Monday, January 30, 2017

Housing: Part 204 - Segregation by incomes and costs

Here is a new graph that covers territory I have covered in numerous ways before.  These are simple standard deviations of relative median home price and relative median income for the 100 largest MSAs in the US.  (For each year, US median = 1) In other words, if all cities had the same median income and home price, these measures would be zero.  As cities diverge from one another, these measures increase.

The rise in home prices during the boom was the result of a bidding war to get into artificially exclusive cities where incomes are higher.  We "fixed" the housing market by destroying the middle class mortgage market.  Since this "fix" didn't address the fundamental problem, we have actually made the fundamental problem worse.  So, the distribution of incomes has become worse since the bust began.

The "fix" did temporarily bring down the variance in home prices, but it couldn't really permanently do that.  So, after the initial dislocation, the long term pressure on localized home prices re-asserted itself, and now the variance of home prices among MSAs is higher than ever.

Wednesday, January 25, 2017

Denver Rents and Prices

In Denver, apparently  (HT:MY) rising supply is leading to a drop in rents, while home prices continue to rise.  This is treated as a mystery, or as a problem of affordability.

But, this is basically what needs to happen across the country.  Affordability is not what is keeping households out of ownership right now.  In any path forward to normalization, rents will decline and prices will rise.  That is even the case if interest rates rise.  In fact, in normalization of the housing market, rates will rise as prices rise and rents moderate.  The question is whether rates are pushed up arbitrarily by monetary authorities or naturally by markets.

I take this as a good sign, even though national indicators still seem mixed.

Sunday, January 22, 2017

Housing: Part 203 - Price Appreciation During the Boom

After 203 posts, I'm starting to forget what I've posted, so maybe this is a repeat, but I don't think I've posted this graph yet.

The x-axis is the median log home price of a zip code in 1996.  The y-axis is the log change in the median home price of that zip code from 1996 to 2006.  I have divided the top 20 MSAs into 4 groups: Closed Access (NYC, LA, Boston, SF, SD), Contagion (Miami, Riverside, Phoenix, Tampa), Open Access (Dallas, Houston, Atlanta), and Other (Chicago, Philadelphia, etc.).  The blue dots are zip codes outside those 20 MSAs. (Data from Zillow.)

During the boom, in the aggregate, it was the highest priced homes that appreciated the most.  (There is a clear upward slope to the cloud of dots.)  But, within each MSA - even within each MSA type, as I have classified them - there is a slight negative slope.  That negative slope is basically what Mian & Sufi noticed, because in their analysis they controlled for the differences between the MSAs.

Unfortunately, this has led to a widespread and passionately held notion that the lenders did this to us - as if the entire boom was defined by the difference between the low priced zip codes in Los Angeles vs. the high priced zip codes in Los Angeles.  But, clearly we can see that if you wanted to guess how much a home's price appreciated during the boom, the most important fact would be what MSA it was located in.  How high priced or credit-constrained the zip code was, within that MSA, would be a much less important fact.

The difference between MSAs comes down to supply elasticity.

Even considering that difference between high and low tier prices within each market, lending was facilitating the bidding war into limited access cities.  The demand for housing in those cities would naturally be focused on the lower tier portions of the local market, where aspirational newcomers would be bidding for access.

What's interesting is that there are two separate inputs into the general consensus about the period that I think lead people astray.  First, by looking at the national market, and ignoring local differences, a consensus developed that price appreciation was unrelated to rent appreciation, and, so, was apparently irrational.  But, if we look at the MSA level, price appreciation is highly correlated to persistent rent inflation.

But, then, building on this notion of irrational price markets, Mian & Sufi fingered credit supply as the cause of the price appreciation.  Yet, here, their causation came from only looking at local changes and not looking at national aggregates.

These were two errors in opposite directions, combined to create a single narrative that aggressive lending led to rising prices.  Between these two errors is the truth, that the explanations for the period come from looking at the differences between MSAs, not from looking within each MSA or mashing them all together into one aggregate.

Home prices since 2006 have taken on a sort of V-shape.  In the bottom tier of the national housing market, which is largely non-urban, where supply acts as if it is elastic mainly because there isn't that much marginal demand, prices rise without much volatility in both periods.  In the middle tier of the national housing market, which is mostly aspirational regional urban housing and the lower tier of Closed Access cities, where middle class households take on some extra costs to tap into income opportunities in many cities, credit constraints are a factor, so the dislocations we have imposed on the mortgage market have dried up effective demand in these zip codes, killing market values.  The top tier of the national housing market, which is supply constrained, but isn't so credit constrained, has faired better, though, of course, in a just world without supply constraints those homes would have market values at a fraction of their current prices.

Friday, January 20, 2017

Housing: Part 202 - FHA insurance rate

Hm.  One of Trump's first acts is to overturn a planned cut in mortgage insurance rates at the FHA.  Reactions:

  • Housing apparently will be a focus, but this, plus Mnuchin's expressed support for the CFPB, suggest that these actions aren't geared toward re-establishing access to mortgages for low tier buyers.  I think that access is central to our ability to extend the recovery and to continue healing labor markets.  I think this is a bearish development.

  • I'm not sure how much this matters, in and of itself.  Implied yields on home ownership are much higher than yields on mortgages.  Affordability is not the problem right now.  Access is.  I don't think millions of lower-middle class households are turning down mortgages because the rates are too high.

  • Notice the difference in reactions to this versus private markets.  This is no different than subprime mortgages that have higher rates in exchange for riskier terms.  Notice how you react to the FHA raising fees versus a private mortgage originator raising fees.  Notice the difference in broad rhetorical reactions to these two similar events.

Thursday, January 19, 2017

Housing: Part 201 - The new urbanization wave

A central theme that has developed in my research is a sort of unstoppable force meets immovable object story.  Technologically and culturally, we have entered a new wave of urbanization.  Whether one sees this as a net positive or negative, it seems inevitable.  We can't stop it any more than we could have stopped urbanization in the wake of mechanized agriculture.

But, politically and culturally, cities in the developed world are incapable of providing the residential density that this wave of urbanization demands.

Here is a graphic from this Bloomberg article by David Ingold.

The problem is that many of these cities cannot grow their populations as quickly as they grow their economies.  It's sort of a self-imposed Malthusianism.  Chicago, Dallas, Houston, Atlanta, Phoenix, Denver, and many of the Florida cities can grow.  Seattle and Portland still do ok, although there are local forces there that may lead them into Closed Access governance.  But, the California cities and the northeastern cities max out at about the national average.  They can grow their economies faster than the national average, but not their populations.

Since the mortgage market collapsed in 2007, population growth has been stifled across the country.  So, now, this problem affects the entire country.  We have had a decade of geographical employment shifts while households are stuck in place because we shut down the market that feeds the supply of homes.

So, now, for lower middle class households, cost is the marginal determinant for labor market shifts.  Strong local economies can't create a boost in housing that would accommodate the supply of labor that those economies demand, because working class households can't get mortgages.  So the whole country is now a Closed Access country where opportunity is locked behind a gate, and the highest bidder wins.  This creates a country of haves and have nots.  Your access to opportunity is governed by your pre-existing access to resources.  You don't pass up on that move to the city because there aren't opportunities there.  You pass it up because it's too expensive.

The problem at the heart of all of this is housing.  There is a consensus against solving that problem, because there is a consensus that low-tier mortgages are predatory.  Until we unlearn that false lesson, we will continue to impose this stagnation on the country's working class.

Here is a great paper (pdf) from Peter Ganong and Daniel Shoag on this problem.  In their conclusion: "First, we find that tighter regulations raise the extent to which income differences are capitalized into housing prices. Second, tighter regulations impede population flows to rich areas and weaken convergence in human capital. Finally, we find that tight regulations weaken convergence in per capita income... Indeed, though there has been a dramatic decline in income convergence nationally, places that remain unconstrained by land use regulation continue to converge at similar rates." (emphasis mine)

They find that historically households moved to income opportunities.  Households with high skills still do.  But, recently, there has been a shift in low-skill/low-income migration.  Those households now migrate to where costs are low.  This is because Closed Access housing policies create a self-imposed Malthusian limit on access to opportunity.  Housing policy - now both through local supply constraints and through mortgage rationing - is creating a Darwinian context.  This is the central problem.  Everything else is noise.

Wednesday, January 18, 2017

December 2016 CPI Inflation

More of the same.  Not much to report this month.  Shelter inflation continues its upward march.  Non-shelter core inflation held steady at about 1.2%.

Since last month, interest rates have been declining - a bearish signal.  Unless there is a bold and quick action on Dodd-Frank after the inauguration that removes liabilities for banks that would lend to the lower tier of the housing market, I still an leaning toward a bit of a bumpy patch ahead.

Monday, January 16, 2017

Housing: Part 200 - Dodd-Frank

In the previous post, Ben Cole referred to this recent Washington Post article.  The article is about research from Foote, Loewenstein, and Willen that finds that there is little evidence for blaming the housing boom on credit to low income households.

My research explains why Foote, Loewenstein, and Willen are right that marginal lending wasn't a cause of the boom, why Mian and Sufi were mistakenly led to think there was, and why, by ignoring the importance of rent and geographic exclusion through housing, they are all wrong to miss the importance of supply in the middle of all of it.

In short, Mian and Sufi focus on the difference between homes in the top tier and bottom tier of each city, and control away the differences between MSAs.  The difference between MSAs is the story.  FLW argue that since credit and the bust extended across the spectrum of households, that irrational exuberance and speculation must have also extended across the spectrum.  But, incomes and rents in the Closed Access cities where homes were bid up to the highest prices have continued to rise just as strongly as they had before, if not more strongly.  So, despite our national efforts to keep money out of housing, home prices in those areas have also been strong.  If the country was full of housing speculators, they were prescient speculators.

As Willen says in the article: “Our understanding of asset prices is still quite primitive,” he said. “We don’t have a really good explanation for why house prices went up as much as they did.”

I do.  I hope they believe it when they see it.  It confirms their findings.  Notice that even the heterodox researchers of the housing bubble, when left with a gap in understanding, default to the speculation thesis.  This bias is deep and broad.

The article ends:
Alan Blinder, the former vice chairman of the Federal Reserve under President Bill Clinton, said that the decisions made on Wall Street merit scrutiny, even if subprime lending was only one aspect of the broader problems in the market.“There was a big housing bubble, a craze, and house prices just went through the roof,” Blinder said. “That by no means exonerates Wall Street.”
Contrary to Rep. Jeb Hensarling (R-Tex.), chairman of the House Financial Services Committee, and his Republican allies on Capitol Hill, Blinder warns that another major financial overhaul could give bankers too much leeway.
“It would be a horrible mistake to dismantle Dodd-Frank,” he said.

I think I have posted a version of this graph before.  It compares the relative home prices of the top and bottom quintile zip codes of each group of MSAs since 1999.  I had been concentrating on the divergence between the top and bottom quintiles after the GSEs were taken over and the Fed finally messed up badly enough that even they started providing nominal support in early 2009.  Top tier homes stabilized after that, but bottom tier homes continued to fall.  The GSEs basically stopped lending to the bottom tier.

But, I had neglected to pay much attention to that odd false nadir in relative home prices in mid 2010.  Guess what was passed in July 2010?  Notice the difference between top and bottom tier home prices before and after July 2010.

Beware the public official seeking "prudence" in the midst of a crisis.

Tuesday, January 10, 2017

JOLTS and Flows update

November JOLTS data is out, so I thought it might be a good time to revisit these numbers.

In general, I think this data is telling a similar story to other data that has been coming in.  We are at the top of a recovery phase.  This could last 5 years or 1 year, and probably the difference comes down to whether the Fed pulls back too much.  Since sentiment appears to be strongly on the side of Fed hawkishness, the risk here is heavily weighted toward too much pull back, I think.

We're probably back to some point in 2007 now, in terms of labor markets, etc.  And, some timely accommodation would be helpful, but as in 2007, instead of accommodation, the Fed is worried about inflation.  Also, like in 2007, the inflation is all coming from a supply problem in housing, so that (1) there is little justification for inflation worries on monetary grounds and (2) accommodation does not have a large inflation risk because, to the extent that inflation would help to continue healing lower tier housing markets, it might lead to more housing starts, which would be disinflationary.  Since we learned all the wrong lessons from the housing boom and bust, we have collectively started doing some strange things, like associating real investment with inflation.  The first graph should worry people more than it does.

Next are weighted moving averages of the JOLTS measures.  Openings and hires have topped.  Quits and layoffs still look good.  Again, we could probably push along these plateaus for years, but I think we will inadvertently choose not to, unless a quick and substantial overhaul of Dodd Frank by the Trump administration leads to a strong rebound in mortgage credit growth.  That might cause natural interest rates to rise quickly enough that the Fed's inherent inertia will have more power than its current hawkish bias, keeping it below the neutral rate long enough to trigger some more expansion in housing.  As a citizen, I hope that's what happens.  As a trader, the bearish position that will pay off if that doesn't happen seems a little more straightforward and easier to step in front of.

The slopes of the weighted moving averages help to see the current trends a little better.  Quits are OK.  Openings and hires are in early recession territory.

Flows tell a similar tale. Net flows are marginally into early recession territory.  Net flows from unemployment to employment certainly are.  Flows from "not in the labor force" (N) to employment were strong, but they have pulled back to normal levels.  Is this a permanent pullback or noise?  And, Flows from unemployment to N continue to move along with no trend.  A downward tick in any of these net flows would be bearish.

Gross flows have all taken a bearish turn.  During recoveries, gross flows flow down in pairs and during contractions they flow up in pairs (except flows between employment and N are reversed).  All three pairs of flows have taken bearish turns.  Note that the employment to not in labor force flow (E to N) is a flow that, when it decreases, is associated with rising employment, even though that would be a bearish indicator.  That measure has been high the past two months.  These would tend to be voluntary exits from the labor force, which suggests economic confidence.  Whether these two months are noise or a reversal of trend might be an important indicator to watch.

A strong flow from N to E might go along with that E to N flow.  But, the turn in flows between U and N suggests that the last two months are noise and that the trend is toward more of the flows into and out of the labor force moving through unemployment, which is not a good sign.

A strange time.  Cyclically things don't look great.  And the range of potential policy outcomes, good and bad, from the incoming administration is probably greater than any previous transition in my lifetime.  Regulatory shocks are not the sort of context that favor either passive asset management or attempts at high expected value speculation, even if some of those shocks might not be so bad from a structural standpoint.

Sunday, January 1, 2017

Housing: Part 199 - More on extreme risk aversion in the early housing bust

One of the late conclusions I have come to in my research on the housing boom and bust is that most of the period during the private securitization boom was a period where investors were risk averse, and this was consistently misinterpreted as risk-seeking behavior.

The most obvious case of this is how, perversely, the intensive demand for AAA securities has been universally taken as a sign of excess, because the institutions that are organized around meeting that demand happen to have financially leveraged business models.  But, most of the owners of that debt aren't leveraged.  In fact, this is acknowledged in parts of the conventional narrative about the period.  The global savings glut wasn't about leveraged savers.  Even domestic money markets were not leveraged.  Remember how it was a big deal that some funds were down by a percentage point or two and "broke the buck"?  There was trillions worth of savings that was not leveraged at all, and this is simply thrown into the memory hole whenever it needs to be ignored in order to keep believing that everything was about excess and recklessness.

As I have pointed out, homeownership peaked in early 2004.  I have tried to demonstrate in various ways how there was a massive outflow of home equity into low risk securities.  The appearance of synthetic CDOs in 2006 and 2007 should have been a stark warning that accommodation was desperately needed.  But, this also was misinterpreted as excess and speculation.


Maybe this is the graph that finally presents the point as I see it.  Here, both the change in home equity and the change in homeownership rate (right scale) are inverted.  From 2005 to 2007, there was a massive outflow of unencumbered and lightly encumbered homeowners from the housing market.  And they piled all of their cash into things like money market funds.

The reason is that risk aversion had become so strong that savers weren't even willing to take on home equity.  New homebuyers tended to be leveraged.  This is partly because lifecycle effects create a natural stable flow of first time homebuyers in all markets.  But, also, because of risk aversion home buying with leverage is basically a form of call options.  And, again, call options can be framed as a tool of speculation or of insurance.  We chose to view it as speculation.  I have come to see it as insurance.

In this graph, we can see the parallel movements out of homeownership (and home equity) and into money markets in 2006 and 2007.  The housing ATM idea has it backwards.  Homeowners weren't using their homes to make withdrawals.  They were using their homes to make deposits.

After 2007, we wiped out homeowners, so since then homeownership has continued to fall, but former homeowners have nothing to show for it.