The Housing Market
Boston Fed President Rosengren doesn’t give as many presentations as some of the other Federal Reserve Bank Presidents, but he gave two significant speeches last week (in Sweden). I want to share some of his comments and slides from “Housing and Economic Recovery.”
While residential investment is only 2.2% of GDP, he discussed several reasons why housing problems have had a disproportionate impact on economic performance and on the recovery of growth and employment:
1. Housing is a small part of GDP, but it’s volatile. It normally has an outsized proportion on growth during the first two years of recovery. It is normally very responsive to monetary policy. In this recovery, housing has not had a positive impact.
2. Since most US homes are financed by 30-year fixed-rate mortgages, a drop in long-term rates really only affects existing homeowners to the extent that they refinance. So, we get less impact from changes in monetary policy than countries where the majority of loans are floating rate. CoreLogic estimates that 75% of “underwater” homeowners are paying “above-market” interest rates and slightly more than half of “positive-equity” owners are doing the same.
3. Many US financial institutions have significant exposure to real estate, either through direct lending or through the purchase of mortgage-backed securities. Therefore, real estate prices impact their capital and this impacts their ability to finance both the housing sector and other parts of the economy.
4. Falling home prices have disrupted the transmission of monetary policy. Falling prices have resulted in the availability of credit becoming more important than the cost of credit. Rates may be lower, but credit might not be available because the value of your home has dropped. Or, even if the value of your home has not dropped, lenders perceive greater risk in the economy and in the value of collateral.
Below, you will find some of his charts:
1. Housing has not provided economic recovery as it has in the past.
2. Net worth dropped from 2005 – 2009. This impacts consumption (which is 70% of GDP) and the ability to fund new businesses.
3. Much of the drop in net worth came from housing.
4. We haven’t had a recovery in construction jobs. Other industries are also impacted by this.
5. Delinquency rates are still high.
6. Housing affordability is very positive. We have low prices and low mortgage rates.
7. The population is growing and household formation is also growing (but household formation appears to be growing at a slower rate).
Rosengren’s Final Conclusions
1. Our economy would be helped if we could find a way to help homeowners refinance into lower rate loans (even if they are underwater).
2. We need to help responsible investors purchase vacant homes and convert them into rental properties.
3. We need to provide certainty with respect to government policy in the housing market in the future.
4. We need a quicker way (in the future) of resolving delinquent mortgages.
Have a great week.
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