Ti16BwLJ1PBjqXEaRCH5Zb3f2hz5-Sub-QtotTK2t1ISKdXrW-6itIS-D66nn3dwNyQUwb4wRCmdBc9X8Sre2hhKFWzVbpe2m74cuj4aFyBnSx5Qtr3gpPd9oZAm4QgVxn9sA6FlkbXAzm8B3STJm6EqpK9nep6AlfvKFyjb_7Ko_Za-Lw=w400-h240" width="400" /></a></div>Also, it isn't the nice neighborhoods that are getting expensive. It's the cheapest neighborhoods in the most housing constrained metros. Here is a graph of home prices in the LA metro since 2000. The pressure here is to trade down on the socio-economic status of a neighborhood in order to get into the LA metro. Young Americans aren't complaining that they can't move straight into Beverly Hills. They are actually bidding up home prices in Compton to try to get into a massive metro area that refuses to grow. Population growth of American cities with the most buoyant local incomes has been recently countercyclical. They barely ever grow, and when the economy starts to do better, they actually start shrinking. This is really weird! In fact, a decent portion of their ascendent local incomes is really just a side effect of the poorest residents systematically being forced to other cities. This is something that I would expect Kevin Drum, of all people, to be really bothered by. This isn't just the way it's always been.<p></p><p>On his more empirical claims, I will just lay out one of my pedantic points. He highlights two facts that appear to downplay the supply crisis narrative. First, he compares cpi housing inflation with cpi inflation excluding shelter. He finds that housing inflation is up 7% more than non-shelter inflation since 2000. He says that of the data he highlights, this is only one of two metrics that point to a housing shortage, but they are "very tiny ones". I have a pedantic sub-point here. He uses "cpi housing" here, which includes furniture, utilities, etc. There is a better metric - "cpi shelter", which only includes the actual shelter. But, even that includes things like lodging. You can even dig down deeper and look at "cpi rent of primary residence". Here's a chart.</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEgLuP01J8ZYE-fvb77j44xf1qcYdnw-gYL6e7yoUl7GSIMiNnDU8n4PL_kqLehua2c_oocETnyDcsNzjexhCgOKlg0TkXqiFCIXhvq2omC4zP3yvI_OkaYsVuifIBw5Lm6mDjICOix2pbLsLEw8GWRRcUOb1_A4sSSLH0-bP7hBLr0L72Hlk9LcpA" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img data-original-height="481" data-original-width="1170" height="264" src="https://blogger.googleusercontent.com/img/a/AVvXsEgLuP01J8ZYE-fvb77j44xf1qcYdnw-gYL6e7yoUl7GSIMiNnDU8n4PL_kqLehua2c_oocETnyDcsNzjexhCgOKlg0TkXqiFCIXhvq2omC4zP3yvI_OkaYsVuifIBw5Lm6mDjICOix2pbLsLEw8GWRRcUOb1_A4sSSLH0-bP7hBLr0L72Hlk9LcpA=w640-h264" title="source: https://fred.stlouisfed.org/graph/?g=Owmx" width="640" /></a></div><br /><br /><p></p><p></p><div class="separator" style="clear: both; text-align: center;"></div>The measure he uses shows 7% excess inflation since 2000. "Shelter" excess inflation is 10%. "Rent of primary residence" excess inflation is 21%. Is that still "very tiny"?<p></p><p>Then, he highlights "rent as percent of household income" from 2000 to 2020, which increased from 22% to 25%. He counts this as a lack of evidence that rents are skyrocketing.<br /></p><p>But, think about this for a minute. If rent inflation is high (and in fact, much higher than his "housing" metric suggested), and yet total spending on rent is relatively level, then that means that American households are greatly decreasing their relative real housing consumption. Here are a couple of graphs showing how the long term trend in gross rent/GDP started rising in the late 1970s. Before 1980, there was generally below-average rent inflation and growth in real housing consumption, which averaged out to a level 8.5%ish of GDP being spent on shelter. After 1980, rent kept taking more of US incomes, but after 1980, this was a combination of high rent inflation and below-average real housing consumption. The real consumption hasn't receded fast enough to make up for the inflation, so total spending on housing has increased.</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEi45flPXbI1uIeTjWzv39uLOipkZGCDzwuA2bfx0UMDtKvRRcBfHxsthUjRf7Yog0MbHcgb1tFre4OBo4Teukw-h86WkJjawm-Q8wSWRZDdUoWnbinbYizIK5wphpUmwXbaVWqE_c0ICAPIi-lXCX35AHaFf-SuwtzpV4BlM_Rc2EcckV_MZr8d9Q" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="1061" data-original-width="1049" height="640" src="https://blogger.googleusercontent.com/img/a/AVvXsEi45flPXbI1uIeTjWzv39uLOipkZGCDzwuA2bfx0UMDtKvRRcBfHxsthUjRf7Yog0MbHcgb1tFre4OBo4Teukw-h86WkJjawm-Q8wSWRZDdUoWnbinbYizIK5wphpUmwXbaVWqE_c0ICAPIi-lXCX35AHaFf-SuwtzpV4BlM_Rc2EcckV_MZr8d9Q=w632-h640" width="632" /></a></div>There is one period where the 5 year rolling average in real housing expenditure growth was faster than real GDP growth - 2009-2012. That isn't because we were building lots of housing then. Ironically, that's because in 2007-2008, the Fed was convinced that we had too much housing, and as I described in "<a href="https://www.amazon.com/gp/product/B09LJKYPCB/">Building from the Ground Up</a>", they basically lowered American incomes until Americans were willing or able to purchase less housing. Since Americans were actually lacking in adequate housing and already spending more of our incomes on it than we would like to, this was catastrophic. That error - the same error Drum is still making about the supply problem - was basically the cause of the financial crisis and recession.<p></p><p>Since the crisis only worsened the housing supply issue, Americans have spent the last decade growing real housing consumption at the lowest relative rate since WW II because we have no other choice. Yet, as long as we continue to be deprived of adequate housing supply, this will only partially offset rising rents.</p><p>There are several implications of this. First, this certainly doesn't sit well with Drum's general assertion that younger generations expect to hit the ground running, increasing their housing consumption more and earlier than their parents and grandparents had. They are increasing their real housing consumption at a lower relative rate than any previous recent generations did.</p><p>Some people will try to suggest that the reduction in real housing consumption is voluntary - smaller families, the norm that as real incomes rise real consumption of housing tends to grow at less than a 1:1 ratio with income, etc. But, if that was the case, rent inflation should be lower. The fact that rent inflation is above average, even though real housing consumption has been low for decades, points to a substantial supply problem.</p><p>So, this is a case of Drum highlighting two "parts of the elephant" that look like they push against the housing supply narrative, when, in fact, taken together, they point to a supply problem.</p><p>Where I would like to conclude, however, is something that Drum gets right that many people don't. He closes with:</p><blockquote><p><i>What about all those investors snapping up houses so the rest of us can't buy them? Isn't that killing off the housing supply?</i></p><p>No. Housing supply is the same regardless of who owns the homes. Besides, corporate and real estate investors buy a small fraction of all the houses sold in America. There are a few specific areas where they're very active, but that's it.</p><p>The real lesson from this trend is not that housing supply is tight, but that in certain areas starter homes are selling too cheaply and apartment rents are too high. That's why it's profitable to buy low-end homes and turn them into rentals. This suggests that in certain places there's an imbalance of what's being built and what people want, but that's likely to balance out before long.</p></blockquote><p>This is correct (except for thinking that it isn't evidence of tight supply)! And, I find this interesting for two reasons.</p><p>First, it would be easy for a skeptic to produce an empirical retort to his closing statement very similar to his retort here against the housing supply narrative. They could show that low tier prices have been increasing along with rising institutional ownership. They could argue that when corporate owners buy up more of the housing stock, they ruthlessly raise rents, and that they are raising rents even though new construction has been growing for a decade. They could point out that homeownership rates are lowest in the places where home prices have been bid up the highest. They could point out that prices are, in fact, rising the fastest where rents are rising the fastest. Drum is right on this, and they would be wrong, yet there are many empirical points just lying in wait to support a number of sets of premises.</p><p>I suppose that means you should be skeptical of all of us. Or, unfortunately, it means that before you can really settle on a point of view here, you're going to have to put in a lot of difficult work parsing the various empirical assertions.</p><p>Second, this is a very good example of how mortgage suppression since 2007 has completely muddied the rhetorical waters on this issue, and made it very difficult to do that parsing.</p><p>Drum is right that the prices are too low and rents are too high in many places. The reason that is the case is because we killed off low-tier mortgage lending in 2008, which is part of what has made housing supply even worse.</p><p>Here's a chart of home prices from 2002-2015, by ZIP code income. The myth about 2002-2006 was that loose lending drove up the prices of low-tier homes to unsustainable levels, and busting the hobgoblin at the center of that myth was part of what we tried to do in 2008. We did it disastrously well. Over the entire period from 2002-2015, low-tier home prices rose much less than high-tier prices. And, in fact, for the most part, they rose together from 2002-2006, and then we shit all over low tier mortgage lending and created a low-tier housing bust in the shadow of the primary housing bust that people are still making excuses for today. The crappy outcome of sucking 30% out of low-tier home prices relative to high-tier prices is bad enough. We should talk about that. But, that's not the end of it.</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEgofZ8xbb8_1BELN4JYJM6yderAklHkGTOh4fBtA3x8r0xZUnh2EUKMBazJZwqsQAt7ATv_j4QIer1pxwiAHMiGZcGa0IugFAyQObHmZKph6kyADXP6L87NRqTRDyMewIfwg7HJnZ3AIx3zTsnFXDrLbqXgaJMCyfAhSgveC_-TkChDR03R-P5lDA" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="349" data-original-width="628" height="223" src="https://blogger.googleusercontent.com/img/a/AVvXsEgofZ8xbb8_1BELN4JYJM6yderAklHkGTOh4fBtA3x8r0xZUnh2EUKMBazJZwqsQAt7ATv_j4QIer1pxwiAHMiGZcGa0IugFAyQObHmZKph6kyADXP6L87NRqTRDyMewIfwg7HJnZ3AIx3zTsnFXDrLbqXgaJMCyfAhSgveC_-TkChDR03R-P5lDA=w400-h223" width="400" /></a></div>At the end of the day, though it's complicated, prices of homes are going to tend toward the cost of alternative new homes. So, you can't just push home prices around to wherever you want. If you push home prices unsustainably low, like we did to low-tier prices with suppressed mortgage lending, they will eventually want to rise again. And, the way they will rise is through rising rents.<p></p><p>As even Drum must agree, based on the charts he highlights, the housing bust did little to bring down rents. So, now, the next chart, is a scatterplot where the 2002-2015 price appreciation is on the x-axis, and the subsequent rent inflation from 2015-2021 is on the y-axis.</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEgCKIkeyIL5RYLFcKv6MbjKudWu7ycnAMDLXTTDUCtcavTL2CjPDVuvpZjwQUqdYoxCI4aRCa88UPxEPcE7Kl9qEbsQc3PcVii_5l5qeUnF0VG_70-fHeXn-gryvBWnBCdeEmNxoQe-2x9xZsgxgFJeh-P6mfBtn6ErMNp0hksbJKWtQfMCYKunTg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="343" data-original-width="619" height="221" src="https://blogger.googleusercontent.com/img/a/AVvXsEgCKIkeyIL5RYLFcKv6MbjKudWu7ycnAMDLXTTDUCtcavTL2CjPDVuvpZjwQUqdYoxCI4aRCa88UPxEPcE7Kl9qEbsQc3PcVii_5l5qeUnF0VG_70-fHeXn-gryvBWnBCdeEmNxoQe-2x9xZsgxgFJeh-P6mfBtn6ErMNp0hksbJKWtQfMCYKunTg=w400-h221" width="400" /></a></div><p></p><p>Quite systematically, where a lack of mortgage financing drove prices down, rents increased excessively, until prices rose back up. The graph (not shown) of price changes from 2002-2021 (rather than 2015) is flat. Prices at the low end and high end have increased similarly. But, to get there, low end rents had to skyrocket, because we made it extremely difficult for low-tier owner-occupiers to create demand as buyers (as opposed to renters), and so supply in the most credit constrained cities has been in the crapper for a decade. With price/rent ratios still pushed down because of a lack of owner-occupier buying power, the only way for prices to rise back to their natural level was for rising rents to make up for low prices.</p><p>(Notice how the recent rise in low-tier rents and prices would seem to bolster the argument of people who falsely believe that the institutional buyers are the cause of all of that!)</p><p>Given all of this, if we aren't willing to stop suppressing mortgage lending, then institutional buyers funding build-for-rent neighborhoods is the only solution left for "balancing out" those markets, as Drum suggests they will. There is a budding movement to stop that from happening, which is just one more step down the road of creating supply constraints and then trying to solve the damage of those supply constraints with more supply constraints. At least on this issue, it seems, Drum will be on the side of allowing new supply.</p><p>Or maybe, he'll take the same approach he takes about current supply conditions, when he writes:</p><blockquote><p><i>Why are you willing to force people to move away from the places they were raised just so you don't have to look at an apartment building near your home?</i></p><p>I'm not. As far as I'm concerned, you may build as many apartment buildings as you want near me. I'm not trying to prevent higher density, I'm just gathering data about the amount of housing in the United States.</p></blockquote><p>So, maybe he'll just watch as all his neighbors fight to block to build-to-rent neighborhoods so that the price and rent levels can't come back into balance, continuing to feel like <i>his</i> conscience is clean, and that the problem isn't severe enough to worry so much about his neighbors' consciences. In the meantime, we are at quite a crossroad, because, if we find ourselves in a position where working class families can't get mortgages to build their own homes, cities keep fighting multi-unit infill developments, and now we start blocking the single-family build-for-rent developments that are one of the dwindling number of options for reversing our housing shortage, things are gonna get real dark.</p><p></p>Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com45tag:blogger.com,1999:blog-1110014885778996459.post-34356366676416098912022-03-17T13:55:00.005-07:002022-03-17T13:55:44.561-07:0016 Part Series on Housing Affordability<p>In 2019, I wrote a 16 part series of posts for the Mercatus Center that laid out a way of thinking about housing affordability. Here are the links to those posts.</p><ol style="text-align: left;"><li style="background-color: white; color: #333333; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 14.85px; margin: 0px 0px 0.25em; padding: 0px;"><a href="https://www.mercatus.org/bridge/commentary/thinking-clearly-about-housing-affordability" style="color: #336699; text-decoration-line: none;">Thinking Clearly About Housing Affordability</a>: "Here is the core analytical error: housing affordability should be measured in terms of <em>rent</em>, but our understanding and policies have erroneously focused on <em>price</em>—to disastrous ends. From monetary policy to credit policy to regulations on local development, responses to the housing bubble have consistently and explicitly aimed for less residential investment, fewer buyers, and fewer homes. Limiting the supply of homes has had a predictable effect of increasing rents. In other words, the problem of affordability, in terms of price, was “solved” after 2007. Affordability in terms of rent was not. Understanding the difference between these two measures will be an important factor in correcting the policy errors that led to the crisis and creating better, more equitable, more stable economic outcomes in the future.<br />I argue in my book, <a href="https://www.amazon.com/Shut-Out-Shortage-Recession-University/dp/1538122146" style="color: #336699; text-decoration-line: none;"><em>Shut Out</em></a>, that the housing collapse and the financial crisis were not inevitable. They weren’t even useful. In fact, their very purpose was mistaken. The fundamental measure for housing affordability is rent, not price. And, trying to bring down prices instead of bringing down rents inevitably will fail on its own terms. In the long run, prices will be determined by rents anyway."</li><li style="background-color: white; color: #333333; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 14.85px; margin: 0px 0px 0.25em; padding: 0px;"><a href="https://www.mercatus.org/bridge/commentary/what-are-landlords-good" style="color: #336699; text-decoration-line: none;">What Are Landlords Good For</a>?: "More efficient markets lead to higher real estate transaction productivity. The resulting higher prices convey that information: owning a home is more valuable now, because it can be done with less hassle. Landlords would be less necessary because transaction costs would be a smaller problem, making homeownership more valuable. Only focusing on price might tempt one to suggest that transaction cost-reducing innovation should be avoided because it would only increase prices."</li><li style="background-color: white; color: #333333; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 14.85px; margin: 0px 0px 0.25em; padding: 0px;"><a href="https://www.mercatus.org/bridge/commentary/homeowners-make-best-landlords" style="color: #336699; text-decoration-line: none;">Homeowners Make the Best Landlords:</a> "When considering the benefits of home ownership on the margin, the focus should be on capturing the excess yield that seems to be widely available to owners. It is this yield that is most important to marginal potential owners, not capital gains... It may be more accurate to think of that excess yield as a form of patronage. A lucrative wage available to those with access to ownership. The wage is earned by performing the duties and taking the risks of a landlord. Upon becoming the owner, the wage remains, but the duties of the job can be shirked. There is no problem tenant to evict. No vacancies to fill. No complaints to manage. It’s a cushy job you can get because your Uncle Sam pulled some strings down at the bank."</li><li style="background-color: white; color: #333333; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 14.85px; margin: 0px 0px 0.25em; padding: 0px;"><a href="https://www.mercatus.org/bridge/commentary/real-estate-investment-doesnt-increase-spending" style="color: #336699; text-decoration-line: none;">Real Estate Investment Doesn’t Increase Spending</a>: "The housing bust is creating more excess capital income than a housing bubble ever could have."</li><li style="background-color: white; margin: 0px 0px 0.25em; padding: 0px;"><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="color: #333333;"><a href="https://www.mercatus.org/bridge/commentary/rising-prices-lower-rents-rising-rents-rising-prices" style="font-size: 14.85px;">Rising Prices, Lower Rents; Rising Rents, Rising Prices</a><span style="font-size: 14.85px;">: "The suppression of credit has lowered Closed Access prices, but they are still high because rents are high. Open access housing has been pushed to a level well below previous norms. But attempting to solve the price problem in Open Access cities has created a rent problem...Where building new homes is permitted, rising prices lead to declining rents. But, rising rents lead to rising prices. In the long run, even the solution to rising prices begins with a focus on lowering rents."</span></span></li><li style="background-color: white; color: #333333; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 14.85px; margin: 0px 0px 0.25em; padding: 0px;"><span style="font-size: 14.85px;">"</span><a href="https://www.mercatus.org/bridge/commentary/myth-about-bubble-buyers" style="color: #336699; font-size: 14.85px; text-decoration-line: none;">The Myth About Bubble Buyers</a><span style="font-size: 14.85px;">": </span>(F)or households 45 to 54 years in age, the homeownership rate in 1982, when the Census Bureau started tracking it annually, was 77.4 percent. It bottomed out at 74.8 percent in 1991 and then recovered to 77.2 percent at the peak in 2004. By 2017, it was down to 69.3 percent!<span style="font-size: 14.85px;">…..</span>Rental expenses as a proportion of incomes (Figure 1), belie the conventional wisdom. The rental value of owned homes was more stable as a portion of owner income than the rental value of rented homes from the late 1990s to the mid-2000s. In other words, if there was an increase in relative spending on housing, it was among renters. The rental value of homeowners was rising in line with their incomes. There is no sign of marginal homebuyers being induced into homeownership and overconsumption.</li><li style="background-color: white; margin: 0px 0px 0.25em; padding: 0px;"><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="color: #333333;"><span style="font-size: 14.85px;"><a href="https://www.mercatus.org/bridge/commentary/squeezing-unqualified-borrowers">Squeezing Unqualified Borrowers</a>: "</span></span>Considering this set of circumstances, the idea that housing affordability is getting worse because <em style="color: #333333; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 14.85px;">prices</em><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="color: #333333; font-size: 14.85px;"> </span><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="color: #333333; font-size: 14.85px;">are high and that the solution is even higher interest rates or tighter credit access is a disastrous misreading. It will lead to a vicious cycle of segregation between households that can qualify under today’s standards (and who then can buy ample units at favorable terms) and households that cannot qualify (and who must keep economizing while a large portion of their wages is transferred as rent to the ownership class). </span>There are two options. Re-opening credit markets to entry-level buyers will return the market to a more equitable equilibrium. Maintaining the market as it is will continue down the path of settling at a new equilibrium where certain households live in smaller, less adequate units, either because of size, amenities, or location."</li><li><a href="https://www.mercatus.org/bridge/commentary/tight-lending-regulations-are-wealth-subsidy" style="color: #336699; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 14.85px; text-decoration-line: none;">"Tight Lending Regulations are a Wealth Subsidy"</a><span style="background-color: white;">:</span><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="color: #333333;"><span style="font-size: 14.85px;"> </span></span><span style="background-color: white;">Thinking in terms of rental value, public policies and market innovations that lower mortgage interest rates can be broadly beneficial to consumers, even if those benefits don’t accrue to the actual borrowers who use those low rates. That is because higher mortgage interest rates have a similar effect on price as exclusionary lending standards. Downward pressure on price creates a rental subsidy for home buyers who don’t require a mortgage.</span></li><li><a href="https://www.mercatus.org/bridge/commentary/property-taxes-are-rent-public-landlord" style="color: #336699; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 14.85px; text-decoration-line: none;">"Property Taxes Are Rent to a Public Landlord"</a><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="color: #333333; font-size: 14.85px;">: </span><span style="background-color: white;">If there is concern that the net effects of government policies, in total, favor housing and lead to market volatility, a return to higher levels of property taxation can be a useful tool for countering it.</span></li><li><span style="background-color: white;"><a href="https://www.mercatus.org/bridge/commentary/property-taxes-can-be-tax-monopoly-power?utm_source=twitter&utm_medium=organic_link&utm_name=urban_economics" style="color: #336699; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 14.85px; text-decoration-line: none;">Property Taxes Can Be a Tax on Monopoly Power</a><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="color: #333333; font-size: 14.85px;">.: </span></span>"If politically maintained monopoly power is going to remain, claiming monopolist profits through taxes is an improvement. The fact that the tax doesn’t affect rents is a sign of efficiency. If rents must be elevated, better that they go to local public services than to the real estate cartel."</li><li><a href="https://www.mercatus.org/bridge/commentary/low-property-taxes-and-obstructed-housing-supply-are-bad-mix" style="background-color: white; color: #336699; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 14.85px; text-decoration-line: none;">Low Property Taxes and Obstructed Housing Supply Are a Bad Mix</a> "It would seem that raising property taxes would make housing more expensive. They are, effectively, a tax on materials to build homes. But the binding constraint to affordable and reasonable housing in twenty-first century America isn’t material. It isn’t a lack of affordable physical space. It is the political obstruction to placing those materials in dense urban centers."</li><li><a href="https://www.mercatus.org/bridge/commentary/are-property-taxes-regressive" style="background-color: white; color: #336699; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 14.85px; text-decoration-line: none;">Are Property Taxes Regressive?</a>: "A region that allows ample new supply and imposes higher property taxes is friendlier to households with lower incomes than a region with obstructed housing supply and low property taxes."</li><li><a href="https://www.mercatus.org/bridge/commentary/income-tax-benefits-homeowners-are-regressive">Income Tax Benefits to Homeowners Are Regressive</a>: "Two of the most important changes to the tax code made by the Tax Cuts and Jobs Act of 2017 (TCJA) relate to housing: a reduction in the deductibility of state and local taxes and a reduction in the mortgage interest deduction."</li><li><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="background-color: white; color: #333333; font-size: 14.85px;"> "<a href="https://www.mercatus.org/bridge/commentary/because-housing-all-taxes-capital-tend-be-regressive">Because of Housing, All Taxes on Capital Tend to Be Regressive</a>".:</span> "(T)he income tax code, as it exists, has regressive effects regarding housing affordability.Given those effects, it is inaccurate to treat capital taxation in general as a progressive tax. Corporate taxation, in general, creates a regressive rent subsidy. A different tax regime that focused on property taxation rather than generalized capital taxation could plausibly produce public revenue in a way that would be more progressive than a tax code that taxes capital income more generally. This should cast doubt on common presumptions about how and why to change the tax code."</li><li><a href="https://www.mercatus.org/bridge/commentary/does-homeownership-really-increase-household-liabilities">Does Homeownership Really Increase Household Liabilities?</a>: "The idea that paying $700 in rent is preferable to a $300 mortgage payment comes from the idea that a potential home buyer would be adding a new liability to their household balance sheet. It would involve leverage, and leverage is dangerous. But this idea is, itself, a product of mental framing. There are assets and liabilities that we explicitly include on balance sheets, like the value of a home and a mortgage, or the market value of a corporation’s future profits. And there are assets and liabilities that we don’t explicitly include, like future rental expenses or the market value of a laborer’s future wages.<span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="background-color: white; color: #333333; font-size: 14.85px;"> ------</span>The explicit financial engineering that spread before the financial crisis has taken on a lot of criticism over the past decade. That financial engineering, ironically, created risks and costs that were more transparent and visible than the implicit financial engineering that has been an unwitting side effect of deleveraging Americans’ explicit balance sheets. A significant part of corporate financial analysts’ academic training is to properly account for the liability of the rents corporations have committed to paying. Wouldn’t it be prudent for mortgage regulators to account for this liability also when evaluating the benefits and costs of the lending standards applied to households?"</li><li><a href="https://www.mercatus.org/bridge/commentary/conceptual-starting-point-housing-affordability-and-public-policy" style="background-color: white; color: #336699; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 14.85px; text-decoration-line: none;">A conceptual starting point for housing affordability and public policy</a>: "Understanding this value and the systematic returns that homes provide leads to a somewhat paradoxical conclusion that (1) homeownership is usually a good investment, and (2) the smaller the investment, the better. In other words, an owner-occupied home with a low rental value can be a great investment, but the downside is that it requires living in a home with a low rental value. The various posts in this series have considered housing affordability with a focus on rent. This focus has led me to the following policy suggestions: we should (1) maintain relatively high property taxes, (2) reduce or eliminate income tax benefits of homeownership, including the non-taxability of the rental value of owned units, (3) eliminate urban supply constraints, (4) reduce regulatory barriers to mortgage lending, especially in low tier markets, and (5) encourage innovation in real estate markets that reduces transaction costs."</li></ol>Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com42tag:blogger.com,1999:blog-1110014885778996459.post-66380655637768476662021-09-01T12:25:00.003-07:002021-09-01T12:25:23.257-07:00Book News<p> Lots of book stuff happening.</p><p><br /></p><p>Scott Sumner's "<a href="https://www.amazon.com/Money-Illusion-Monetarism-Recession-Monetary/dp/022677368X">The Money Illusion</a>" is coming out. This is an important account of the 2008 recession. It is the framework for viewing the economy that drew me into my housing work.</p><p>Rowman & Littlefield is releasing a paperback version of my first book "Shut Out" this month! And here is a code you can use to get it for only $18.90.</p><p>Use code: <span style="background-color: white; color: #201f1e; font-family: Calibri, sans-serif; font-size: 14.6667px;">RLFANDF30</span></p><p><span style="background-color: white; color: #201f1e; font-family: Calibri, sans-serif; font-size: 14.6667px;">Here: </span><span style="color: #201f1e; font-family: Calibri, sans-serif;"><span style="font-size: 14.6667px;">https://rowman.com/ISBN/9781538163009/Shut-Out-How-a-Housing-Shortage-Caused-the-Great-Recession-and-Crippled-Our-Economy</span></span></p><p>And, in January, my followup book "<a href="https://www.amazon.com/Building-Ground-Up-Reclaiming-American/dp/1637581610/">Building from the Ground Up</a>: Reclaiming the American Housing Boom" will be out.</p><p>Should be an exciting few months ahead!</p>Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com24tag:blogger.com,1999:blog-1110014885778996459.post-74130953355578695832021-06-25T16:50:00.003-07:002021-06-25T16:50:35.893-07:00The curious sine curve of equity returns<p> Occasionally, I take a new look at how equities are doing compared to a long-term sine wave. Over the course of the last century or so, real total returns on the S&P 500 follow a sine curve pattern in a surprisingly regular way. I'm just fitting curves here, so I don't want to say too much about it, but it is interesting.</p><p>The positive performance of the stock market over the last few years is actually right in line with the long-term trends.</p><p>Here are charts comparing real total returns to the sine curve, fitted to 20th century results, with the last 21 years out of sample.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOawKiEupE2oCmYuQwDzLXwsmhPWIWiRgoic705lFopKXt6Ew1q14T5cPF-PtxhCoJGbY3MdrpOkez51Aia3ZHTD8ea7JLBpxqNMoLnva9cFMjCL1vSbRPxoAZKzue5mYQPraaRBEWkA/" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="474" data-original-width="503" height="376" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOawKiEupE2oCmYuQwDzLXwsmhPWIWiRgoic705lFopKXt6Ew1q14T5cPF-PtxhCoJGbY3MdrpOkez51Aia3ZHTD8ea7JLBpxqNMoLnva9cFMjCL1vSbRPxoAZKzue5mYQPraaRBEWkA/w400-h376/image.png" width="400" /></a></div><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrg9UsFZRskhpb8Q5LJ_rfSOpAQkTsEV8BEZnVQ9b8ca2B2_GyICtvbyf7FpQHHcK9mdpDxRX09-KAZ4We5_a-0dZjsVI-BSy0y1SFNMoBkvuxN2sqjJo0j6JnxVu6RaTi8cpvuFkH2w/" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="474" data-original-width="503" height="376" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrg9UsFZRskhpb8Q5LJ_rfSOpAQkTsEV8BEZnVQ9b8ca2B2_GyICtvbyf7FpQHHcK9mdpDxRX09-KAZ4We5_a-0dZjsVI-BSy0y1SFNMoBkvuxN2sqjJo0j6JnxVu6RaTi8cpvuFkH2w/w400-h376/image.png" width="400" /></a></div><br /><p></p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKvCbqQiOvTfoHdGw-I-9midDETeS8tKF_rZw0n-SOG9s1ivRcnX3oLqiXLNo9LobqJIZ3Bwig5azQiLpYAWj3cPc5rDe2scrtIB4N9ba4Gb-S-9k52XsVu734g_U8xl-bIaYYhcuAKg/" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="474" data-original-width="503" height="376" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKvCbqQiOvTfoHdGw-I-9midDETeS8tKF_rZw0n-SOG9s1ivRcnX3oLqiXLNo9LobqJIZ3Bwig5azQiLpYAWj3cPc5rDe2scrtIB4N9ba4Gb-S-9k52XsVu734g_U8xl-bIaYYhcuAKg/w400-h376/image.png" width="400" /></a></div><br /><br /><p></p>Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com50tag:blogger.com,1999:blog-1110014885778996459.post-71980122790637913962021-06-21T21:47:00.006-07:002021-06-25T16:51:13.771-07:00More on Interest Rates and Home Prices<p>Some follow-up thoughts on yesterday's <a href="https://www.idiosyncraticwhisk.com/2021/06/interest-rates-and-home-prices.html">post.</a></p><p>There might be some more to think about regarding interest rate sensitivity and local supply constraints. I asserted yesterday that the decline in yields from 2000 to 2005 was concentrated among the more expensive cities, but that yields remained relatively stable in other cities during that time. One implication is that expensive cities may be more rate sensitive. I am unusually flummoxed by the patterns here for some reason. But, digging around some more, I think I have become less sure of my intuition about sensitivity to interest rates and about relative housing yields across metros.</p><p>This first chart suggests the reason for expecting more yield volatility in expensive cities and possibly more sensitivity to interest rates. Clearly, over time, high rents have become an increasingly important factor in housing markets. Systematically, where rents are higher, gross yields are lower. And, where rents are low, yields seem to remain relatively stable over time. The relationship between rent levels and yields moves up and down through hot and cold markets. In other words, a bit counterintuitively, where rents rise, the rent/price ratio declines and becomes more volatile.</p><p></p><table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: left;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJTX8MQX7oR1Q7Cjg-Udpharz5Jpn9GWuPKxozxL8QkAj0HAu5fjtGnHYZjyDUX7IDPaYRI_TLr3UfkZzS9RLCjhDfrqbo7p0mfGmDDCxlGzL_qGqfIKBK9nSfCUrrfpffMONTJdP7lA/" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img alt="" data-original-height="306" data-original-width="480" height="255" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJTX8MQX7oR1Q7Cjg-Udpharz5Jpn9GWuPKxozxL8QkAj0HAu5fjtGnHYZjyDUX7IDPaYRI_TLr3UfkZzS9RLCjhDfrqbo7p0mfGmDDCxlGzL_qGqfIKBK9nSfCUrrfpffMONTJdP7lA/w400-h255/image.png" width="400" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Data from Zillow.com affordability measures</td></tr></tbody></table>But, when I look more closely at cyclical changes, I just don't see the pattern that this suggests there should be. During the 2000-2005 boom, the Closed Access cities and the Contagion cities experienced anomalous declines in gross yields. Long term interest rates also declined during that time, but I think the decline in yields in those markets was a result almost purely of these anomalies. In the Closed Access cities, the anomaly was mostly continued strong rent inflation, and in the Contagion cities, it was from short-term price surges having to do with big shifts in migration that stressed their local markets. Taking the Closed Access and Contagion cities out of the mix, in the rest of the country, if anything, housing in cities with higher yields was somewhat more sensitive to changing interest rates than housing in cities with lower yields.<p></p><p>As housing has moved through the aftershocks of the boom and the crisis, this seems to continue to be the case. Once those anomalies from 2002-2006 worked their way out of the system, housing seems to be only somewhat sensitive to long term rates, and it is more sensitive to rates where housing is less expensive.</p><p>Zillow has detailed rent data going back to 2014. Looking very broadly at the numbers up to 2014, gross rent/price was in the same range that it had been in the 1990s, and that this was more or less the case across MSAs. Over that time, 30 year TIPS rates had declined from about 3.5-4% to around 1%. One could suppose that this is because housing yields are not rate sensitive or because shifts to very tight lending had added a premium to housing yields, counteracting the change in TIPS rates.</p><p>I'm working very broadly here, but it appears that there could be three general forces at work here. (1) expected rent inflation, (2) long-term real rates, (3) tight lending since 2007.</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitT9APWkPdxR-83zRfhaCU41jvkZUCNLzMXGL7uJYp9ofmVcknD4viwKaeNxPeNG8lzMa9QoV9xRvj_elJA0KN4kWT6i6xz7vzZBDYOo9q0EP8e6z54fhnmCKnvUV1Erp6z5gBLHDB6A/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="288" data-original-width="480" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitT9APWkPdxR-83zRfhaCU41jvkZUCNLzMXGL7uJYp9ofmVcknD4viwKaeNxPeNG8lzMa9QoV9xRvj_elJA0KN4kWT6i6xz7vzZBDYOo9q0EP8e6z54fhnmCKnvUV1Erp6z5gBLHDB6A/w400-h240/image.png" width="400" /></a></div>In "Shut Out", being a little more thorough, I suggested that expected rent inflation could explain differences in home prices across cities, plus about a 20% price increase due to declining rates. Rates have declined about that much again, since the boom. These two factors may be correlated, because if low rates trigger more home buying demand, that should lower rents where supply is elastic and raise rents where supply is inelastic. It's complicated.<p></p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFU7ZnmmIA0D1wcIMsK1HHsdRHqlX4n4r4r8lHTkKhkgCkfOg34u5F4S2ue0fug9S1VSL47EJSG6vNUJ2e8tcNtWocCJmRf0dZc2Nz661-NxGeuOuFRQaKm1FtGR6hyTDHo4wgD9w1Ng/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="289" data-original-width="481" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFU7ZnmmIA0D1wcIMsK1HHsdRHqlX4n4r4r8lHTkKhkgCkfOg34u5F4S2ue0fug9S1VSL47EJSG6vNUJ2e8tcNtWocCJmRf0dZc2Nz661-NxGeuOuFRQaKm1FtGR6hyTDHo4wgD9w1Ng/w400-h240/image.png" width="400" /></a></div>From 2014 to about September 2019, housing yields appear to have declined the most in metros with higher yields. This changed after September 2019, and maybe this has mostly been due to Covid issues, but since then, yields have declined across the board. I suspect that part of what is going on is that there has been a temporary decline in rents in the expensive, low yield cities, which has temporarily lowered their yields. As those rents recover, yields in those cities will move back up. So, it appears that there is a systematic change since 2014 of yield compression. Yields in low-yield cities are staying about the same and yields in high-yield cities are declining.<div><br /><div>In any case, there is a striking difference between this recent move in home prices and the 2000-2005 move. There are no anomalous cities here. The changes in yields are relatively similar across cities, and, apparently, correlated with existing yields.</div><div><p></p><p>This shift could reflect at least three factors:</p><p>1) Unsustainable bubble activity. This is always a popular choice. I am skeptical, of course, because in general the whole existence of this project of mine owes itself to discovering evidence, time after time, that has contradicted these types of explanations. Also, as with so much housing data, the difference between cities dwarfs the changes within them. Should we call a decline from a 10% yield to a 8% yield a bubble when the country is full of cities with 6% yields? This would call for tight monetary and/or lending policies. Of course, I think that is likely the continuation of a wrong perception that has been knee-capping our economy for 15 years now.</p><p>2) Maybe prices in <i>high</i>-yield markets are more sensitive to interest rates. In that case, rising rates (if they ever come) might be associated with declining prices. I don't see much sign of loosening lending standards. Most of the activity is still among those with high credit scores. If that is the case, loosening regulations on mortgage lending could be a useful countermeasure to help keep prices from collapsing if prices are sensitive to rising interest rates.</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCnvMSwUFPYOlWPH3nkyk92xYhSTlDyHPAkj6OMZeaHpEPt7i1eqfKEFRdLwbjH8pNUhkEG5Wy7clqSIWsSqxMgZiFgIjiIASFXiMI22s-byG0ES7xElpXqPbNvvuq9mj1RhrA7DGjZQ/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="289" data-original-width="480" height="241" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCnvMSwUFPYOlWPH3nkyk92xYhSTlDyHPAkj6OMZeaHpEPt7i1eqfKEFRdLwbjH8pNUhkEG5Wy7clqSIWsSqxMgZiFgIjiIASFXiMI22s-byG0ES7xElpXqPbNvvuq9mj1RhrA7DGjZQ/w400-h241/image.png" width="400" /></a></div>3) Maybe the convergence in yields is happening because all cities are becoming supply-deprived. In that case, strong growth and generous lending will be key. Why might this be the case? Building has been much lower in affordable, high-yield cities since 2005. In this chart, there are a few outliers well below the regression line. Those are Contagion cities who were especially walloped by the financial crisis (Phoenix, Las Vegas, Orlando, etc.). Other cities have a quite high correlation. Building has been low in affordable cities. I attribute this to tight lending. These cities tend to have lower incomes. And, because of this, rents have been rising broadly across MSAs. Recently, rents have moderated or fallen in the low-yield cities because of Covid migration. In any case, less building could mean that buyers in all metros expect rents to be strong. This can be seen in vacancy rates, too. Vacancy rates have always been low in the low-yield cities. Vacancies in other cities are declining too, because of the lack of building.<p></p><p></p><table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXcFjQ-QiGSqK3x9JRvrEvblT_Z99GdUoGFQJ9KJf1fTuaVhglHaiAJ1JWERn4Oxa_R1NRIfe6Z7y0gCCQlsETnIki4Ms-87u2GdM_-vQftdUafA2xwYIPE28cOLh_7MkB9tuLLIQVHw/" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img alt="" data-original-height="488" data-original-width="1172" height="266" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXcFjQ-QiGSqK3x9JRvrEvblT_Z99GdUoGFQJ9KJf1fTuaVhglHaiAJ1JWERn4Oxa_R1NRIfe6Z7y0gCCQlsETnIki4Ms-87u2GdM_-vQftdUafA2xwYIPE28cOLh_7MkB9tuLLIQVHw/w640-h266/image.png" width="640" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">https://fred.stlouisfed.org/graph/?g=EU8h</td></tr></tbody></table><br /><p></p><p>Of course, I would expect some combination of 2 & 3. Surely there is some sensitivity to real long-term interest rates. The questions are how sensitive home prices are to interest rates, how that sensitivity might differ across cities with different supply elasticities, and how much tight lending standards may have altered that sensitivity.</p><p>I thought there might be more anomalous movement among MSAs in the recent market activity. Austin, for instance, might have seen an unsustainable decline in yields, as the Contagion cities had before 2006, because of a big migration shift. I suspect that tight lending plays a role here. In 2003-2005, migration led to more building. And, possibly the migration was more targeted at certain cities than it is today. But, because entry level housing is greatly obstructed by tight lending (and because of supply chain issues related to Covid), there hasn't been as much of a supply response in these markets recently. So, rents have been rising in cities that tend to take in more migration in recent years. Migration is pushing up prices, but more so than in 2005, it is pushing up rents, so the Contagion cities aren't anomalies in terms of yield. And, since the migration is related to lower demand for Closed Access residency, the Closed Access cities are experiencing some anomalous decline in yields, but this is coming more from declining rents than from rising prices, and will likely reverse or moderate as Covid passes.</p><p></p></div></div>Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com26tag:blogger.com,1999:blog-1110014885778996459.post-38641650902519779522021-06-20T19:53:00.003-07:002021-06-25T16:50:57.221-07:00Interest Rates and Home Prices<p> A couple of quick thoughts on recent home price appreciation.</p><p></p><div class="separator" style="clear: both; text-align: center;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirpLMJFOoT1HYiOAvn0uLKiBQgNfjys7zsAi2nLmaXHcI4qCA1YkdxGKIXivu2vpO27p3Xf25wf4Km9LG2Tfs6j3c6m5WXuIlVSQljQSG_4woEOxtBQE0DbC2TMlnXLM9EQ6BMcANmCw/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="399" data-original-width="480" height="332" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirpLMJFOoT1HYiOAvn0uLKiBQgNfjys7zsAi2nLmaXHcI4qCA1YkdxGKIXivu2vpO27p3Xf25wf4Km9LG2Tfs6j3c6m5WXuIlVSQljQSG_4woEOxtBQE0DbC2TMlnXLM9EQ6BMcANmCw/w400-h332/image.png" width="400" /></a></div></div>In graph 1, I estimate a national median gross rent/price yield from Zillow rent and price data. I compare it to the 30 year TIPS (real) interest rate (plus 8%). Certainly a case can be made that some of the recent price movement has been related to declining real long term yields. However, without more historical data, this doesn't tell us much. Two measures both moved in a certain direction over a period of time, and so it's easy to match them up on the y-axis.<p></p><p>Here is a longer series with similar measures. Here, I estimate the national average gross rent/price level with total rent/total residential real estate value for owned homes. I also used the CPI rent inflation measure with the Case-Shiller national home price index, with a scaling constant as a second version of the estimate. Both estimates of rent/price yields follow similar trends.</p><p>Here, I use a 30 year TIPS bond issued in 1998 and then in more recent years the general estimate for 30 year TIPS yields. Here I only added a 3% spread to the TIPS yields. Part of the difference is that the mean yield is lower than the median yield. (Price/rent is not the same across the market. It is systematically higher where rents and prices are higher.) Part of the difference is that we imposed a one-time shock on housing during the financial crisis, adding a 2-3% spread on housing yields compared to other assets, so the spread in the first graph from 2014 onward is much higher than it had been before.<br /></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpgrZ916B0GsL33nhYa2WFStRsvbhRSD0cTesmxU6plPg6sc56PuQrxuOJCgyaUpCQvo42COujkJtnoYGN6btvbkX0tLJQy_4i5BWv6hFFicXgl465kHFDU7Fc9qBSFJG7bxXDb5Jh3w/" style="margin-left: auto; margin-right: auto;"><img data-original-height="485" data-original-width="1169" height="266" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpgrZ916B0GsL33nhYa2WFStRsvbhRSD0cTesmxU6plPg6sc56PuQrxuOJCgyaUpCQvo42COujkJtnoYGN6btvbkX0tLJQy_4i5BWv6hFFicXgl465kHFDU7Fc9qBSFJG7bxXDb5Jh3w/w640-h266/image.png" title="https://fred.stlouisfed.org/graph/?g=ESSe" width="640" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">https://fred.stlouisfed.org/graph/?g=ESSe</td></tr></tbody></table><br />When I first started looking at these things years ago, I excused the pre-2006 price increases with this relationship. I still more or less stand by that. It isn't controversial to say that home prices are related to interest rates. In fact, I think it helps clarify the analysis to show that it is specifically real long-term rates that seem to correlate with housing yields. But, even in 2005, that doesn't tell the whole story. Rent/price yields are not uniform across cities. They decrease systematically where rents are high. Some of that might be attributed to expectations of future rent increases. Some of it might be attributed to lower cost of ownership where rent is a product of location rather than structures and services. In any event, before 2000, gross housing yields had been between 6-7% for some time, and after 2000 they continued to be in that range in most cities. In some cities like LA or NYC, they declined to more like 3-4%. The aggregate yield around 5% was an average of a country increasingly becoming bifurcated into at least two different stories.<p></p><p>So, it may be that the correlation between 30 year TIPS and housing yields from 1998 to 2008 overstates the relationship. In most places the gross housing yield didn't decline as much as the 30 year real rate. Yet, even if one assumes that a 2% spread remains in place between long term real rates and housing yields, the recent drop in real interest rates is enough to support recent home price increases, even if the relationship is slight.</p><p>Actually, I think the causality may go both ways a bit. In other work, I have mentioned that housing used to be cyclical in terms of quantity and now, because we have obstructed construction so much, it is cyclical in terms of price. It is hard not to notice a similar regime shift in interest rates. Before 2000, real interest rates were relatively stable, and changes in interest rates were largely related to inflation expectations. Since 2000, real long term interest rates have become strangely volatile.</p><p>In the mid-20th century, housing yields remained stable because when rents increased, a lot of new homes were built until rents declined again. All those new units required capital. Mortgages, construction loans, home equity. An increase in demand for investment (in generally safe assets and securities) drove GDP growth higher and put upward pressure on interest rates.</p><p>There is a lot of concern about a lack of safe assets, which is driving down interest rates. Homes in California used to be safe assets. They aren't any more. They are risky investments in a cartel. Mortgages used to be safe assets for investment, but many aren't legal any more, so the trillions of dollars worth of new homes they would have funded, which also would have been safe assets in Texas, Nebraska, and Tennessee, also don't exist.</p><p>So, there is an interesting set of interacting variables here. If inflation rises, I don't think that will have much effect on real home prices or construction activity. If real rates rise, which will be associated with real economic growth (and probably with a mitigation of short-run inflation), then it should have a moderating influence on home prices. But, unless mortgages can flow, multi-unit projects can be easily approved, and construction can run hot, then rents will continue to rise and long-term real interest rates will continue to be limited. In that case, it seems like a "hot" market is likely to remain, with housing growth (but at historically low construction rates) and high prices (low housing yields), while the "have nots" who are under the "tyranny sincerely exercised for the good of its victims" will face rising rents.</p><p>I suspect that a construction boom would both lower rents and raise real long-term interest rates. But, the boom must come first. In the meantime, housing is in a peculiar space, where we should expect there to be some sensitivity to rising rates if the economy continues to recover, yet also housing yields continue to retain at least a 2% spread to long-term 30 year rates, compared to pre-crisis norms, so that nobody should expect home prices to revert to earlier relative levels (especially as rents continue to rise).</p>Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com32tag:blogger.com,1999:blog-1110014885778996459.post-27668249938245253562021-03-22T13:10:00.002-07:002023-08-20T21:37:08.108-07:00Brig Burton and Carly Burton, again<p>I have good news, or at least not bad news, I guess.</p><p>I sold my business to Brig Burton in 2010. He ended up defrauding me in that transaction. I had to sue him.</p><p>I previously mentioned the Burtons <a href="https://www.idiosyncraticwhisk.com/2019/05/brigham-burton-and-carly-burton-have.html">here</a>.</p><p>The key part:</p><p><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="background-color: white; color: #333333; font-size: 14.85px;">I had to sue him in civil court in order to get fully paid for the business. The judgments I was granted against him included fraud and conversion. He appealed the rulings, and the appeals court </span><a href="https://law.justia.com/cases/arizona/court-of-appeals-division-one-unpublished/2016/1-ca-cv-14-0410.html" style="background-color: white; color: #336699; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 14.85px; text-decoration-line: none;">upheld</a><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="background-color: white; color: #333333; font-size: 14.85px;"> them, including the punitive damages that were assessed. The appeals court confirmed that "</span><span style="background-color: white; color: #333333; font-family: BookAntiqua; font-size: 14.85px;">based on the record in this case, the jury could have found by clear and convincing evidence that Burton’s conduct was aggravated and outrageous, evincing an evil mind. Therefore, we decline to set aside the punitive damages awards."</span></p><p><br /></p><p>Anyway, I thought I was through with them, but the Burtons <a href="http://www.superiorcourt.maricopa.gov/docket/CivilCourtCases/caseInfo.asp?caseNumber=CV2019-096536">sued me</a> after I posted that post. We were able to make them to post a bond, so that when the judge dismissed the case (which she eventually did), the Burtons would have collectible funds to use to pay my legal expenses. Which the judge also ruled they had to do.</p><p>Brig seems busy lately. For example:</p><p>Here: <a href="https://www.bizbuysell.com/business-broker/b-a-burton/green-tree-alliance/31184/">https://www.bizbuysell.com/business-broker/b-a-burton/green-tree-alliance/31184/</a></p><p>and</p><p>Here: <a href="https://nationaldiversified.com/?page_id=1794">Brig Burton – Business Growth Leader Worldwide (nationaldiversified.com)</a></p><p><a href="https://kevinerdmann.substack.com/p/brig-burton">Update</a></p>Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com74tag:blogger.com,1999:blog-1110014885778996459.post-72184267744570272092021-01-05T11:32:00.006-07:002021-01-05T11:32:50.307-07:00December 2020 Yield Curve<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg81POPJimWURWE2kTyKna4Qyix4yca_c8Ina7T4W705jFLUPutPZMdPqUoMoyyAW4KcxcRcwALekFN9J_ST7fQr77umB75B9ZmTWVAgq7UVmoA5dbcnxErrNuuo5rWUgRSkY3gjStSUg/s485/2021-1-5-2.PNG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="362" data-original-width="485" height="299" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg81POPJimWURWE2kTyKna4Qyix4yca_c8Ina7T4W705jFLUPutPZMdPqUoMoyyAW4KcxcRcwALekFN9J_ST7fQr77umB75B9ZmTWVAgq7UVmoA5dbcnxErrNuuo5rWUgRSkY3gjStSUg/w400-h299/2021-1-5-2.PNG" width="400" /></a></div> The yield curve looks pretty good. Long term rates still are recovering. The expected date of the first short term rate hike also appears to be coming closer. This all seems like good news to me. All in all, pretty good monetary management for the COVID-19 recession, I think.<p></p><p>It seems to me that a short position in early 2023 Eurodollar contracts has a nice risk/reward balance. Not much room for downside (declining interest rates), but quite a bit of room to run higher (higher interest rates).</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFR-gXL7KFC51FXplbgxgaQGT7tPAALHt4VdfGFQJpIOt0fUv6TVhdko_C-P7R1YP5DcxH9tIIUEm57T9Tll1vJlTCzJROi-ajvCqGxx-5XRy5p8z2k8SCJ3RfBW0JHIMMG09yWZg8Rw/s480/2021-1-5-3.PNG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="480" data-original-width="478" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFR-gXL7KFC51FXplbgxgaQGT7tPAALHt4VdfGFQJpIOt0fUv6TVhdko_C-P7R1YP5DcxH9tIIUEm57T9Tll1vJlTCzJROi-ajvCqGxx-5XRy5p8z2k8SCJ3RfBW0JHIMMG09yWZg8Rw/w399-h400/2021-1-5-3.PNG" width="399" /></a></div><br /><br /><p></p>Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com47tag:blogger.com,1999:blog-1110014885778996459.post-87166618316501623722020-11-12T13:02:00.006-07:002020-11-12T13:02:43.107-07:00October 2020 Inflation Update<p> I haven't updated the inflation numbers for a while. Covid-19 has probably made it difficult to say too much, because there are so many compositional shifts in the demand basket. But I think it is worth taking a look at what is happening in rent inflation.</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiilNMLxwfUFMAi-u0Ff2Qib2GXqFPHzVnugJa5Qb3MKFv8pioQQg_rLwrp5Snffu8Lz0cic8JgVUWJEbHN2kWoW-X7jOwXZeo2GHdExtAFe-7fn_MQaCaQBM572s-lHzyHxe1qch4r-g/s420/2020-11-12-3.PNG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="291" data-original-width="420" height="278" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiilNMLxwfUFMAi-u0Ff2Qib2GXqFPHzVnugJa5Qb3MKFv8pioQQg_rLwrp5Snffu8Lz0cic8JgVUWJEbHN2kWoW-X7jOwXZeo2GHdExtAFe-7fn_MQaCaQBM572s-lHzyHxe1qch4r-g/w400-h278/2020-11-12-3.PNG" width="400" /></a></div>Much of the drop in the stated core CPI number is coming from declining rent inflation (or shelter inflation). Core inflation excluding shelter is still below 2%, so the Fed has room to goose spending within their mandate. Trailing 12 month shelter inflation has declined from about 3.4% to 1.7% since the Covid-19 outbreak, and the run-rate may not be positive.<p></p><p>Real-time data suggests that much of this appears to be related to some amount of exodus from expensive cities like San Francisco and New York City. However, declining CPI-measured rent inflation is pretty evenly distributed among the major metro areas.</p><p>There are three periods of sharply declining rents in this period, and it is interesting to compare them. In 2002-2003, construction was hot and new supply was bringing down rents in cities with elastic supply (Dallas and Atlanta, but not New York and LA). Then, from 2008-2010, the foreclosure crisis and the sharp tightening in lending markets created a negative demand shock for shelter, driving down rent inflation everywhere. That was associated with very low rates of construction.</p><p>Now, the decline in rent inflation is associated with low but moderately rising construction activity. If that continues, it would suggest that lower rent inflation is mostly due to income shocks and the specific character of the Covid-19 context, where landlords may be opting for more leniency until the market settles. If there really is a persistent shift of housing preference into less dense cities and housing units, then that should be associated with rising demand for shelter and more construction, not lower rents. In that case, there would be a compositional shift out of the expensive cities, and rent inflation might decline as tenants leave the expensive cities (pulling rents there down) and move to cities where new demand is met by supply rather than price inflation. The fact that rent inflation is currently declining in cities like Phoenix, which we should expect to be the destination for some of those moving tenants, suggests that income shocks are more important now than inter-MSA migration.</p><br /><p><br /></p>Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com57tag:blogger.com,1999:blog-1110014885778996459.post-83290922589003117212020-11-12T11:29:00.002-07:002020-11-12T11:29:45.851-07:00October 2020 Yield Curve Update<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjF1sE9aIPRARRfwRNZ1rDOdUcUUuMPY9INourV-UoG_QoEAuRTa1KaCOnF6FjWrQzLYZ7tmi1HLWRYhgI7Uqlue7x-zGptNwrcMzD-1xzquhfrOHQk_tSZJJK4egU1__81eZkAcfCTJQ/s553/2020-11-12-1.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="408" data-original-width="553" height="295" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjF1sE9aIPRARRfwRNZ1rDOdUcUUuMPY9INourV-UoG_QoEAuRTa1KaCOnF6FjWrQzLYZ7tmi1HLWRYhgI7Uqlue7x-zGptNwrcMzD-1xzquhfrOHQk_tSZJJK4egU1__81eZkAcfCTJQ/w400-h295/2020-11-12-1.PNG" width="400" /></a></div> The yield curve has taken a strong bullish move as a result of the election and the Covid-19 vaccine progress. The long end of the Eurodollar curve is nearly back to the pre-Covid level.<p></p><p>The date of the first rate hike remains in mid-2021, but the escape velocity has increased significantly. Forward inflation breakevens remain level at about 1.6%, which suggests that the recent improvement has been due to real shocks. The Fed probably still has room for more traditional accommodation.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhwxjNPhtq8PYDJQQinyKNGyDFt9VbobsVb9eGKBHa4WsHEX7ac7z6bgE1XN9TTF9TMAIdNHrNLzKoQEBtV12V32t3MOJ_494sOEamdqJUG2vYTrvYSH3byemCWvERf7mzQiDULuTKzsw/s481/2020-11-12-2.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="480" data-original-width="481" height="399" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhwxjNPhtq8PYDJQQinyKNGyDFt9VbobsVb9eGKBHa4WsHEX7ac7z6bgE1XN9TTF9TMAIdNHrNLzKoQEBtV12V32t3MOJ_494sOEamdqJUG2vYTrvYSH3byemCWvERf7mzQiDULuTKzsw/w400-h399/2020-11-12-2.PNG" width="400" /></a></div><br /><br /><p></p>Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com37tag:blogger.com,1999:blog-1110014885778996459.post-26775309309750935202020-10-04T20:41:00.004-07:002020-10-04T20:41:46.347-07:00September 2020 Yield Curve Update<div class="separator"><p style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtJekTYDzDln5VVH8AZzOt0XBR_GVJkneJEhr3HpeJ8sdPp7byxKvz66EmsSabBvSWP0KqpPUZwkBT9931rfQsvqfo_ycOWf3NJufR0X1Qk4LsoiWGMkYHq9grCMZZD7dP5sx4eUXAUg/s555/2020-10-4-1.PNG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em; text-align: center;"><img border="0" data-original-height="407" data-original-width="555" height="294" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtJekTYDzDln5VVH8AZzOt0XBR_GVJkneJEhr3HpeJ8sdPp7byxKvz66EmsSabBvSWP0KqpPUZwkBT9931rfQsvqfo_ycOWf3NJufR0X1Qk4LsoiWGMkYHq9grCMZZD7dP5sx4eUXAUg/w400-h294/2020-10-4-1.PNG" width="400" /></a> The yield curve continues to slowly show optimism. The long end of the curve continues to climb. It's now back up above the yields of early April. This suggests that the market foresees continued relatively strong recovery in employment and that the Fed is adequately providing liquidity. Forward inflation expectations have leveled out below 2%, but they are basically as high as they were before the Covid-19 outbreak. That's probably reasonably good news. And, the expected date of the first rate hike is settling in around the June 2021 contract, which is pretty bullish. The market seems to think recovery is in the works.</p></div><p><br /></p><p>Both because there is an endemic lack of adequate supply and because of some of the demand responses to Covid-19, residential investment should be strong to help with a continuation of positive trends. This suggests to me that if there is much of a pullback in stocks, it will be from an unforeseen negative real shock.</p><p><img border="0" data-original-height="479" data-original-width="476" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEir4B9K_F8Wiqzx0GZfKKUVnVc7EQbiJAsRfRLFrFOuLjAqPH-lMWKD9IAII-DUP6CEIIJSKxT4CnASlBY_hr8rdrSIY3IQnnjK0YM7Q1qYY-4qqnCOGtdQ4nNT6EVsdGTC4AkURSoOtA/w398-h400/2020-10-4-2.PNG" width="398" /></p>Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com62tag:blogger.com,1999:blog-1110014885778996459.post-13979289498338727712020-09-29T14:05:00.001-07:002020-09-29T14:05:42.163-07:00Getting the word out.<p>There have been a couple of great citations recently of my housing boom work.</p><p>As I mentioned recently, Mercatus published <a href="https://www.idiosyncraticwhisk.com/2020/08/housing-policy-monetary-policy-and.html">a paper</a> that Scott Sumner and I had written. Matthew Yglesias at vox.com cited it in a nice <a href="https://www.vox.com/the-highlight/21401460/housing-economy-coronavirus-great-rebuild">article</a> about the need for more housing.</p><p>Also, Congress' Joint Economic Committee issued a new report on monetary policy that surprisingly pushes the envelope on new ideas. <a href="https://www.jec.senate.gov/public/index.cfm/republicans/analysis?ID=051267FC-0147-4E31-BE80-946E0543AF82">Stable Monetary Policy to Connect More Americans to Work</a></p><p>It was penned by Senior Economist Alan Cole. The report cites Shut Out and supports the NGDP targeting policy that the Mercatus Center Monetary Policy group has been advocating for.</p><p><a href="https://www.econlib.org/congress-economics-profession/">Here is</a> Scott Sumner's reaction to it. It's worth reading both Scott's reaction and the report itself. It is very encouraging to see the building blocks being put in place for future improvements on these policies.</p>Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com27tag:blogger.com,1999:blog-1110014885778996459.post-38319805203225867232020-09-02T19:39:00.001-07:002020-09-02T19:39:09.433-07:00August 2020 Yield Curve<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhu4X5hPiQCfPAbmzY7OpJe4eQiJRCXkcoqKLSmjCA7KrMdqwpt0eeC6T9ng7MYiC68AaqxE_DipJiwDX3YPUWVDN87bBelWKnx7y313ugRqy-iv75gBhzGyGysVSlnzDy3_wNzJkxVMg/s559/2020-9-2-1.PNG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em; text-align: center;"><img border="0" data-original-height="405" data-original-width="559" height="324" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhu4X5hPiQCfPAbmzY7OpJe4eQiJRCXkcoqKLSmjCA7KrMdqwpt0eeC6T9ng7MYiC68AaqxE_DipJiwDX3YPUWVDN87bBelWKnx7y313ugRqy-iv75gBhzGyGysVSlnzDy3_wNzJkxVMg/w448-h324/2020-9-2-1.PNG" width="448" /></a>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.</p>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.)<div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0g8Sh11PCEvkQ7Utt58VsD8rHFCoKVcOz9zIwoC4sDw739BuQ6hQ7ohCLTQn7lhkXDvZ0-Gb6JDw9QtZGeURkT-WxL3hz9_e6Bmiw35SOsx6ZFEvtg80-k9bkwmgMjk2Gev2Gt7lNLA/s479/2020-9-2-2.PNG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="479" data-original-width="478" height="383" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0g8Sh11PCEvkQ7Utt58VsD8rHFCoKVcOz9zIwoC4sDw739BuQ6hQ7ohCLTQn7lhkXDvZ0-Gb6JDw9QtZGeURkT-WxL3hz9_e6Bmiw35SOsx6ZFEvtg80-k9bkwmgMjk2Gev2Gt7lNLA/w383-h383/2020-9-2-2.PNG" width="383" /></a></div><p>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.</p></div>Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com81tag:blogger.com,1999:blog-1110014885778996459.post-78294828248236625412020-08-26T11:20:00.009-07:002020-08-26T11:20:49.232-07:00Housing Policy, Monetary Policy, and the Great Recession<p>Here's a link to a research paper the Mercatus Center has published by me and Scott Sumner.</p><p><a href="https://www.mercatus.org/publications/monetary-policy/housing-policy-monetary-policy-great-recession">Housing Policy, Monetary Policy, and the Great Recession</a></p><p>It's a combination of Scott's work on Federal Reserve policy and my work on the housing bust. Here is our takeaway:</p><p>------------</p><p>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. </p><p>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:</p><ol><li><i>Reform zoning regulations in urban areas.</i> 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. </li><li><i>Avoid a situation where lending regulations are most lax during booms and tightest during recessions.</i> It was this sort of regulatory pattern that almost certainly exacerbated the severity of the Great Recession. </li><li><i>Monetary policy should seek stable growth in nominal gross domestic product (NGDP).</i> 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.</li></ol><div><br /></div><div>------------</div><div><br /></div><div>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.</div>Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com32tag:blogger.com,1999:blog-1110014885778996459.post-52700783389120903642020-08-02T14:11:00.000-07:002020-08-02T14:11:07.504-07:00Trends in Housing Supply<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiT3dZK-c-eV1d94d5tzJKEQZUzE-8CS-QfI4iYLYdsyTVxfxRq1gXIUNe8gB5pjVYgFJ3b0Wb9Pug7ieC7QOE5TiFfb6fU_dWyrbQo7tolO92TjxHT-AIJE8GDvzYP4gpipiqkbS0zTQ/s1600/2020-8-2-1.PNG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="371" data-original-width="559" height="265" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiT3dZK-c-eV1d94d5tzJKEQZUzE-8CS-QfI4iYLYdsyTVxfxRq1gXIUNe8gB5pjVYgFJ3b0Wb9Pug7ieC7QOE5TiFfb6fU_dWyrbQo7tolO92TjxHT-AIJE8GDvzYP4gpipiqkbS0zTQ/s400/2020-8-2-1.PNG" width="400" /></a>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.<br />
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I find several interesting items to note here:<br />
<br />
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.<br />
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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.<br />
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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.<br />
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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.<br />
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Fortunately, the political center seems to be moving in that direction. We have a long way to go.<br />
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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.Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com55tag:blogger.com,1999:blog-1110014885778996459.post-27061971963208451272020-08-01T12:37:00.000-07:002020-08-01T12:37:05.220-07:00July 2020 Yield Curve UpdateThe 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%.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYcnf-Wr9MDI8WtC7J6Y-SQUOc7RsS24_4edYj0KjSCJJf551UUIdDAZoHLixqu2tGmO9ukNHjWm_vfPslPzYOvrrS1jTCyKFVjEbC1nZWEZs08FiE9Vg19dOSCrskY-cEmHOMWO0DYw/s1600/2020-8-1-1.PNG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="408" data-original-width="555" height="293" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYcnf-Wr9MDI8WtC7J6Y-SQUOc7RsS24_4edYj0KjSCJJf551UUIdDAZoHLixqu2tGmO9ukNHjWm_vfPslPzYOvrrS1jTCyKFVjEbC1nZWEZs08FiE9Vg19dOSCrskY-cEmHOMWO0DYw/s400/2020-8-1-1.PNG" width="400" /></a>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.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNZKTYDYh89ZfTJffGyRcKKgSGCw3RYoe0Dhw1nxwgx8W7Amyujk9QRRsaqf1YQ-8RtwojG46InFdoMzlpauWiy87rZpzq8uiosIzivdgV64diET4KqntPlJuFMcOGDtEi0zB07cZW0g/s1600/2020-8-1-2.PNG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="481" data-original-width="482" height="398" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNZKTYDYh89ZfTJffGyRcKKgSGCw3RYoe0Dhw1nxwgx8W7Amyujk9QRRsaqf1YQ-8RtwojG46InFdoMzlpauWiy87rZpzq8uiosIzivdgV64diET4KqntPlJuFMcOGDtEi0zB07cZW0g/s400/2020-8-1-2.PNG" width="400" /></a>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.<br />
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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.<br />
Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com17tag:blogger.com,1999:blog-1110014885778996459.post-13075747195149419762020-07-28T09:17:00.000-07:002020-07-28T09:17:19.615-07:00A 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.<br />
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Vacancies also declined sharply.<br />
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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.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhmic8JSfCBf9lvQEHg1OgAodxW6wQdPvSWQ7KEjg1_U9lYnQqJsSxhuE2Yw8adGB681l-6S2rbd4GptrBNUNb15jzUb_6THJLdDReVQW98RQY4bLBFTZSBBPHGuBrexcpSJbswG2Prdg/s1600/2020-7-28-1.PNG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="324" data-original-width="482" height="268" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhmic8JSfCBf9lvQEHg1OgAodxW6wQdPvSWQ7KEjg1_U9lYnQqJsSxhuE2Yw8adGB681l-6S2rbd4GptrBNUNb15jzUb_6THJLdDReVQW98RQY4bLBFTZSBBPHGuBrexcpSJbswG2Prdg/s400/2020-7-28-1.PNG" width="400" /></a></div>
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.<br />
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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.Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com18tag:blogger.com,1999:blog-1110014885778996459.post-56889598319011978822020-07-07T13:29:00.000-07:002020-07-07T13:29:06.245-07:00June 2020 Yield Curve UpdateThe yield curve remains at about the same place it was a month ago.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgh-G-gQS1Tze8xgQvrs4N44d5qpxpdEuArC1PIcev-kediUkzINeGL3tcqv6M0TClZqWe-DyGO0izpgLs6uxs8KX5ysqkCYHaf6Aiu1EqTmhhFI8WRraplvbxLvFIcIP6Jn2VLLzy29w/s1600/2020-7-7-1.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="404" data-original-width="550" height="293" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgh-G-gQS1Tze8xgQvrs4N44d5qpxpdEuArC1PIcev-kediUkzINeGL3tcqv6M0TClZqWe-DyGO0izpgLs6uxs8KX5ysqkCYHaf6Aiu1EqTmhhFI8WRraplvbxLvFIcIP6Jn2VLLzy29w/s400/2020-7-7-1.png" width="400" /></a>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.<br />
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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.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNvTvSVBgUXTggF8bsITZD3tmfO7LohQXDaZKC8XON72aYcBd4qltNVmr56R0GtWtqhd9cLv1P_rzJUAQiJoWoXdDSOpSIL4FSzuFqCpO2H809Fs2h_ulj-PeBs1cV9DJh1OaymJNEqw/s1600/2020-7-7-2.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="478" data-original-width="478" height="398" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNvTvSVBgUXTggF8bsITZD3tmfO7LohQXDaZKC8XON72aYcBd4qltNVmr56R0GtWtqhd9cLv1P_rzJUAQiJoWoXdDSOpSIL4FSzuFqCpO2H809Fs2h_ulj-PeBs1cV9DJh1OaymJNEqw/s400/2020-7-7-2.png" width="400" /></a>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.<br />
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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.<br />
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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.Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com21tag:blogger.com,1999:blog-1110014885778996459.post-17591536552774867982020-06-08T15:44:00.000-07:002020-06-08T15:44:02.656-07:00May 2020 Yield Curve Update<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsdX5yMf_eOB6oeIQV6Nj-Th9Yr-eiRsCejfM0046jTC75FxGlT_YAN0-z5V5Vaboc8NSwQSTuYcnhnhUhQLyl4A-sVth9fKDR1y4BHL8jxH62KMfL1Ch2kEYcntn-miI2sOIeIQhSiA/s1600/2020-6-8-1.PNG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="410" data-original-width="550" height="297" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsdX5yMf_eOB6oeIQV6Nj-Th9Yr-eiRsCejfM0046jTC75FxGlT_YAN0-z5V5Vaboc8NSwQSTuYcnhnhUhQLyl4A-sVth9fKDR1y4BHL8jxH62KMfL1Ch2kEYcntn-miI2sOIeIQhSiA/s400/2020-6-8-1.PNG" width="400" /></a></div>
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.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEix-PX9nWTYga14WNQFrvGjrN1VDtuKUjUy7NswfXRswf4kqKu5pSYre7MxDFKow6nrJQiTwZ256zkj6avmcv4UvEBBHNGFwhXiDIhUoS6NpEHZBpmWo5EuwYF4H9JseuD6wEPK25nUlg/s1600/2020-6-8-2.PNG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="479" data-original-width="482" height="397" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEix-PX9nWTYga14WNQFrvGjrN1VDtuKUjUy7NswfXRswf4kqKu5pSYre7MxDFKow6nrJQiTwZ256zkj6avmcv4UvEBBHNGFwhXiDIhUoS6NpEHZBpmWo5EuwYF4H9JseuD6wEPK25nUlg/s400/2020-6-8-2.PNG" width="400" /></a>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.<br />
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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.<br />
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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 <a href="https://fred.stlouisfed.org/series/T5YIE">under 1%</a>, so there is room for more, but obviously the Fed has been very active.)<br />
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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.<br />
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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.<br />
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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.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMY_8DJ3esX2LS37m7r6NEkBtvICRtzIdIkKAq9dNQtV-TdgUwWylCyNuYmcxBySpSrhZvBDNwVqniWV2RF7gAf-1N_AJ9Q_i4P21vupmXGt5mvyyNgmgMreE9Z2c0VH0iHFzXqKtADQ/s1600/2020-6-8-3.PNG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="361" data-original-width="580" height="248" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMY_8DJ3esX2LS37m7r6NEkBtvICRtzIdIkKAq9dNQtV-TdgUwWylCyNuYmcxBySpSrhZvBDNwVqniWV2RF7gAf-1N_AJ9Q_i4P21vupmXGt5mvyyNgmgMreE9Z2c0VH0iHFzXqKtADQ/s400/2020-6-8-3.PNG" width="400" /></a>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.<br />
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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.<br />
<br />Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com12tag:blogger.com,1999:blog-1110014885778996459.post-56863103637484084832020-05-08T13:38:00.001-07:002020-05-08T13:38:41.712-07:00April 2020 Yield Curve UpdateThe Eurodollar charts are updated through today. The Treasuries chart is monthly.<br />
<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgKFGYld8yLtNsakKHfx76QGpAx8gPDA32aQ4KX-wABIfkUUUEWez-11V4UndBbJXLGt5xt-e9axXFqf0BnalYRPwdtmNR7VSegTYJKP3Mit2em_6wUhZkjBpg7oa65oa3IL6F3eLljlA/s1600/2020-5-8-3.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="362" data-original-width="581" height="248" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgKFGYld8yLtNsakKHfx76QGpAx8gPDA32aQ4KX-wABIfkUUUEWez-11V4UndBbJXLGt5xt-e9axXFqf0BnalYRPwdtmNR7VSegTYJKP3Mit2em_6wUhZkjBpg7oa65oa3IL6F3eLljlA/s400/2020-5-8-3.png" width="400" /></a>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.<br />
<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2pFuA799S1Lg1a8DEwCJrr6DYv7tF_BGHx2YLXanw6N0Dvz-folwK3nuXnV5kVqmq2dmqIVelPI0iFijAfEMh2xceLpGSmXaLUdHvMYuY8jXHbe3iWSvNjClgvfC2liezrOcCnk5wMg/s1600/2020-5-8-1.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="402" data-original-width="545" height="295" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2pFuA799S1Lg1a8DEwCJrr6DYv7tF_BGHx2YLXanw6N0Dvz-folwK3nuXnV5kVqmq2dmqIVelPI0iFijAfEMh2xceLpGSmXaLUdHvMYuY8jXHbe3iWSvNjClgvfC2liezrOcCnk5wMg/s400/2020-5-8-1.png" width="400" /></a>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.<br />
<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiusr8TG31lReTZ4jYEl7EwYXdF9sgQnvG2GS1q_E4WriUdxe38dJZmCIK60l9R7GiNoTVsj1NpFdCTbd6D7UD1pDMHXdQSc5G9tmDjayN18r9KBQVibYFaNor5ibLUkFY76dqtKEV__g/s1600/2020-5-8-2.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="478" data-original-width="481" height="396" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiusr8TG31lReTZ4jYEl7EwYXdF9sgQnvG2GS1q_E4WriUdxe38dJZmCIK60l9R7GiNoTVsj1NpFdCTbd6D7UD1pDMHXdQSc5G9tmDjayN18r9KBQVibYFaNor5ibLUkFY76dqtKEV__g/s400/2020-5-8-2.png" width="400" /></a>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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
<br />
<br />
<br />
<br />
Disclosure: I do not have a position in UBT any more.Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com46tag:blogger.com,1999:blog-1110014885778996459.post-26587806921863261962020-04-29T11:55:00.001-07:002020-04-29T11:55:23.168-07:00Housing: Part 364 - Rising homeownership rates
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">This graph from </span><a href="https://twitter.com/lenkiefer/status/1255148510321635330"><span style="color: blue; font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">Len Kiefer</span></a><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">
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.<o:p></o:p></span><br />
<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi94hwO_jNdvc0cQ6Suq796BYkktXPbjRg3Zo4tKeqRMBV8bR7clqJXWqzzZKX0Abd9J3DP14Q0AjXhww50lMQYRqpBZH9I0u8l6V2ljApi3QjSWios9YE12TyE3L8fcnY6MvQpAjwzcA/s1600/2020-4-28-1.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="1600" data-original-width="1281" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi94hwO_jNdvc0cQ6Suq796BYkktXPbjRg3Zo4tKeqRMBV8bR7clqJXWqzzZKX0Abd9J3DP14Q0AjXhww50lMQYRqpBZH9I0u8l6V2ljApi3QjSWios9YE12TyE3L8fcnY6MvQpAjwzcA/s400/2020-4-28-1.png" width="320" /></a>Now, you can see from the graph that homeownership <span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">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.</span><br />
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";"></span><br />
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">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.</span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">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.</span></div>
<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: right; margin-left: 1em; text-align: right;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNDnw3NiPUk9wrV5IxRVSQAIP0AKKBS4C-DBGhLbx76A9FkujjtKw_AHP7eh018-a5qnXdr7Rs8MKKqG1ZyIwzACxBtuY4zcp0K-RO-5nrtCEumxx1iWlTDWNqhBY4oX4FdIbArp37hw/s1600/2020-4-28-2.png" imageanchor="1" style="clear: right; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" data-original-height="674" data-original-width="919" height="292" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNDnw3NiPUk9wrV5IxRVSQAIP0AKKBS4C-DBGhLbx76A9FkujjtKw_AHP7eh018-a5qnXdr7Rs8MKKqG1ZyIwzACxBtuY4zcp0K-RO-5nrtCEumxx1iWlTDWNqhBY4oX4FdIbArp37hw/s400/2020-4-28-2.png" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Source: <a href="https://www.newyorkfed.org/microeconomics/hhdc.html">https://www.newyorkfed.org/microeconomics/hhdc.html</a></td></tr>
</tbody></table>
It is difficult to imagine homeownership rates increasing much further without further loosening in lending standards.<br />
<br />
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.<br />
<br />
<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: right; margin-left: 1em; text-align: right;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0JcspxI7cXNTNSjcVlCoItwzs61prS07olsE_U9SqXJmiPKfpFR54e060TiTNPlNgHz8zTv5oyWdkOnO1Mm_4Y17Pjk0nsuqNffXyLPDarq1nmSqeVz8ERQf26csoksQKoXuvuzL1cw/s1600/2020-4-28-3.png" imageanchor="1" style="clear: right; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" data-original-height="526" data-original-width="722" height="291" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0JcspxI7cXNTNSjcVlCoItwzs61prS07olsE_U9SqXJmiPKfpFR54e060TiTNPlNgHz8zTv5oyWdkOnO1Mm_4Y17Pjk0nsuqNffXyLPDarq1nmSqeVz8ERQf26csoksQKoXuvuzL1cw/s400/2020-4-28-3.png" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Source: <a href="https://www.fico.com/blogs/age-beauty-credit-worthiness-youth">https://www.fico.com/blogs/age-beauty-credit-worthiness-youth</a></td></tr>
</tbody></table>
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">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?<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">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.<o:p></o:p></span></div>
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">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.<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">For some number of households on the
margin, the new standards are within reach, and they have made the effort to
adjust. According to </span><a href="https://www.fico.com/blogs/which-consumer-segments-have-driven-average-fico-score-higher-over-past-decade"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";"><span style="color: blue;">Ethan Dornhelm</span></span></a><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">
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.<o:p></o:p></span></div>
<br />
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt 0.5in; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">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. <o:p></o:p></span></div>
<br />
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">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.<o:p></o:p></span></div>
<br />
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">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.<o:p></o:p></span></div>
<br />
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">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 </span><a href="https://www.idiosyncraticwhisk.com/2020/04/investors-gentrifiers-and-flippers-oh-my.html"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";"><span style="color: blue;">columns</span></span></a><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";"> about how
awful it is when "Wall Street is your landlord."<span style="mso-spacerun: yes;"> </span>We will notice, vaguely, that things just
seem harder for the tenant in that apartment.</span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">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.</span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">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.</span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">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.<span style="mso-spacerun: yes;">
</span>But, really, there are couples like that in St. Louis just as there are
in San Francisco.<span style="mso-spacerun: yes;"> </span>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.<span style="mso-spacerun: yes;"> </span>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. </span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">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.<span style="mso-spacerun: yes;"> </span>We must
attempt to account for these costs in the quest for public prudence.</span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">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.<span style="mso-spacerun: yes;"> </span>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.<span style="mso-spacerun: yes;">
</span>Today, public housing policy is making those voluntary trade-offs more
difficult while simultaneously imposing other involuntary trade-offs.</span></div>
Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com21tag:blogger.com,1999:blog-1110014885778996459.post-40865884384049099832020-04-19T20:42:00.000-07:002020-04-19T20:48:56.412-07:00A Missed Prediction and A Couple of ArticlesFirst, 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.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-XAFt9_WgQZT9HmITYLF28WX8eViWbkTLBU25beeIfpKceWHCxooT2Hb5XtudM91pFkUsTIL6kDuee6XUEsRT3TloqojA0Rhff-9NJCsaepDAIkS_4B8FzZG9TC1BL7xGFjhLHMMK9A/s1600/2020-4-19-3.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="285" data-original-width="473" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-XAFt9_WgQZT9HmITYLF28WX8eViWbkTLBU25beeIfpKceWHCxooT2Hb5XtudM91pFkUsTIL6kDuee6XUEsRT3TloqojA0Rhff-9NJCsaepDAIkS_4B8FzZG9TC1BL7xGFjhLHMMK9A/s400/2020-4-19-3.png" width="400" /></a></div>
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.<br />
<br />
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 <a href="https://marketurbanism.com/2020/04/19/automobiles-seeded-the-massive-coronavirus-epidemic-in-new-york-city/">Market Urbanism</a> 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.<br />
<br />
Second, here is an article at<a href="https://www.bloomberg.com/opinion/articles/2020-04-10/coronavirus-fallout-u-s-housing-prices-will-tumble?srnd=opinion&sref=ASwlXxSA&utm_content=business&utm_medium=social&utm_source=twitter&cmpid%3D=socialflow-twitter-view&utm_campaign=socialflow-organic&cmpid=socialflow-twitter-business"> Bloomberg</a>: "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.<br />
<br />
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:<br />
<blockquote class="tr_bq">
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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.</div>
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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. </div>
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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.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqECsAvTil5Www9N4w8ToM9euoJ4EUrPEiHIYx8_J55A8BV-PMEES3Ce8CxoInFC4GWOkcTQwTzOYwJenrNdfBqdNdHdHEm0rRNiPCg0wcKbgpwp3EavoeDsCFG2Yg7l1EDt9hrX6ocQ/s1600/2020-4-19-4.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="282" data-original-width="473" height="237" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqECsAvTil5Www9N4w8ToM9euoJ4EUrPEiHIYx8_J55A8BV-PMEES3Ce8CxoInFC4GWOkcTQwTzOYwJenrNdfBqdNdHdHEm0rRNiPCg0wcKbgpwp3EavoeDsCFG2Yg7l1EDt9hrX6ocQ/s400/2020-4-19-4.png" width="400" /></a></div>
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.<br />
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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.<br />
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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.Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com19tag:blogger.com,1999:blog-1110014885778996459.post-14831551245515555012020-04-08T23:20:00.000-07:002020-04-09T15:34:30.472-07:00CoronavirusI 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.<br />
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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 <a href="https://www.bloomberg.com/opinion/articles/2020-01-27/coronavirus-from-china-will-challenge-u-s-institutions-too">Tyler Cowen</a> and <a href="http://www.overcomingbias.com/2020/02/consider-controlled-infection.html">Robin Hanson</a> 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.<br />
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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 <a href="https://twitter.com/KAErdmann/status/1244741629467955200">Twitter</a> 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.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzbgdog5EOu_0P-rNjBe7WsWXE6fTp8-KA2SwSzM4BVmYC3KDGSgzC8JKTZUPyblskNdLV01NGLta-VPe8zEKQODpp2Jl0Ekt67d_neA69E1oUunetSMX0OLhG5wDc68NVjFjvgjykGg/s1600/2020-4-8-1.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="320" data-original-width="476" height="268" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzbgdog5EOu_0P-rNjBe7WsWXE6fTp8-KA2SwSzM4BVmYC3KDGSgzC8JKTZUPyblskNdLV01NGLta-VPe8zEKQODpp2Jl0Ekt67d_neA69E1oUunetSMX0OLhG5wDc68NVjFjvgjykGg/s400/2020-4-8-1.png" width="400" /></a>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.<br />
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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.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgsE5XEyLYgsAykLphCyca6aP1RgHG7tF3IjBkBKl8VZTWtMQpKMTmLbaN3s1EKAYAUb01PU2EFhh36FXvP2o0Ouz25dgjG3XUN_xweyeKPnFXtCQFVwOuqbgb86DAz536SxzKlHpVfIw/s1600/2020-4-8-4.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="381" data-original-width="479" height="317" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgsE5XEyLYgsAykLphCyca6aP1RgHG7tF3IjBkBKl8VZTWtMQpKMTmLbaN3s1EKAYAUb01PU2EFhh36FXvP2o0Ouz25dgjG3XUN_xweyeKPnFXtCQFVwOuqbgb86DAz536SxzKlHpVfIw/s400/2020-4-8-4.png" width="400" /></a></div>
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.<br />
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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.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhh3_HSSBU5bXorJI2ysHxGXkhUwNaytteaUQqtMGmC1qyDdXJn4SL2I2olP1gHaoX9BBu95GOQbKQKwZggEk3KiobHmXk9d9r6stZ2M2tDnYnzhEYS7B7kzWkGsecG-aPyKifwUUhmVw/s1600/2020-4-8-5.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="289" data-original-width="476" height="242" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhh3_HSSBU5bXorJI2ysHxGXkhUwNaytteaUQqtMGmC1qyDdXJn4SL2I2olP1gHaoX9BBu95GOQbKQKwZggEk3KiobHmXk9d9r6stZ2M2tDnYnzhEYS7B7kzWkGsecG-aPyKifwUUhmVw/s400/2020-4-8-5.png" width="400" /></a></div>
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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.<br />
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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.<br />
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PS. The April 9 <a href="https://covidtracking.com/">report</a> shows more new cases than on April 4, so my first prediction failed also.<br />
<br />Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com20tag:blogger.com,1999:blog-1110014885778996459.post-25106337356371062020-04-06T09:30:00.000-07:002020-04-06T09:30:11.106-07:00March 2020 Yield Curve UpdateWell, 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.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgo5LqvI5I_eQv5VodbN2qCCcHr6uticg9wxQ5D8DVnrX6L6qeyosr_tsvJYHy_X5ebcfeoAUg-VS4K9qwF_0QdEEe1vclVwcpLM_ycMluBhYJ29ePQZ-yjDZ7v4_gj7O7fYdJ66s0FsA/s1600/2020-4-4-4.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="359" data-original-width="579" height="247" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgo5LqvI5I_eQv5VodbN2qCCcHr6uticg9wxQ5D8DVnrX6L6qeyosr_tsvJYHy_X5ebcfeoAUg-VS4K9qwF_0QdEEe1vclVwcpLM_ycMluBhYJ29ePQZ-yjDZ7v4_gj7O7fYdJ66s0FsA/s400/2020-4-4-4.png" width="400" /></a></div>
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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.<br />
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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.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhTq3zC7eB7bnOK0W9ollOCCyX_gEV0ENlZrBzYKhDFhr0sgr3BtPL158Zn6Og-hyL9JmZJvqSaT3VwAhPrHrOHH8phaIe_sEzIJAGjIiiThUbRJff3phTPERs9eyWnxLxP9EnyoefuA/s1600/2020-4-4-5.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="404" data-original-width="551" height="292" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhTq3zC7eB7bnOK0W9ollOCCyX_gEV0ENlZrBzYKhDFhr0sgr3BtPL158Zn6Og-hyL9JmZJvqSaT3VwAhPrHrOHH8phaIe_sEzIJAGjIiiThUbRJff3phTPERs9eyWnxLxP9EnyoefuA/s400/2020-4-4-5.png" width="400" /></a><br />
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.<br />
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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.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRrdNOqJGk-D63D8nwJkBBYKOuNB93wqecqmqORdhklDkU5MKmjmGTUxuxGFqesoDfCHz3JH4fr9MJXIYjSYnkSlBnS-Mb4uRPJZzwi5hNAZz9d6OX46JAohiqXZvnm5_iJyYcEjf7yQ/s1600/2020-4-4-6.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="471" data-original-width="478" height="393" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRrdNOqJGk-D63D8nwJkBBYKOuNB93wqecqmqORdhklDkU5MKmjmGTUxuxGFqesoDfCHz3JH4fr9MJXIYjSYnkSlBnS-Mb4uRPJZzwi5hNAZz9d6OX46JAohiqXZvnm5_iJyYcEjf7yQ/s400/2020-4-4-6.png" width="400" /></a>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.<br />
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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.<br />
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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.<br />
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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.<br />
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But, of course, the virus creates many uncertainties.<br />
Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.com13