tag:blogger.com,1999:blog-1110014885778996459.post1213142929094467763..comments2024-03-28T01:12:29.954-07:00Comments on Idiosyncratic Whisk: Framing is Everything: Housing and Monetary PolicyKevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-1110014885778996459.post-41400091169635427252014-10-10T19:46:32.083-07:002014-10-10T19:46:32.083-07:00Thanks again, Glenn. I did a new post with some g...Thanks again, Glenn. I did a new post with some graphs that your original comment sent me looking for.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-17141740228817383342014-10-10T17:48:30.361-07:002014-10-10T17:48:30.361-07:00I think we do, and that is fair! I have saved your...I think we do, and that is fair! I have saved your blog and read it daily since discovery; you are extremely insightful in any case :)Glennnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-4884569397447840362014-10-10T17:29:15.362-07:002014-10-10T17:29:15.362-07:00Well, I'll let you have the last word, since o...Well, I'll let you have the last word, since our discussion is a good example of "framing is everything", and so I think we'll be talking past one another. I appreciate your interest and your input on the topic. I think we agree that public distortions in the market should be removed.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-50888309621998457692014-10-10T17:17:59.533-07:002014-10-10T17:17:59.533-07:00I said net, but meant relative to trend in the fir...I said net, but meant relative to trend in the first paragraph above. Sorry; writing to quickly to make sense!Glennnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-3406375881007792502014-10-10T17:15:28.456-07:002014-10-10T17:15:28.456-07:00This followed a 30% rise in home prices in the 3-y...This followed a 30% rise in home prices in the 3-years immediately prior - there was no net price decrease. Over the 10 most recent years - which include the largest drop in US home prices, perhaps ever, and certainly in the modern period - home prices are up 13.5%.<br /><br />On net, there is no deviation in home price appreciation from 30-year trend of about 5%. A return to trend from trough in 13-months is remarkable. This kind of price appreciation - in the absence of any supply- or demand-side explanation - is clear evidence of policy influence and sticky prices among homeowners.<br /><br />The rapid price decrease during the recession was induced by banks, not traditional homeowners. When banks took possession of properties used as collateral on bad loans, they did not behave as traditional owner-occupants: they unloaded quickly, and at any price. The reason for the rapid rise is that bank-owners are no longer significant players in the market, and the remaining population is recalcitrant towards selling.<br /><br />Today we observe the following curious phenomena: a collapse in transaction volume, and a flat price appreciation. We saw the same pattern in the early stages of the recession (before banks took ownership and began selling on a mechanical, price-clearing mechanism). This is precisely because homeowners are highly unwilling to accept lower prices for homes, and they can do this because policymakers will support them in a variety of ways. The market clears by inventory rather than price changes, and this is an inefficient clearing mechanism. So housing in the United States is a relatively broken market.Glennnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-52525764564222282542014-10-10T14:33:47.317-07:002014-10-10T14:33:47.317-07:00Thanks, Glenn. But, the reason people can't b...Thanks, Glenn. But, the reason people can't borrow at all is because home prices collapsed, not because home prices were too high. Clearly, it's not because of incomes to debt service ratios are too low.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-1528051928669505942014-10-10T14:32:03.139-07:002014-10-10T14:32:03.139-07:00In the past 7 years, we have seen home prices drop...In the past 7 years, we have seen home prices drop by 30% nationwide, then begin rebounding by more than 10% annually. Sticky prices among homeowners can't explain rapidly rising prices. And, if policymakers are committed to increasing home prices, they've been doing a bang up job!<br />I'd say the Fed undermined reasonable home prices because there is huge political support for doing just that.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-19678538879131484162014-10-10T14:17:07.878-07:002014-10-10T14:17:07.878-07:00That said, I think your overall analysis is quite ...That said, I think your overall analysis is quite useful, and I hope I did not come across as overly critical. I just think the presumption that prices are not too high is erroneous, even if it is the case that costs-net-of-borrowing appear low (this latter factor may not matter if you cannot borrow in the first place).Glennnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-38139351265087425242014-10-10T14:15:05.171-07:002014-10-10T14:15:05.171-07:00I cannot answer, because i do not know. I suspect ...I cannot answer, because i do not know. I suspect there may not be one. There is tremendous commitment on the part of policymakers to supporting (increasing) home prices, and owners themselves are extremely price sensitive: they are not willing to sell at a loss.Glennnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-26936123254430048862014-10-10T07:34:41.270-07:002014-10-10T07:34:41.270-07:00Thanks for your input, Glenn. I will look more cl...Thanks for your input, Glenn. I will look more closely at the household formation data.<br /><br />What is the easy method you would propose for lowering home prices?Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-60502500201474008892014-10-09T11:06:24.161-07:002014-10-09T11:06:24.161-07:00"We've got people who would like to buy h..."We've got people who would like to buy houses, but they can't."<br /><br />Because housing is too expensive.<br /><br />"People who would like to live in houses, but there aren't enough."<br /><br />I don't think that is the case at all. According to USCB, there were 133M housing units in the US in 14Q2, with 18M vacant. In 09Q1, there were 130M housing units, and 19M vacant. Vacancies have declined marginally, but housing supply has only slightly lagged population, and well exceeded the rate of household formation.<br /><br />This fact is consistent with a "prices are too high" story.<br /><br />You argue that the returns to housing as an asset are high and positive, and that therefore, housing is cheap. This does not follow, if credit constraints are binding. The typical young American considering forming a new household cannot afford the asset - at any rate. Normally, this would create an arbitrary opportunity; banks should be willing to originate the loans in exchange for a captured share of these future returns. They are not. This implies some combination of two things:<br /><br />i. The returns to home-ownership are far lower than you imagine (nil or negative).<br />ii. Financially liquid lenders face unapparent credit constraints, themselves (Dodd Frank, investment uncertainty, etc), and therefore cannot make the loans.<br /><br />The easy solution in either case is to allow home prices to fall until either buyers or lenders are no longer bound by the credit constraints. For various reasons (mostly bad public policy), home prices cannot fall, and the market has seized.Glennnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-74739054102323911002014-10-09T09:32:24.853-07:002014-10-09T09:32:24.853-07:00Thank you, Kenneth.Thank you, Kenneth.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-36105103617889903392014-10-09T09:32:03.686-07:002014-10-09T09:32:03.686-07:00Thank you, Kenneth.Thank you, Kenneth.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-52876300179442048162014-10-09T08:22:45.318-07:002014-10-09T08:22:45.318-07:00Kevin, this is a brilliantly written article. Tha...Kevin, this is a brilliantly written article. Thank you for spending the time to educate those of us who are curious and practical, but lack your technical sharpness and willingness/ability to plow through the data.<br />Kenneth Dudahttps://www.blogger.com/profile/10593455504357461005noreply@blogger.com