Friday, September 29, 2017

Housing: Part 259 - Phoenix home prices and interest rates

As readers who have watched my time-lapse chart of home price changes know, the price movements in bubble cities like Phoenix were peculiar, and they happened late in the process.  Late enough, in fact, that Phoenix prices still looked very normal, even as the Fed started to raise rates in 2004, and it was only after rates started to rise that home prices in Phoenix shot up.  That is because the bubble in Phoenix had little to do with monetary policy and much to do with a massive Closed Access refugee crisis that brought tens of thousands of migrants to Phoenix - some needing rental housing and some with sweet Closed Access capital gains cash burning a hole in their pockets.  These are the ingredients of a bubble.  And a classic bubble is basically what Phoenix had.  It just didn't have much to do with interest rates.

Of course there are many people who blame the housing bubble, in general, on loose monetary policy - the Fed held rates too low for too long and that caused buyers to borrow too much and to bid up the price of homes to unsustainable levels.  I have concluded that this is not correct.

But, all of that aside, and the "cause" of debating the truth of the matter, learning better policy prescriptions aside, given how widely that belief is held, these graphs are just funny.  If any Fred graph could make you laugh out loud, these have to be them.  The first graph is the price level in Phoenix compared to the Fed Funds rate.  The second graph is the one year change in the price level in Phoenix compared to the one year change in the Fed Funds rate.


Come, on.  That's funny.

So, I noticed over at Bob Murphy's blog in the comments of a post, there was some chatter among the Austrian Business Cycle folks about how low interest rates caused the housing bubble.  So I posted links to these graphs and asked for replies.  Nobody is going to change a deeply held belief over a couple of Fred graphs, so I thought it would be interesting to see what explanations they would come up with to explain how home prices accelerated as interest rates increased.  I was sure they would have some.

Bob even kindly copied the graphs into a new post for his readers.  There wasn't much reaction to it.  I really didn't even get to see many explanations.  I think I am accurately portraying the reaction by saying Bob and his readers didn't feel like this needed an explanation because these graphs are self-evident confirmations of the Austrian theory that low interest rates cause asset price bubbles.

Bob thought this third graph was the best way to look at it - with the Fed Funds level and the change in prices.  When prices were accelerating in 2005, rates were rising, but they were still relatively low compared to previous cycles, so they were still capable of fueling the bubble.

In the current version of the manuscript I am finishing, I sometimes try to get the reader to mentally commit to a stated expectation before I review the actual data. I wonder if I should even place empty graphs in the book and say, before you read the next chapter, draw a graph of what you think, say, homeownership rates did over this time period.  I think if I asked a room full of 100 Austrian BC proponents to draw a graph of home prices and interest rates, none of them would draw anything like this.  The blue hump would be one or two years earlier, at least.  None would have prices decelerating in 2002 and 2003.  But, upon seeing the actual graphs, fully 100 of them would agree that they had all miscalculated and placed the price run up too early.

In fact, the graph they would draw would probably look much like the graph of Los Angeles home prices.  That's because Los Angeles housing wasn't whip-sawed by a migration shock.  Los Angeles was the source of the shock, because the same rising rents that were the fundamental cause of the rising prices were also driving residents out of town.  And, yes, low (long term real) interest rates and flexible financing made those prices rise higher.

Whatever else you might say about it, though, the Los Angeles graph isn't very funny.

1 comment:

  1. Superb post.

    When it comes macroeconomics, most practitioners emulate my late, great Uncle Jerry, who said, "Even if it is true, I still don't believe it."

    There is a clump of people who believe money should be tighter, everywhere and always. They talk about gold a lot (for some reason, the silver standard is not popular). After 40 years of disinflation and deflation, they still describe central banks as statist-inflationist institutions. In the present-tense, too.

    A toughie going forward: Of course, the US closed-access cities are not the only cities in the world with skyrocketing house prices. This is seen is Great Britain, Australia, NZ, Canada, Hong Kong.

    Monetary authorities have a dilemma: 1) Keep monetary where it helps general economic growth, but explodes house prices, or 2) flatten house prices and suffocate the economy.

    This Hobson's choice is so distasteful that the right answer in orthodox macroeconomic circles is 3) Let's not talk about it, but reinforce our intellectual and politico-economic bulwarks.

    I guess we have already seen the middle-class priced out of housing in closed-access cities, and the aforementioned nations.

    Maybe there is a plateau out there somewhere, for housing prices, without suffocating the economy. Maybe getting there in Great Britain.

    Would be better to un-zone property or balance trade deficits.