�� The Housing Boom and Bust: Model Meets Evidence Greg Kaplan Chicago Kurt Mitman IIES - Stockholm Gianluca Violante Princeton ���������� �� ���������
The Questiony �� Relative House Price 0.3 Boom 0.2 Logs (1997:Q1 = 0) 0.1 Bust 0 -0.1 -0.2 1995 2000 2005 2010 2015 Year
The Questiony �� Relative House Price 0.3 Boom 0.2 Logs (1997:Q1 = 0) 0.1 Bust 0 -0.1 -0.2 1995 2000 2005 2010 2015 Year • What caused the boom and bust in house prices?
�� Two Viewsy 1. Credit view • Availability of credit to marginal borrowers determines demand for housing and house prices • Financial deregulation and rise in securitization in early 2000s led to ‘unsustainable’ lending to subprime low-income borrowers
�� Two Viewsy 1. Credit view • Availability of credit to marginal borrowers determines demand for housing and house prices • Financial deregulation and rise in securitization in early 2000s led to ‘unsustainable’ lending to subprime low-income borrowers 2. Expectations view • Waves of optimism and pessimism affect desire to borrow, housing demand and house prices • Middle- and high-income prime borrowers crucial to the story
�� Two Viewsy 1. Credit view • Availability of credit to marginal borrowers determines demand for housing and house prices • Financial deregulation and rise in securitization in early 2000s led to ‘unsustainable’ lending to subprime low-income borrowers 2. Expectations view • Waves of optimism and pessimism affect desire to borrow, housing demand and house prices • Middle- and high-income prime borrowers crucial to the story ◮ What do the microdata say?
Equilibrium Models of the Credit Viewy �� Favilukis-Ludvigson-van Nieuwerburgh (2015); Justiniano-Primiceri-Tambalotti (2015); Greenwald (2016) • Successful in generating large house price movements
Equilibrium Models of the Credit Viewy �� Favilukis-Ludvigson-van Nieuwerburgh (2015); Justiniano-Primiceri-Tambalotti (2015); Greenwald (2016) • Successful in generating large house price movements • What does it take for looser credit to push up house prices? 1. Large effect of credit shocks on housing risk premium 2. Many households constrained in their housing consumption
Equilibrium Models of the Credit Viewy �� Favilukis-Ludvigson-van Nieuwerburgh (2015); Justiniano-Primiceri-Tambalotti (2015); Greenwald (2016) • Successful in generating large house price movements • What does it take for looser credit to push up house prices? 1. Large effect of credit shocks on housing risk premium 2. Many households constrained in their housing consumption • Model features that deliver these outcomes: 1. Short-term debt & no default: housing is very risky 2. No rental market: many households that want to consume more housing, but can’t
�� Our Papery • Equilibrium model with rental market and long-term mortgages • Aggregate shocks: income, credit, and beliefs • Parameterize to cross-sectional and life-cycle facts • Compare to aggregate time-series on: house prices, rent-price ratio, home ownership, leverage, and foreclosures • Decompose the role of each shock • Compare with new micro evidence • Study transmission of house prices to consumption • Evaluate debt forgiveness policies
Model: Household and Financial Sectorsy �� • OLG with two phases in lifecycle: work and retirement • CES utility over ND consumption ( 1 − φ ) and housing ( φ ) • Idiosyncratic uninsurable earnings shocks y • Saving in risk-free bonds, exogenous fixed interest rate • Housing can be bought at p h (sold s.t. transaction cost) or rented at ρ • Long-term mortgages (to be repaid before death), with cash-out refi option, defaultable, competitively priced by financial intermediaries • At origination: max LTV and max PTI constraints ( λ m , λ π ) and origination costs ( κ m , ζ m ) • HELOCs: one-period non defaultable debt ( λ b )
Model: Production and Governmenty �� Final good sector • Linear technology in labor with productivity Z w = Z → Construction sector • Housing permits + labor → aggregate housing investments I ( p h ) Rental sector • Frictionless conversion of rental units into OO units and viceversa • Zero-profit condition yields equilibrium rental rate ρ Government • Taxes workers (with mortgage interest deduction) and properties, sells land permits, and pays SS benefits to retirees
�� Lifecycle Profiles of Ownership and Leveragey 1 1 Leverage - Model Leverage - Data 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 Home Ownership - Model Home Ownership - Data 0 0 30 40 50 60 70 80 30 40 50 60 70 80 Age Age • Steep rise in home ownership from age 25 to 50 • Home ownership remains flat during retirement • Sharp decline in leverage over the life cycle
Aggregate Shocksy �� • Aggregate labor income: Z • Credit conditions: (i) mortgage origination cost ( κ m , ζ m ) (ii) LTV and PTI limits ( λ m , λ π )
Aggregate Shocksy �� • Aggregate labor income: Z • Credit conditions: (i) mortgage origination cost ( κ m , ζ m ) (ii) LTV and PTI limits ( λ m , λ π ) • Beliefs / News about future housing demand Three regimes for φ (share of housing services in u ): ��� φ L : low housing share and unlikely transition to φ H ��� φ ∗ L : low housing share and likely transition to φ H � � φ H : high housing share
Aggregate Shocksy �� • Aggregate labor income: Z • Credit conditions: (i) mortgage origination cost ( κ m , ζ m ) (ii) LTV and PTI limits ( λ m , λ π ) • Beliefs / News about future housing demand Three regimes for φ (share of housing services in u ): ��� φ L : low housing share and unlikely transition to φ H ��� φ ∗ L : low housing share and likely transition to φ H � � φ H : high housing share Boom-Bust: shift from (a) to (b), and back to (a)
Aggregate Shocksy �� • Aggregate labor income: Z • Credit conditions: (i) mortgage origination cost ( κ m , ζ m ) (ii) LTV and PTI limits ( λ m , λ π ) • Beliefs / News about future housing demand Three regimes for φ (share of housing services in u ): ��� φ L : low housing share and unlikely transition to φ H ��� φ ∗ L : low housing share and likely transition to φ H � � φ H : high housing share Boom-Bust: shift from (a) to (b), and back to (a) • Calibration of news shock: use data on expectations... but residual
�� Household Expectations in the Modely Probability of H 1 0.5 0 2000 2005 2010 2015 Year
�� Household Expectations in the Modely Probability of H 1 0.5 0 2000 2005 2010 2015 Year • For boom years, survey evidence in Case-Shiller-Thompson shows US households expected house price to grow 5-10 pct per year
�� House Pricesy House Price Benchmark 1.3 Belief Income 1.2 Credit Data 1.1 1 0.9 0.8 2000 2005 2010 2015 Year
�� House Pricesy House Price Benchmark 1.3 Belief Income 1.2 Credit Data 1.1 1 0.9 0.8 2000 2005 2010 2015 Year • Belief shock accounts for all boom-bust in house prices
�� House Pricesy House Price Benchmark 1.3 Belief Income 1.2 Credit Data 1.1 1 0.9 0.8 2000 2005 2010 2015 Year • Belief shock accounts for all boom-bust in house prices • Households unconstrained with respect to housing consumption
�� Rent-Price Ratioy Rent-Price Ratio 1.1 1 0.9 Benchmark 0.8 Belief Income Credit 0.7 Data 2000 2005 2010 2015 Year � 1 − δ h − τ h � � p ′ � ρ = ψ + p h − E p h h 1 + r b • Belief about future appreciation shared by investment company
Home Ownership Ratey �� Home Ownership 1.1 Bench Belief Income 1.05 Credit Data 1 0.95 2000 2005 2010 2015 Year • Cheap credit drives rise in home ownership • Households constrained in tenure choice, not housing choice
�� Explaining the Effects of Credit Shocksy • Why looser/tighter credit does not affect housing demand? ◮ Defaultable long-term debt: housing risk premium is small ◮ Rental market: buyers are not constrained in housing choice
�� Explaining the Effects of Credit Shocksy • Why looser/tighter credit does not affect housing demand? ◮ Defaultable long-term debt: housing risk premium is small ◮ Rental market: buyers are not constrained in housing choice • Why is rise in home ownership disconnected from house prices? ◮ Renters buy houses of similar size of those they rented ◮ It’s the current home owners who upsize and push up demand
�� Explaining the Effects of Credit Shocksy • Why looser/tighter credit does not affect housing demand? ◮ Defaultable long-term debt: housing risk premium is small ◮ Rental market: buyers are not constrained in housing choice • Why is rise in home ownership disconnected from house prices? ◮ Renters buy houses of similar size of those they rented ◮ It’s the current home owners who upsize and push up demand • If hh’s already consume optimal amount of housing, why buy more? ◮ Housing is both a consumption good and an asset ◮ Many households buy larger houses to realize expected capital gains
Leverage (debt/house value) y �� Leverage 1.8 Benchmark Belief 1.6 Income Credit 1.4 Data 1.2 1 0.8 2000 2005 2010 2015 Year • Credit loosening is crucial to maintain constant leverage pre-boom
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