Pethokoukis

Should we worry about rising home prices?

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Housing prices are up. The S&P/Case-Shiller 10- and 20-city composites climbed 7.3% and 8.1% from a year earlier through January. Now last year was not a great one for US incomes. Real disposable personal income rose just 1.5%. But low mortgage rates  have improved affordability despite the modest income rise. Zillow:

In the pre-bubble period from 1985 through 1999, homeowners spent 19.9 percent of their monthly income on mortgage payments. But because of historically low interest rates currently in the 3 to 4 percent range, at the end of Q4 2012, homeowners were spending only 12.6 percent of their monthly incomes on housing payments — or roughly 37 percent below historic norms. Low interest rates have translated into more purchasing power for homeowners, as the cost to finance homes has gone down.

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But what happens when rates go up? Won’t affordability decline? There goes the housing market, right? A few thoughts the risk of a bursting housing “bubble”:

1. If higher rates reflect stronger GDP growth, income growth could offset at least some of the rate rise.

2. Low interest rate can mean monetary policy is too tight rather than too loose. I am not so worried that the Fed is supereasy right now. Rate are low here, but rates are low everywhere, reflecting weak economic growth.

3. If monetary policy isn’t a problem, how about regulatory policy? Here is a bit of analysis and a few charts from “Is the Federal Reserve breeding the next financial crisis?” by Ambrogio Cesa-Bianchi and Alessandro Rebucci:

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Figure 3 provides a picture of the behaviour of monetary policy and the mortgage market as in Figure 2, but for the period after the financial crisis, from 2006 to 2012.

– Mortgage originations have steadily decreased since 2006 (Panel a).

– Moreover, and differently from the 2003-06 period, the share of private-label Mortgage Backed Securities (MBS) over total MBS issuance has decreased to almost zero (Panel b). This is important because it implies that virtually all MBS are issued by well-regulated institutions as opposed to largely unregulated non-depository institutions.

– The share of high-LTV ratio mortgages is slowly picking up from the very low levels achieved in 2009 (Panel c), but it is still well below the levels of 2007

– Finally, the risk perceived by banks involved in residential lending is decreasing, while lending standards are easing from overly tight levels to more normal levels (Panel d). This evidence therefore shows that, despite historically low interest rates, current data are not sending alarming red signals regarding these markets.

 

 

3 thoughts on “Should we worry about rising home prices?

  1. I guess we need to translate for Juandos the Juander Dogmatist. “The market share of private label MBSs has dropped to almost zero.” Take a look at this Goldman Sachs 2006 issue and you understand why. California second mortgages. Average equity of 0.79 percent. (Yup LTV of 99 percent.) No docs accounted for 58 percent of the loans. To clarify, holding second mortgages, bondholders got zero recovery in foreclosure.
    GS peddled crap because investors were lining up to buy it, or Sloan quotes Wall St wisdom “When the ducks quack feed them.” http://money.cnn.com/2007/10/15/markets/junk_mortgages.fortune/

    Well, the ducks aren’t going to quack for a long. long time. And, as Mr. P puts it, “This is important because it implies that virtually all MBS are issued by well-regulated institutions as opposed to largely unregulated non-depository institutions.” And that would be a tacit admission that Wall St blew up the housing market.

    Banks are too cautious also, which is why O wants them to loosen up. Ginnie Mae has packaged high LTV loans (FHA, VA) since 1970 with barely a hiccup until reckless private label MBS lending drove housing prices into the stratosphere. It’s called underwriting.

    • todd parroting back some of his insipid social justices studies claims: “I guess we need to translate for Juandos the Juander Dogmatist“…

      Actually todd old sport what you really need to do is change from your normal position and look for some realistic sources of information besides the Obama water carriers at CNN…

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