« Housing Prices, Wealth, and the Current Depression--Posner's Comment | Main | Reply to Comment on Housing--Posner »

04/05/2009

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c031153ef0133efd38e64970b

Listed below are links to weblogs that reference Housing Prices and Consumption-Becker:

» Get Rid Of Acne from Get Rid Of Acne
If you have long hair, try not to let it touch your face as hair also secretes oils which when transferred to the face can cause acne. Likewise, if you get your hands dirty don’ t touch you face until you have washed them as this transference is also a... [Read More]

» match dating from match dating
In this 21 st Century digital dating game there seems to be a lack of focus. How can you be fully dedicated to one date when you’ ve got several others lined up? Isn’ t it possible you could pass up the person of your dreams and not realize it? Let me ... [Read More]

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

incelf

–í–æ—Ç —Ä–µ—à–∏–ª –≤–∞–º –Ω–µ–º–Ω–æ–≥–æ –ø–æ–º–æ—á—å –∏ –ø–æ—Å–ª–∞–ª —ç—Ç–æ—Ç –ø–æ—Å—Ç –≤ —Å–æ—Ü–∏–∞–ª—å–Ω—ã–µ –∑–∞–∫–ª–∞–¥–∫–∏. –û—á–µ–Ω—å –Ω–∞–¥–µ—é—Å—å –≤–∞—à —Ä–µ–π—Ç–∏–Ω–≥ –≤–æ–∑—Ä–∞—Å—Ç–µ—Ç.

Nat

But what if an increase in home prices can be leveraged differently - say for instance borrowing on the equity of home that magnifies a household's wealth? Wouldn't that lead to more consumption than stagnant housing prices?

If Prof. Becker's statement on the impact of housing asset is true shouldn't that be equally true of all assets, including rise in stock prices across the board as witnessed during the dot com boom? How is that different from the housing asset?

GungaBob

With all due respect, Professor Becker doesn't rate a "pass" here: No literature search; no data.
For those interested in such matters, try searching the Calculated Risk blog for "Mortgage Equity Withdrawal", and also look at: Alan Greenspan and James Kennedy: "Sources and Uses of Equity Extracted from Homes" Discussion Series 2007-20, Federal Reserve Board, March 2007.

RPB

This would be excellent analysis if your world did exist. However, with the widespread creation and use of products designed to cash out equity you also have to examine housing's wealth effect on consumers.

Low interest rates increased the magnitude of the short term gain allowed by these equity products. Also, low interest rates decreased the expected return on long term investment. The double entente of low expected long term gain and heightened short term gain incentivized many consumers to cash out home equity for consumption. Low interest rates also fostered greater use of adjustable mortgage products to purchase houses, aiding an asset bubble. The confluence of enticing mortgage products made owning a home accessible to many and combined with low real returns, created a housing bubble.

Combine the adjustable rate mortgages with soaring asset values and low rates. Now you have the incentives, the means and the rationality for cashing out the equity in your home; prices will continue to rise. While not prudent, this was the belief many consumers were sold on.

Furthermore, the belief also existed that you could refinance your mortgage when the higher rates kicked in (for teaser, ARM, etc type products) using similar adjustable rate or low rate based loans. Asset value growth fostered equity cash out all the while being primed by low interest rates.

Furthermore, one could argue it was low interest rates that forced people into viewing housing as an investment in the first place (no other positive means of alpha). And it can be argued the low rates motivated the great securitization of low quality mortgage, debt and loan instruments. A strong contention, but financial innovation was the means to our 'end' while low rates increased the perverse incentives across the entire spectrum of agents: borrower, loanee, securitizer, investor, etc.

Walt W

Much of the increase in the price of "homes" was in fact an increase in the price of land. To the degree that land is a fixed asset, a higher or lower price of land is, from an economy point of view, a transfer payment with no real effect. To the degree that the increase in the price of homes was in the form of bigger homes on more developed plots of land, the loss is the consumer surplus loss from having too much of a good. I'm not sure the generational perspective adds much to this story.

Charlie

Wow, for attempting to use a simple lifecycle bequest story you really botched it. If presented with an increase in wealth why wouldn't the families attempt to leverage that gain (incef was thinking along these lines too). One example of many, what if the young, who by the stories own parameters only live in one quality of house, sold the inherited house? This provides an increase in wealth greater than expected, then they can either save or consume, but more than likely both causing both an increase in consumption and an increase in wealth.

Of course that is the problem with simple stories, but when you don't consider what most reasonable people would do, then you weren't just telling a story.....you were using a fairy tale to back up your idea.

Anonymous

–≠—Ç–æ –æ—á–µ–Ω—å –∏–Ω—Ç–µ—Ä–µ—Å–Ω–æ –∏ –Ω—É–∂–Ω–æ.

–ú–∞—Ä–≥–∞—Ä–∏—Ç–∞

–≠—Ç–æ –æ—á–µ–Ω—å –∏–Ω—Ç–µ—Ä–µ—Å–Ω–æ –∏ –Ω—É–∂–Ω–æ.

crmorris

Following up on Gungabog and his reference to the Greenspan-Kennedy data. Kennedy's (updated) data shows that homeowners withdrew $4.2 trillion in home equity in the 2000-2007 period. Equivalent to 6.1% of gross disposable personal income. Or almost the same amount as the amount of the goods and services trade deficit during that time -- which was $4.5 trillion. No wealth effect???? Now mortgage equity withdrawal is effectively zero, and look what's happened to consumption.

Old Curmudgeon

By concentrating on economics to the exclusion of all else, Professor Becker and most of the commentators miss other important causative factors that implicate land-use laws and regulations, and people's response to them.


It began with the post-WW II decline in urban habitats caused by riots of the 1960s that along with "block busting" gave rise to "white flight," all of which drove city dwellers to the suburbs (with Uncle Sam ecouraging that exodus and subsidizing it with low-cost home financing, favorable tax laws, road building programs, etc.). Add to that the rise of an urban underclass, the catastrophic collapse in quality and safety of urban public schools exacerbated by bussing, an increase in urban crime rates and a corresponding decline in law enforcement (particularly in the 1970s), and urban redevelopment that became an engine of destruction of affordale urban dwellings by the hundreds of thousands per year. All that led to seeing the suburbs as the place to be, and eventually gave rise to the suburban NIMBY sydrome that inspired enactment of exclusionary ("low-growth") land-use regulations and a decline in construction of homes in the better areas.


The increased demand for good suburban housing was thus met with a constricted supply in places where people most wanted to live. This caused what is now known as "urban sprawl" as developers increasingly built on the urban periphery where there were no NIMBY-shouting neighbors.


Developers in "hot" markets (California being the perfect example) thus maximized their profits by building the biggest and fanciest homes they could, leading to an explosive escalation in home prices that eventually rippled downward in the housing market because of the widespread belief that to buy a good home and to keep its surroundings static was a road to riches, and that if you didn't buy it now you would not be able to do so in the future.


Add to that the Clinton administration's pressure on the banks as well as Fannie and Freddie to make improvident loans available to people who couldn't afford home owership, and what you have is a bonfire waiting for ignition. The ignition came in the form of the Fed's artificially low interest rates that created an illusion of affordability, aided by the consequences of more women entering the workforce and pooling their wages with their husbands' salaries to pay for homes otherwise beyond their ability to own. By degrees affordability ceased to have meaning because monthly payments were low and home prices were going up and up with no evident limit in sight.


Voila! The bubble.

livinginchimerica

Amazing to see no data or charts to support this commentary, as someone else pointed out. Makes me wonder if this was the same type of weak analysis that was conducted at the Fed, which had them leave rates too low for too long (in spite of Mr. Greenspan's absurd protestations that he was not at fault for the bubble) or contemplate raising rates as late as August 2007, when calamity was on the doorstep and not inflation.

Folks in Washington would do well to develop an understanding of how the real world works as events are unfolding, not in retrospect. The core driver of the bubble, as with any bubble, was irrational exuberance, in this case about future home price growth, especially in the coastal housing markets. Excessively high home price growth expectations made real mortgage and other interest rates negative (hence our negative savings rate) and homes appear eminently affordable to homebuyers, particularly if they could get 100 LTV financing. Mortgage brokers, mortgage lenders, Wall Street and the rating agencies also signed on to these expectations, mostly because they were paid on a fee basis on volumes of loans and deals originated, and they distributed most of the risk (although they were probably sucked into the irrational exuberance as much as anyone else). Now we have negative home price growth exerting enormous stress on our consumption-driven economy (think of the -10% or so annual home price growth as the correct interest rate deflator, giving us 15% real mortgage rates - not good for a country as weighed down by debt as the US is), through credit defaults of all forms and increased savings. The stress will not relent until home prices stabilize (ie zero price growth), which eventually will happen, but perhaps not for a long while. At the same time, consumption will remain under pressure, although old habits (who doesn't love a trip to the mall) will die hard.

To assert that US consumption was in some way not correlated with the boom in home prices, at this late stage in the game, is obviously absurd, and way beneath what one would expect from as prestigious an institution as Hoover. It's too late to undo what has been done, but assuming the authors are based in DC, the commentary highlights another bubble that apparently persists to this day - the thought bubble of Washington.

Jack

Curmudgeon? Were you trying to make a case that the poor and minorities, those who "couldn't afford home ownership" were the main cause of the Wall Street Ponzi scheme? BTW how did you come by your handle? Jack

Old Curmudgeon

Try again, Jack. My point, which I thought was obvious, was that as the ripple effect spread, not only the poor and minorities, but middle class people got caught up in the frenzy. Here is an actual example well known to me, from my neck of the woods: a nice house with a view, in an upper middle-class area, sold in 1968 for $68,000. In 1980 it was formally appraised at $325,000, and in 1989 it sold within 24 hours of listing for $575,000 ($25,000 above its listing price). Even today, you would be hard put to buy it for $1.5 million. Does that make my point for you?

No, these were no poor folks. The latter got screwed by the "sub-prime mortgage" thing. But this sort of thing made people we don't think of as poor, unable to buy a nice home, absent the crazy financing that kept their monthly payments lower than their loan balance required - a clearly unsustainable thing that depended on the buyers' ability to turn their homes over for more, on the "greater fool" theory. It worked, but only for a while.

Jack

Cur: Thanks, but no, your example didn't do much for making your point,..... though we'd all agree that the recent run-ups were unsustainable.

As for "The ignition came in the form of the Fed's artificially low interest rates that created an illusion of affordability........"

Truth is most Fed actions do not directly affect mortgage rates. Instead........ a Fed that "eases too much" is likely to foment inflation or at min. fears of inflation which would have the effect of pushing interest rates upwards, as those buying the bonds would not want to lend long and have inflation eat up their returns. There was MUCH more going on that influenced the "bubble" some of which I posted about under the Posner essay.

Ha! We DO agree that folks, poor, middle class and quite wealthy all took a screwing.

BorvefPreovA

–°–µ–Ω–∫—Å –∑–∞ –∏–Ω—Ñ—É, –ø–æ—á–∏—Ç–∞–ª —Å –∏–Ω—Ç–µ—Ä–µ—Å–æ–º

Old Curmudgeon

Jack, Of course there was much more going on. That was my original point. What I wanted to make clear was that land-use laws and regulations and their impact on the housing market had an enormous effect, even though Professor Becker did not mention any of that.

As for that screwing, it did take place all right, but it was often aided and abetted by the poor judgment, recklesness and at times fraudulent behavior of the screwees.

Jack

Cur...... I live part of the time in the Anchorage bowl where land, despite the enormity of Alaska is scarce, and part of the time in Tulsa where land is "infinite". In both places the lack of land use planning has created costly problems. But! until yesterday (about noon?) land use planning was considered "commie" and summarily dissed.

That, in retrospect, those who exercised "poor judgment, recklesness and at times fraudulent behavior" may well have come out as minor clones of "our?" Wall Street geniuses, had the overall Ponzi continued even a bit longer.


Also, I don't think we've ever expected the consumer to self-limit his ability to repay a loan. Isn't that what "bankers" are for? Or? are we expecting sort of an honor system with the bankers out at their country club, the doors left open to allow access to a self-service pile of dollars? or yuan? Aren't the big bucks paid to accurately assess risk????

Jack

Cur...... I live part of the time in the Anchorage bowl where land, despite the enormity of Alaska is scarce, and part of the time in Tulsa where land is "infinite". In both places the lack of land use planning has created costly problems. But! until yesterday (about noon?) land use planning was considered "commie" and summarily dissed.

That, in retrospect, those who exercised "poor judgment, recklesness and at times fraudulent behavior" may well have come out as minor clones of "our?" Wall Street geniuses, had the overall Ponzi continued even a bit longer.


Also, I don't think we've ever expected the consumer to self-limit his ability to repay a loan. Isn't that what "bankers" are for? Or? are we expecting sort of an honor system with the bankers out at their country club, the doors left open to allow access to a self-service pile of dollars? or yuan? Aren't the big bucks paid to accurately assess risk????

Jack

Cur...... I live part of the time in the Anchorage bowl where land, despite the enormity of Alaska is scarce, and part of the time in Tulsa where land is "infinite". In both places the lack of land use planning has created costly problems. But! until yesterday (about noon?) land use planning was considered "commie" and summarily dissed.

That, in retrospect, those who exercised "poor judgment, recklesness and at times fraudulent behavior" may well have come out as minor clones of "our?" Wall Street geniuses, had the overall Ponzi continued even a bit longer.


Also, I don't think we've ever expected the consumer to self-limit his ability to repay a loan. Isn't that what "bankers" are for? Or? are we expecting sort of an honor system with the bankers out at their country club, the doors left open to allow access to a self-service pile of dollars? or yuan? Aren't the big bucks paid to accurately assess risk???? and protect the depositor's capital??

ball valve

in an upper middle-class area, sold in 1968 for $68,000. In 1980 it was formally appraised at $325,000, and in 1989 it sold within 24 hours of listing for $575,000 ($25,000 above its listing price). Even today, you would be hard put to buy it for $1.5 million. Does that make my point for you?

Rhys

"The message of my discussion is not that higher housing prices have no wealth effects, but rather that any such effects are likely in the aggregate to be much smaller than what is often claimed." Yes, but smaller does not necessarily mean less significant. Have you read The Power of Small ( http://tinyurl.com/d6qopb )? Sometimes it's the little things that matter the most.

ApefWeceBele

–ß—ë—Ä—Ç –≤–æ–∑—å–º–∏! –ö—Ä—É—Ç–æ!–í—ã –°–∞–º–∏ –æ—Ç–≤–µ—Ç–∏–ª–∏.–ë–µ—Ä—É –≤ —Ü–∏—Ç–Ω–∏–∫! –°–º—ã—Å–ª –∂–∏–∑–Ω–∏ –∏ –≤—Å—ë –æ—Å—Ç–∞–ª—å–Ω–æ–µ. –†–µ—à–µ–Ω–æ.–ë–µ–∑ —à—É—Ç–æ–∫.

Nick

If I bought a house for $500,000 with no money down in 2004 and it doubled in value by 2006, I would feel considerably richer. And if I mistakenly came to believe that my home's future long term price appreciation was much higher than I had initially expected, then I would not worry about spending within my means. I could live off of endless mortgage equity withdrawls.

Now, if the price of my home suddenly plummets back to $500,000, and looks to be heading lower, then all of my "excess" spending was misguided. I now need to massively ratchet up my savings to repair my household balance sheet.

We are now in the early to mid stages of a household balance sheet debt-deflation depression similar to Japan circa 1992.

Nominal, or even real, interest rates are not a central part of this story. Nor are future generations.

Nick -- Kyoto

Jake

In pertinent part, Professor Becker writes: "The only elderly gaining from higher home prices are those who want to downsi[z]e their living space. . . . [W]hile the rapid declines of house prices during the past few years may have had large effects on apparent wealth, it probably was not much of a drag on aggregate consumption, nor much of a stimulus to the savings rate."

Becker is dead on. Retiring with too much house tends to decrease one's level of consumption in retirement. If the value of one's home exceeds the FHA-insured limit, monetizing that excess equity by anything short of an outright sale is impractical.

JT

If interest rates go down, but home prices go up, doesn't that mostly even out the actual price of the home? In comparison to earlier higher interest rate/lower home prices times? This last real estate boom cycle was built on artificial growth and poor money management habits. Should we really be that surprised when the cycle went bust?

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been posted. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment

Become a Fan

May 2014

Sun Mon Tue Wed Thu Fri Sat
        1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 27 28 29 30 31