FEDERAL RESERVE BANK OF SAN FRANCISCO WORKING PAPER SERIES Innovations in Mortgage Markets and Increased Spending on Housing Mark S. Doms Federal Reserve Bank of San Francisco John Krainer Federal Reserve Bank of San Francisco
that speaks to some of the things that I've been concerned about. (Remember, you can always find learned opinions to support your point of view. It doesn't mean that you are right, merely that you have good company).
There were a few things that I wanted to share with you:
First, let's look at the increase in homeownership and housing prices:
I will profess a little surprise that the housing stock (which I take to mean available homes=existing plus newly build) % to be as low as it was. I conclude, perhaps erroneously, that the percentage of new housing to existing housing--though great in absolute numbers--is small in relative percentage. Nevertheless, the increase in homeownership is impressive.Second, and a bit unrelated to my overall purpose, but a statistic that I think deserves some airtime is the amount of employment in the mortgage banking sector.
You might expect that the slope of the employment line would be steeper, but one of the points in the paper was the amount of productivity increases:
"Most recently (mid 1990s to mid-2000s), technology has played an important role in stimulating these changes in the mortgage market by improving the ability of lenders to gather and process information. Consumers now appear to face lower costs for obtaining mortgages, refinancing existing mortgages, and extracting home equity; a better ability of mortgage issuers to measure and price the risk of mortgage applicants; and a greater array of mortgageinstruments from which consumers can choose."
The third schedule shows the the the increase of MBS's in private conduits. You know why I'm interested in that !!!!
The slope of this curve is astounding.But also consider this little ditty (I've added the underlines):
"As the down payment constraint is eased, housing consumption increases monotonically. Moving from a down payment rate of 20 percent to 10 percent results in a 24 percent increase in the quantity of housing purchased. As can be observed on the left-hand scale of Figure 5a, this increase in housing consumption also accompanies an increase in total lifetime utility. Not surprisingly, the easing of constraints makes households happier. However, the increase in housing consumption comes at the expense of non-housing consumption."Finally, here's the table that reflects the relationship of housing expenditures on consumption.
As you know, there has been much discussion about the resiliency of the consumer. My sense of it is that the consumer is reaching the saturation of point of consumption. The salient points in this paper (to the extent that I understand them correctly) are
- Mortgage innovations have allowed people to buy more house than they would otherwise (though I will concede that "more" house may solely be to buy the inflated cost of a house they would have purchased more cheaply otherwise).
- Housing expenditures increase at the expense of other consumption
- The percent of homeowners has increase dramatically over the last few years
6 comments:
Today's spending and inflation numbers tend to confirm the hypothesis that increased home ownership has come at the expense of consumption.
I cannot see OTBE that mortgage innovations could have allowed people to buy "more house". They could have allowed people to borrow more in order to begin purchasing a house i.e. in the case of 10% down to avoid waiting to build a required deposit but the house ain't purchased till the fat mortgage payments stop singing.
This in itself would as far as my calcuations work not allow a buyer to pay a higher price. lower interest rates on the other hand may allow someone to pay more for a property or "get more property" for the same monthly payments than someone who cannot/could not access those rates though it is no reason why they should.
So a potentially higher valuation comes either from interest rates,sheer willingness to pay more out of the same income, or ability and willingness to to pay more lets say due to higher income. Here the illusion of increased affordability might be facilitated by innovations such as short term teaser rates etc.
What we have had is a combination of the two. Again in and of itself neither means either higher prices but they do mean OTBE more affordability. The we just have to look at how the market would function.
First "there is always one" this guy or gal bids a higher price for whatever reason and the whole thing kicks off. One thing about housing is that it is heterogenous good but has many measures that seem to stick in the mind a homogenous so despite heterogeneity the whole stock is to some extent priced at the margin.
So off we go and one thousand transactions later prices across the board are higher. But thank the Fed affordability has increased so no big deal yet...but wait... interest rates apply to nearly everyone (ex credit rating etc) so affordability has increased across the board SIMUTANEOUSLY delivering a kind of exogenous demand shock at the margin where it counts.
This greater affordability
awed Mortgage innovations have people to buy more house than they would otherwise (though I will concede that "more" house may solely be to buy the inflated cost of a house they would have purchased more cheaply otherwise).
Housing expenditures increase at the expense of other consumption
The percent of homeowners has increase dramatically over the last few year
Now "more house" has been being delivered to the market through renovations, rebuilds, improvements etc. to existing (depreciating) stock and through innovation (or not) in design, materials etc. in new builds... all along (and one would think as in any industry that productivity and technological innovation would be delivering "more house" for the money all the time) but with the demand shock and prices for the same stock rising you would theoretically be getting less house for your (hard earned) money (mmmm maybe that's where the mysterious increase in "utility" comes from ((I thought those always came with bills!!)).
But of course the market responds. How? Improvements to existing stock (now supposedly) at a higher value are justified and what self- respecting householder has not been dying to spruce up their depreciating asset especially when the Joneses got a brand new kitchen/garage/landscaping?
So now the existing stock begins t justify some of the price increase and tack on a bit more.
Meanwhile the new builds need to compete amongst themselves and an improving stock .... more house for your money (maybe some productivity ((and value)) at this stage here)... innovations in fittings, size, design etc.
The demand shock has set off a spiral.
Now has more out of income been devoted to housing at an individual and economy-wide level, than otherwise... undoubtdedly.
Has that taken away from expenditure on other things.... obviously OTBE and for a new mortgage holder.
But housing has by increasing the value of stock allowed a huge consumption stimulus for stockholders through MEW and what they spent on should be plain in the economy's pattern over the last 5 years or so. ... note that housing equity as a whole has not increased even though "prices" and "wealth" have.
This should help answer your question when will it end.
Others might be what are the benefits and costs.
Intersting stuff Leisa. The conclusions seem obvious, yet....
But I'm with you in questioning how long the resiliency of the consumer can last...one thing is sure, a breaking point will come some day. If not now due to the bursting of the RE bubble, certainly by the time the last of the baby-boomers retire.
BTW, love your blog...been reading it for a few weeks now so the kudos are long overdue. I found it by following your link from Bill's site
Glenn
We can all be assured that we will have front row seats as this situation unfolds. Though to be fair, (and to piggyback on my Fisher book), I have to consider that it is possible that my thoughts (and those of most other rational people) on the consumer are wrong (one of those what do you believe thats false sort of things).
Glenn--thanks for your nice comments and for visiting/commenting.
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