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The difficulties of a housing stimulus
Ed Olsen, one of the nation's foremost housing experts, points out that it's much harder to stimulate housing than many people think because you have to take into account the rental market.
The primary effect of many proposals directed at the housing market would be to decrease the demand for rental units by about the same amount as they would increase the demand for owner-occupied units. This would be the effect of the proposed tax credits or loans at below-market interest rates to new homebuyers.
...The impact of preventing foreclosures on housing prices is overstated for the same reason. The overwhelming majority of families who default on their mortgages move to another unit that they do not share with others. Therefore, preventing foreclosures would have little effect on the total demand for dwelling units and hence little overall effect on market prices.
...Subprime mortgages did induce some people to buy houses beyond their means, and foreclosures would decrease the demand for the types of houses bought by these people. This would decrease the prices of similar houses. However, when they default on their mortgages, the families involved move to more modest houses or apartments, thereby increasing the demand for other types of units in other locations and the prices of units of these types. Preventing foreclosures would lead to higher prices for some properties and lower prices for others.
Read the whole thing (doc).
Posted by Alex Tabarrok on February 4, 2009 at 03:24 PM in Economics | Permalink
Comments
"...Subprime mortgages did induce some people to buy houses beyond their means, and foreclosures would decrease the demand for the types of houses bought by these people."
This is, in my opinion, the problem in the Central Valley in California where I'm from. Oddly, many of the worst loans were at the height of the bubble. In other words, the buyers, who were going to have a hard time in any case, were buying at the top of the market. I have no idea how low the prices on many of these houses will have to go before people would buy them again.
In the meantime, renting allows you, in a downturn, the possibility of getting a cheaper place a lot easier than having a mortgage. In the Central Valley, we could be talking about a very long time for a housing recovery. Maybe I'm wrong.
Posted by: Don the libertarian Democrat at Feb 4, 2009 11:39:29 AM
yes, this is one of the fun things about a massive debt that is mostly dollar denominated (ie internal to the US) with houses as collateral. after this is all done, the same people are going to end up in the same houses.
Posted by: babar at Feb 4, 2009 11:43:06 AM
I live with a roommate and pay less than $600/month in rent but could probably afford to pay twice that much if I so desired. If the government really wants to stimulate demand for housing, they should identify people like me and start writing us checks to cover 20% down payments (even better: they can give me a bigger down payment and perhaps a monthly stipend so that I can afford to buy a house at this county's medan price). I would also like a pony and a flying car, please.
Posted by: Sean P. at Feb 4, 2009 1:46:29 PM
We don't have a shortage of housing, so what is there to stimulate, prices? If the government wants inflation, just print more money. Not hard at all.
Posted by: Jason (the commenter) at Feb 4, 2009 3:24:12 PM
What about letting in ANY immigrant that can show that he/she is unlikely to be a net cost to the public sector? (eg. give every H1B visa holder permanent residence.)
Posted by: mgunn at Feb 4, 2009 3:52:54 PM
Two economists at the Federal Reserve Bank of Boston, Kristopher S. Gerardi and Paul S. Willen, have published an important paper, "Subprime Mortgages, Foreclosures, and Urban Neighborhoods," in which they did the difficult job of calculating subprime default rates by ethnicity for all of Massachusetts over the last decade.
It should be required reading for anybody interested in the mortgage meltdown.
http://www.bos.frb.org/economic/ppdp/2008/ppdp0806.pdf
Posted by: Steve Sailer at Feb 4, 2009 4:06:13 PM
Olsen is right in theory as this is a straightforward application of Econ 101 general equilibrium analysis. But in practice, the housing bubble was characterized by, among other things, an increase in the price-to-rent ratio. According to Calculated Risk, this measure is about 35% higher than it was in 1982. So if people started acting like the economically rational agents Olsen assumes, prices ought to tank by at least 30% any day now.
Granted, I think it's a terrible argument to say we should spend trillions of dollars in order to keep the housing bubble inflated. But if everyone started walking away from their mortgages at once and started renting, we really would see prices tank. Keeping people in their homes and keeping them paying their mortgages will ease the painful adjustment to lower prices.
Posted by: Ricardo at Feb 5, 2009 3:15:01 AM
This argument (for doing nothing) misses an essential point: there is no ONE housing market in the US. The giant mortgage insurer PMI measures market conditions each quarter in 381 MSA's in the US, and finds that 2/3's of these have little or minimal chance of prices falling in the next two years. Why? Because there was little if any bubble in those markets. 60% of the foreclosures are in 4 states, states that could have been the poster children for "bubble" and subprime- California, Nevada, Arizona, and Florida, and of the 40% left? Most are in the industrial areas of the NE and Great Lakes.
Prices are now falling in the 2/3's of the markets that didn't experience the "bubble" because of the macro conditions of NCC- No Consumer Confidence drying up demand, and even these markets who didn't "bubble" have throuhg lack of demand and enough foreclosures coming on the market, to push prices down.
The stimulus needs to be enough to stop the downward price spiral where there was no bubble, but not be so much to not allow the Bubble States home prices to fall further. Combine it with a massive government backed home loan refi- for ALL home purchasers since 2005, those paying and those not paying, with write downs of principal in the 4 states mentioned at least to remove the economic incentive to walk away, and get more people above water, and staying in their homes.
Doing Housing stimulus right will be hard, and tricky, because of unintended consequences and the unpredictablity of the times we are in. But the cost of doing nothing is too great. The nation can not afford to lose another 2 trillion dollars in wealth, because of the housing markets in 4 states.
Rightly or wrongly, Americans have used their houses like a savings account. I know I'm asking for a calibration of policy that recent history would suggest is beyond the means of our government, yet I still believe intervention is necessary, and it needs to be monitored, adjusted, and improved as we go.
We are in for a rough 5 years no matter what we do, but we can't stand idly by and watch the 2/3's of the markets who NEVER participated in the bubble lose more home values. Yes I live in one of those markets, and after having my 401K's raped last year, I'd like to preserve my home's value.
Posted by: Terry McDonald at Feb 5, 2009 7:54:48 AM
This argument (for doing nothing) misses an essential point: there is no ONE housing market in the US. The giant mortgage insurer PMI measures market conditions each quarter in 381 MSA's in the US, and finds that 2/3's of these have little or minimal chance of prices falling in the next two years. Why? Because there was little if any bubble in those markets. 60% of the foreclosures are in 4 states, states that could have been the poster children for "bubble" and subprime- California, Nevada, Arizona, and Florida, and of the 40% left? Most are in the industrial areas of the NE and Great Lakes.
Prices are now falling in the 2/3's of the markets that didn't experience the "bubble" because of the macro conditions of NCC- No Consumer Confidence drying up demand, and even these markets who didn't "bubble" have throuhg lack of demand and enough foreclosures coming on the market, to push prices down.
The stimulus needs to be enough to stop the downward price spiral where there was no bubble, but not be so much to not allow the Bubble States home prices to fall further. Combine it with a massive government backed home loan refi- for ALL home purchasers since 2005, those paying and those not paying, with write downs of principal in the 4 states mentioned at least to remove the economic incentive to walk away, and get more people above water, and staying in their homes.
Doing Housing stimulus right will be hard, and tricky, because of unintended consequences and the unpredictablity of the times we are in. But the cost of doing nothing is too great. The nation can not afford to lose another 2 trillion dollars in wealth, because of the housing markets in 4 states.
Rightly or wrongly, Americans have used their houses like a savings account. I know I'm asking for a calibration of policy that recent history would suggest is beyond the means of our government, yet I still believe intervention is necessary, and it needs to be monitored, adjusted, and improved as we go.
We are in for a rough 5 years no matter what we do, but we can't stand idly by and watch the 2/3's of the markets who NEVER participated in the bubble lose more home values. Yes I live in one of those markets, and after having my 401K's raped last year, I'd like to preserve my home's value.
Posted by: Terry McDonald at Feb 5, 2009 7:55:34 AM
This argument (for doing nothing) misses an essential point: there is no ONE housing market in the US. The giant mortgage insurer PMI measures market conditions each quarter in 381 MSA's in the US, and finds that 2/3's of these have little or minimal chance of prices falling in the next two years. Why? Because there was little if any bubble in those markets. 60% of the foreclosures are in 4 states, states that could have been the poster children for "bubble" and subprime- California, Nevada, Arizona, and Florida, and of the 40% left? Most are in the industrial areas of the NE and Great Lakes.
Prices are now falling in the 2/3's of the markets that didn't experience the "bubble" because of the macro conditions of NCC- No Consumer Confidence drying up demand, and even these markets who didn't "bubble" have throuhg lack of demand and enough foreclosures coming on the market, to push prices down.
The stimulus needs to be enough to stop the downward price spiral where there was no bubble, but not be so much to not allow the Bubble States home prices to fall further. Combine it with a massive government backed home loan refi- for ALL home purchasers since 2005, those paying and those not paying, with write downs of principal in the 4 states mentioned at least to remove the economic incentive to walk away, and get more people above water, and staying in their homes.
Doing Housing stimulus right will be hard, and tricky, because of unintended consequences and the unpredictablity of the times we are in. But the cost of doing nothing is too great. The nation can not afford to lose another 2 trillion dollars in wealth, because of the housing markets in 4 states.
Rightly or wrongly, Americans have used their houses like a savings account. I know I'm asking for a calibration of policy that recent history would suggest is beyond the means of our government, yet I still believe intervention is necessary, and it needs to be monitored, adjusted, and improved as we go.
We are in for a rough 5 years no matter what we do, but we can't stand idly by and watch the 2/3's of the markets who NEVER participated in the bubble lose more home values. Yes I live in one of those markets, and after having my 401K's raped last year, I'd like to preserve my home's value.
Posted by: Terry McDonald at Feb 5, 2009 7:55:49 AM
Whats wrong with the idea of offering everyone a low interest rate, say 4.25% for thirty years, if that doesn't bring down their payment enough then offer a forty year finance. If people still can't afford their mortgage then foreclose, they probably are in over their heads anyhow. This will stabilize the housing market right away and stop the foreclosures or a least give everyone an idea of how many more houses will hit the market.
This will also be fixed financing and not allow this problem to reoccur in 5 years.
At this point everything should be relatively stable and hopefully housing prices will stabilize. For the people that think their getting taken advantage of by not getting any special treatment,offer them 4.25% interest rate also.
Make everyone pay refinance charges this will bring money into the banks right away and save jobs. If people don't have the cash to refinance, do like we have always done, finance the refinance charge.
Why would people finance an overprice house? Simple they probably will never get a interest rate that low again. It will be a "fixed rate" and they will know what their house payment will always be. Lets face it, fluctuating interest rates are and always have been a "Bad Idea" beneficial only to the banks.
The second reason to except this offer:
People would have build in incentive to accept this offer because after allowing people the opportunity to refinance say for 2 months, or 4 months or even 6 months the interest rates will go to lets say, 5.25% or 5.75%. Still a nice rate but people buying into the now lower price of housing will still have a similar payment ( lower house price, higher interest, Higher price house, lower interest). This will also stimulate the housing market & economy in general because people will be trying to buy houses while the interest rate is low.
This is just a rough idea, I am sure it has some flaws but it seems to make more "cents" that having this problem reoccur in 5 years. Also it will let the banks get back on their feet sooner because of the refinance income and without tax dollars and I'll bet it's cheaper in the long run.
Problem is I can't find anyone to bounce this idea
off of, especially our politicians. Seems like they just don't answer their mail.
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