Discussion of Mian and Sufis House Price Gains and U.S. Household - PowerPoint PPT Presentation

Discussion of Mian and Sufi’s “House Price Gains and U.S. Household Spending from 2002 to 2006” Robert E. Hall Hoover Institution and Department of Economics Stanford University with help from Susan E. Woodward ♥ Lessons from the Financial Crisis and the Great Recession for Economic Modelling Jerusalem 19 June 2014 · 1

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Two major fundamental asset classes: business assets and housing Households own $16 trillion in corporate equity and debt 3

Two major fundamental asset classes: business assets and housing Households own $16 trillion in corporate equity and debt and $22 trillion in real estate 3

Two major fundamental asset classes: business assets and housing Households own $16 trillion in corporate equity and debt and $22 trillion in real estate Household corporate holdings are hardly leveraged at all, while real estate is heavily leveraged 3

Two major fundamental asset classes: business assets and housing Households own $16 trillion in corporate equity and debt and $22 trillion in real estate Household corporate holdings are hardly leveraged at all, while real estate is heavily leveraged Non-financial business is not very leveraged, while financial institutions have heavily leveraged portfolios of mortgage claims on heavily leveraged households · 3

Flow of Funds Accounts: Loan-to-value ratios for household holdings of the two major asset classes 60 50 Loan to value ratio, percent 40 Homes 30 20 10 Corporate equity and debt 0 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 4

Looking more deeply into the economics of the cash-oh-hand household: Household budget constraint 1.4 Saving 1.2 Future consumption 1.0 Borrowing 0.8 on house 0.6 0.4 Unsecured borrowing 0.2 0.0 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 Current consumption 5

Cash-on-hand household 1.4 Saving 1.2 1.0 Future consumption Borrowing 0.8 on house 0.6 0.4 Unsecured borrowing 0.2 0.0 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 Current consumption 6

Effect of lower house collateral 1.4 Saving 1.2 1.0 Future consumption Borrowing 0.8 on house 0.6 0.4 Unsecured borrowing 0.2 0.0 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 Current consumption 7

Effect on current consumption 1.4 Reduction in current Saving consumption 1.2 Future consumption 1.0 Borrowing 0.8 on house Choice before 0.6 decline in Choice after collateral 0.4 decline in Unsecured collateral borrowing 0.2 0.0 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 Current consumption 8

FHFA national house-price index, real 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1995 1998 2001 2004 2007 2010 9

Data from the Survey of Consumer Finances Broken down by actual household income 10

Data from the Survey of Consumer Finances Broken down by actual household income House values are for all households, not just homeowners · 10

House values of lowest 20 percent of households by income 2.0 Lowest 20 percent 1.8 1.6 1.4 1.2 FHFA price index 1.0 0.8 0.6 0.4 0.2 0.0 1995 1998 2001 2004 2007 2010 11

House values of households between 20th and 40th percentile 1.8 1.6 20th to 40th percentile 1.4 1.2 FHFA price index 1.0 0.8 0.6 0.4 0.2 0.0 1995 1998 2001 2004 2007 2010 12

House values of households in the top 60 percent by income 2.5 Top 60 percent 2.0 1.5 FHFA price index 1.0 0.5 0.0 1995 1998 2001 2004 2007 2010 13

Observation The income group seemingly most likely to expand home value tracked the index, while the lowest income group and the highest had value increases well above the price index · 14

Loan to value ratio, homeowners in lowest 20 percent by income 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 1995 1998 2001 2004 2007 2010 15

Loan to value ratio, homeowners in 20th to 40th percentile 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 1 2 3 4 5 6 16

Loan to value ratio, homeowners in 40th to 60th percentile 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 1 2 3 4 5 6 17

Loan to value ratio, homeowners in 60th to 90th percentile 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 1995 1998 2001 2004 2007 2010 18

Loan to value ratio, homeowners in 90th to 100th percentile 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 1995 1998 2001 2004 2007 2010 19

Observation All income groups show some squeeze in 2010, in the form of rising LTVs, especially the bottom group · 20

Role of investors Zhenyu Gao (Princeton Ph.D. student) and Wenli Li (Philadelphia Fed), “Real Estate Investors and the Boom and Bust of the US Housing Market” · 21

Investment mortgages as a percent of subprime mortgages 50 45 AZ CA 40 FL 35 NV 30 US 25 20 15 10 5 0 199019911992199319941995199619971998199920002001200220032004200520062007 22

Investment mortgages as a percent of prime mortgages 35 30 AZ CA 25 FL 20 NV 15 US 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 23 V

observation Investors contributed to the leverage cycle substantially · 24

The leverage cycle, expansion phase Real-estate prices begin to rise 25

The leverage cycle, expansion phase Real-estate prices begin to rise Consumption rises as collateral expands 25

The leverage cycle, expansion phase Real-estate prices begin to rise Consumption rises as collateral expands Households and investors bid up prices in anticipation of further appreciation 25

The leverage cycle, expansion phase Real-estate prices begin to rise Consumption rises as collateral expands Households and investors bid up prices in anticipation of further appreciation Financial institutions expand highly leveraged holdings of mortgage-based assets · 25

Contraction phase Real-estate prices begin to fall 26

Contraction phase Real-estate prices begin to fall Consumption cut by declining collateral and repayment requirements from lenders 26

Contraction phase Real-estate prices begin to fall Consumption cut by declining collateral and repayment requirements from lenders Price decline amplified by financial squeeze 26

Contraction phase Real-estate prices begin to fall Consumption cut by declining collateral and repayment requirements from lenders Price decline amplified by financial squeeze Financial crisis as thinly capitalized banks and other institutions become insolvent because of declining value of mortgage-based collateral · 26

Shiller’s real house price since 1890 250 200 150 100 50 0 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 27

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