OK, if was obvious that home prices were wildly excessive in 2006, why is that not also true today? Nominal house prices are now far above 2006 levels, and even in real terms they are rapidly approaching the 2006 peak
My thoughts:
1. Housing starts have been in the toilet for a decade. Looking at these charts, single-family housing starts were at an annual rate of over 1.2 million starting in 2001, and they were over 1.6 million from 2003 through 2005. Single-family starts plummeted to around 500,000 per year from 2008 through 2012, and they barely topped 800,000 last year.
Over the last decade national average rental costs have risen faster than inflation. As I recall, they were rising more slowly than overall inflation from 2001 through 2007.
In short, compared with 2006, high housing prices today look more like a supply problem and less like a bubble.
Update: Commenter Handle points to the price/rent ratio chart, which clearly tells you that we are not at 2008 levels.
2. The U.S. has multiple housing markets. Looking at the Core-Logic price index page, the cities that have seen big price increases in the past decade include San Francisco, Boston, Denver, and Seattle. San Francisco and Boston are notoriously supply constrained. Denver and Seattle also are more likely experiencing long-term increases in demand relative to supply. The “sand states,” where housing performed the worst during the crisis, have lower prices than they did ten years ago, in some cases much lower.
In short, today we are seeing high prices in areas where income growth has been very strong. In 2005 and 2006, we saw higher prices driven by looser credit conditions.
In the UK, the problem has been that people compete for housing not with what they can afford, but what they can borrow. As a result, the lending market has pushed prices up.
Another upward factor has been regulations which on the face of it seem to be beneficial to the housing stock, but push prices beyond which working people can afford.
A further fact is the complicated transfer process. If you buy a high end second hand car (eg a Rolls Royce or Bentley costing the price of a small house), produce the money and exchange it for the car. An appropriate entry is made in the log book or registration document. With a house there are so many fingers in the pie for reports and other inefficient time delaying processes. No one trusts anyone, and in the UK many people end up hating the person that bought their old house and/or sold them their new house. The legal professions laugh all the way to the bank. The legal and administrative costs exceed what the bricks and mortar and land cost to buy fifty years or so ago.
From Bill McBride: The latest New vs. Existing Home Sales, Price to Rent ratios, and Mortgage Equity Withdrawal as a Percent of Disposable Income.
That MEW graph tells an incredibly under-reported story: for several years, about 7-9% of all American disposable income was being derived via refinancing and equity extraction. That was huge and far above typical levels. A whole suite of conditions during the housing bubble were aberrant and unprecedented, and the claims that the simultaneity of the correction in that enormous market and the Global Financial Crisis was coincidental, or that the correction would not have occurred in some monetary policy counterfactual, is an extraordinary one that requires much stronger support than Sumner has provided. We’ve seen a return to housing market normalcy lately with prices mostly related to the fundamentals of supply and demand. What was going on in the 2000s was not normalcy, not by any means.
This is really one of Sumner’s big blind spots which seems to be a result of (1) An EMH / pragmatism-based crusade against the usefulness of the “market bubble” concept (similar to the legitimate crusade against the Zero Lower Bound as a real limit to monetary policy concept), and (2) An unwillingness to attribute any causal contribution to the GFC to anything other than faulty monetary policy for central banks across the developed world which failed to keep nominal spending on trend.
It’s possible to believe both that there was a housing bubble in the mid 2000s caused by loose credit conditions, and that the GFC was greatly exacerbated by bad monetary policy, and that better policy could have done much more to smooth the waves and cushion the blow. Sumner’s arguments seem to indicate that he sees belief in the former as coming at the cost of belief in the latter.
Thanks. I’m going to put a link to the price/rent chart in the main post.
Homeownership peaked in early 2004, and from 2004-2006 there was a mass migration event out of the most expensive cities, many of whom had been homeowners who were moving to much less expensive cities. So, much of that MEW was actually the product of selling or buying down market.
If the primary factor had been a credit boom that was funding both an oversupply of housing and an unsustainable debt-financed consumption spree, then rent inflation should have been low and inflation in other goods and services should have been high. But, the data tells the opposite story.
Most of that equity extraction was simply part of a process of liquidating gains from economic rents from political capital repression through local housing opposition that are capitalized in home values. Some of those economic rents were claimed by selling properties and some were claimed by borrowing from them. The value of the real estate in cities where those high values persist is much higher than the brief jump in values in the bubble cities like Phoenix, and in those cities prices were only high for a year or two. There was some equity extraction in those bubble markets, but it wasn’t the primary source.
Urban coastal real estate owners have several trillion dollars worth of ill gotten gains burning a hole in their pockets, and they were just engaging in some consumption smoothing.
“there was a mass migration event out of the most expensive cities”
That’s interesting, would you happen to have a link to something that could tell us how big that temporary mass migration event out of the cities was?
Here is a post with a graph showing the IRS data.
http://idiosyncraticwhisk.blogspot.com/2017/05/housing-part-230-supply-and-demand.html
ACS only goes back to 2005, but shows similar magnitudes.
I tend to agree with you on housing prices and the houses sold are limited. One view of single house mortgage debt by the Fed shows a consistent $3% annual growth since 2012 so consumer and bank balance are still reasonable shape. (It was $9.9T in 2014 and $10.5T in Q3 2017 so it is growing slowly.) In 2006 mortgage debt was increasing 5 – 10% annually and when prices fell in 2007 the consumer & bank balance collapsed.
That said. It is hard to fix the supply problem even beyond urban deregulation as builders aren’t go construct is prices fall by more than 10%.
Anyway I quoted on Money Illusion we may return to an old fashion Fed induce recession and we have a downturn more similar to the 1957/1958 Eisenhower one.
Rent inflation has been higher than general inflation for 20 years, except for the foreclosure crisis after 2007. Rent inflation briefly converged with general inflation in 2005 because housing supply was finally strong enough to moderate it. As soon as housing starts began to collapse in early 2006, rent inflation shot up to above 4%. When the Fed kept the target rate pegged at 5.25% until Sept. 2007, the only reason core CPI was anywhere close to their 2% target was because of rent inflation, which of course is largely imputed and does not involve the use of cash.
” When the Fed kept the target rate pegged at 5.25% until Sept. 2007, the only reason core CPI was anywhere close to their 2% target was because of rent inflation, which of course is largely imputed and does not involve the use of cash.”
Does not involve the use of cash is a difficult way of looking at things. First 1/3rd of the population doesn’t own and rents, so high rent inflation has a real impact on that segment of the population. Secondly imputed rents are paid by new homeowners in some form or another (generally higher housing prices) over long time periods. If 5% of houses are sold each year over a 20 year period your median homeowner has bought their house withing the last 11 years, and higher prices means locking in that higher cost for decades. This is a major labor mobility inhibitor and (if calculated well, a dubious assumption at times) represent real costs of home ownership. The fact that it is not directly cash payed doesn’t imply that it shouldn’t be part of inflation or shouldn’t be worried about (but implies that the time frames and impacts are distorted compared to immediate goods).
You are correct. I have no problem with it being part of the measurement of inflation. I have a problem with it being used in cyclical monetary policy. And, ownership skews very heavily to higher priced properties, so a very large percentage of rent inflation is imputed.
In terms of long term cost of living trends, price is certainly related to rent, but there is no reason to use it instead of using rent. Furthermore, if we do use home prices as a proxy for housing inflation instead of rent, then that would have called for massive monetary stimulus in late 2007 to stabilize home prices, but oddly, there seems to be broad agreement that the Fed shouldn’t be in the business of stabilizing home prices. That’s fine, but people shouldn’t be able to have it both ways.
I could make the opposite argument (if I favored monetary policy at all) in that because these costs filter through more slowly then we need to address them earlier, not later, in their cycle. The long term consequences will be greater and far more difficult reverse as future action will also filter through slowly. If you want economic smoothness then you absolutely have to include these prices in the index.
I agree. If we had moved sooner to encourage more homebuilding in 1995-2002, we would have gotten ahead of the curve and avoided the problem.
In what way would/could monetary policy have encouraged more home building from 1995-2002?
Here’s a recent CPI update I did where you can see core CPI, Shelter CPI, and Core CPI less Shelter over the past 20 or so years.
http://idiosyncraticwhisk.blogspot.com/2018/02/january-2018-cpi.html
Is there a good book on U.S. government housing policy and its impacts? In “housing policy” I include such things as: urban renewal, mortgage tax breaks, flood insurance, regulations on the (now defunct) savings and loan associations, Freddie Mac and Fannie Mae, and zoning restrictions.
I would recommend this: https://www.aei.org/wp-content/uploads/2014/03/-rethinking-federal-housing-policy_101542221914.pdf
Key Point: Not just federal or state housing policy, but local pro-growth policies, must be carefully evaluated in view of their effects on housing costs. Some “environmental” policies are actually “force density or redistribute wealth” policies and may have peculiar effects.
I write this from Seattle metro.
Before deciding that market prices seem irrational, ask what part of those prices are covering fees directly collected by government, and what are costs imposed by government (required sprinklers for example). If those numbers have gone up, that will explain part of the housing cost increase. Consider also lop sided demand – by which I mean not just “lots of people bidding for few dwellings” but rather “lots of rich people bidding for all of the dwellings”.
Combined with, so far, only fringe opposition to more growth (I think much stiffer opposition will come, but maybe not for 10 years.)
In Seattle metro (depending on which of many jurisdictions) the permits and fees to build a new dwelling may be say $50K to $70K (hearsay.) In Portland there’s been a debate about whether ANY housing can be built for less than $100/sq ft (media a while ago) or so, because of fees, permits, and imposed costs. Note that structural costs of simple structures are vastly less than that.
Understand that WA has no income tax (and might not get net money from one) and so quite a lot of all government budgets come from property taxes and various fees. Often there’s no pretense that a permit fee is covering an inspection, it’s a flat out tax.
If local government is funding the fire department and the police and the sewer department in part from fees on new construction, then new construction will have a minimum cost, but also be encouraged.
People are often caught out by this. They’ll suggest building dwellings for poor or homeless people out of structurally cheap things like shipping containers, not realizing that the costs of lumber and drywall are nowhere near the main expense. You still have to have a place to put it, water and power and sewer hookups, transport access, and local government will have to get money from it. Local government buying land and putting low cost housing on it is giving up government and local economy revenue opportunity over time. (Which I suppose is why Seattle mostly trys to force developers to provide low income units in exchange for height variances and the like.)
Even well connected groups like habitat for humanity encounter this (former leader told me directly.)
What does this have to do with a “bubble” or “not bubble” question? Well, Seattle metro, which the local press claims has been the hottest housing market in the country for some 18 months, has
(a) lots of costs for new construction which are funding government
(b) lots of rich people with huge borrowing power associated with MSFT, amazon, google, etc. bidding up prices
(c) geographic as well as social economic constraints on density, along with the usual political issues.
Does that in any way imply a housing bubble? A bubble in the return to labor for working at amazon maybe, but a housing bubble?
There are massive constraints on the expansion of supply in the greater Seattle metro area. They are geographic and political. On the geographic side, Seattle is smack-dab in the center of a narrow isthmus with the Puget Sound on one side, and Lake Washington on the other. The remainder of the buildable land is comprised of lowlands scoured out by the advance and retreat of the glaciers during the last ice age. These extend about 10-30 miles east of the Puget Sound. The lowlands are bounded by the cascade foothills, which are generally far too steep to to permit dense residential construction.
There are two facets to the political constraints on supply. The first is that zoning laws and the permitting process make adding supply within a reasonable commuting range to Seattle exceptionally difficult and expensive. The second is that the political establishment in the city and county are dominated by utopian ideologues who want to prescribe how people commute. They want more people to ride bikes, but Seattle is characterized by steep hills and 9 months of dark, wet, cold weather that discourages cycling. They want to make mass transit the predominant mode of transport in the city, but favor slow, expensive, outmoded, and inefficient systems like street cars and light rail over busses, ride-sharing. Relocation of port facilities that generate high volumes of freight traffic and occupy hundreds of acres of prime land adjacent to the CBD are simply not discussed.
The upshot is that homes that permit a commute into the CBD in 30 minutes or less are beyond the reach of any household grossing less than $250K per year. There are high crime areas with horrible schools where one can buy a house for less, but those generally do not appeal to couples who have or are contemplating having children. Buying in an affordable area either to the North or South of the city consigns one to a 65-90 minute commute each way, and that time is likely to increase steadily each year.
At some price-point, either in dollars for home prices or time spent commuting, or both – this simply becomes untenable and the only solution is to remove the political constraints on the supply of homes or personal mobility.