The Macroeconomic Effects of
Housing
Stijn Van Nieuwerburgh
GSE conference
Outline
• Some basic facts about housing & macroeconomy
• Explaining the boom and bust in U.S. housing
markets
• Housing and the macro-economy today
• Principles for reform of housing policy beyond
GSE reform
Some basic facts about housing
1. Housing is a large and volatile component of
household wealth
– 33% of net worth in 2000, but 48% in 2006
– Increase of $14tr in household wealth
2. Housing is the key collateral asset for households to
borrow against
– Mortgage debt/GDP was 54% in 1996, but 89% in 2006
– Increase of $6tr in household mortgage debt
Mortgage debt and home equity
1.0000
home equity (%)
0.9000
Mortgage debt to GDP
0.8000
0.7000
0.6000
0.5000
0.4000
0.3000
0.2000
0.1000
0.0000
195201
195603
196101
196503
197001
197403
197901
198303
198801
199203
199701
200103
200601
201003
Some basic facts about housing
3. House prices increased and decreased dramatically
in last decade, even relative to fundamentals
– House-price to rent ratios went up 34-57% btw. 2000.1 and
2006.2, depending on the house price measure
– They fell 14-33% btw. 2010.3 and 2006.2
– Similar boom-busts in other countries (e.g., Ireland, Spain)
Price-rent ratio 1975.1-2010.3
160
Freddie Mac
150
FHFA
140
Case-Shiller
130
120
110
100
90
80
197501
198001
198501
199001
199501
200001
200501
201001
What explains rise in house prices?
• Financial innovation in mortgage market:
– Improved access to borrowing for many households
•
•
•
•
Through new products (subprime, Alt-A, option ARM)
Through higher maximum allowed LTVs
Through lower documentation and underwriting standards
GSEs were important supporting actors in mortgage credit boom
– Cost of tapping into one’s home equity fell dramatically for all
households
• mortgage origination & refi costs, HELOC origination costs, etc.
reduced by more than 50%
• Higher awareness of equity extraction options
• Huge foreign purchases of U.S. Treasuries and Agencies
– Foreigners hold 2/3 of outstanding marketeable amount
– Mostly price-inelastic foreign official institutions in Asia (reserve
& currency motives)
Foreign holdings of Treasuries & Agencies
4500.00
4000.00
3500.00
Treasuries
3000.00
Agencies
2500.00
2000.00
1500.00
1000.00
500.00
0.00
What explains the fall in house prices?
• A reversal of financial market liberalization
– Collapse of non-prime originations and private-label
securitization; government (F &F and Ginnie) is 95% of
mortgage market
– Return to tighter underwriting standards: higher LTVs
– Costs of tapping into home equity back up
• Foreign purchases of US Treasuries and Agencies remain
high
– Treasury holdings increased $1.7tr from 2008 to2010
– Agency holdings down $0.3tr from 2008 to 2010
Insights from our analysis
• Observed house price swings are consistent with rational
model of household behavior
– Normal business cycle fluctuations +
– Financial market liberalization in mortgage market and its sudden
reversal during the crisis +
– Large foreign purchases of US bonds
• Foreign purchases are instrumental to keep interest rate
low, but have only modest effects on house prices
– They force US households to save in riskier assets, such as houses
and stocks, and they demand extra risk compensation
– What will happen if foreigners scale back their US bond holdings?
• High house valuations in 2006 signaled lower future prices,
not higher future rents. Valuation ratios now back to
normal.
Insights from our analysis
• Financial innovation in mortgage market + foreign bond
purchases fueled consumption boom, especially among
younger and poorer households, as well as construction
boom
• Increase in housing wealth matches data
• Caution: relaxation of credit standards by financial
industry itself may not have been optimal
– But difficult to sort out ex-ante vs. ex-post!
Housing and the macro-economy today
• Increase in housing wealth stimulated consumption
during the boom through mortgage equity withdrawals.
Process now works in reverse to dampen spending.
• Massive (mortgage) debt overhang will take many years
to work off.
• Residential investment fell off a cliff; new construction
now flat at ¼ of boom level; drag on employment
• Foreclosures add to high housing inventory and further
depress prices. This reduces collateral values further.
• 14mn home-owners under water (23%), with an
additional 8mn that are within 5% (LTV>95%)
=> hampers efficient labor reallocation
End of government stimulus
• Large fiscal and monetary policy interventions kept
world economy from collapsing in 2009
– 4 million loan modifications under HAMP, FHA, and Hope
Now
– Tax credits for house purchases expired April 30, 2010
• Programs such as the Term Asset Lending Facility
supported MBS market enormously in 2009
– Total ABS issuance below $5bn per month before TALF,
increased to $25bn in spring 2009
– Termination in March 2010
– Held mortgages rates historically low (i.e., high prices and
large capital gains for investors) in 2009-2010
• Fed stopped buying MBS and Agencies in 2010 and is
now unwinding its $1.25tr position
13
Fed is unwinding its mortgage position
1400000
Treasury
Agency+MBS
1200000
1000000
800000
600000
400000
200000
0
12/18/2002
12/18/2003
12/18/2004
12/18/2005
12/18/2006
12/18/2007
12/18/2008
12/18/2009
12/18/2010
14
GSE reform = macro-economic policy
Housing policy beyond GSEs
• No other country has the extent of government
support for home ownership
• No other country has GSEs with large investment
functions
• Yet, U.S. is similar to other countries in outcomes
– home ownership is not particularly high,
– mortgage market is not particularly large relative to the
size of the economy,
– Mortgage rates are not particularly low
• Govt. intervention did not prevent the housing crash
• Securitization did not diffuse the fallout from the crash,
because risks largely remained in financial sector
• Other countries more focused on rental assistance
Housing policy beyond GSEs
1. Reduce the distortions induced by the government
–
–
Relative price of housing consumption; 50% increase in sq.
ft. since mid-1970s
Relative price of residential investment; business and
human capital is more efficient => higher growth
2. Reduce focus on home ownership, shift policy toward
rental housing
–
–
–
–
No distinction between house sizes, first-or second home,
and leverage is subsidized
U.S. home ownership policies are regressive and add to
income inequality
Rental policies can target needy
Bring commitments on budget; assign role to HUD/FHA
Housing policy beyond GSEs
3. Shift credit risk exposure towards household
– QRM: Lower LTV and better documentation
– Banking sector shows to be ill-equipped to bear
aggregate housing risk, which is systemic
– Allow for more recourse?
4. Stimulate competitive mortgage markets
– Level-playing field
– Eliminate product distortions by allowing private
market initiative: if PLS deal economics make no
sense, more ARMS instead of FRMs