The Unassuming Economist

Global Housing Watch Newsletter: April 2018

This post is written by Kilian Heilmann, and Andrea Nocera. Both are Postdoctoral Research Associate at the Dornsife Institute for New Economic Thinking (INET) at the University of Southern California.

The USC Dornsife Institute for New Economic Thinking (INET) organized a conference on “Housing, Urban Development, and the Macroeconomy” on April 6^th and 7^th at the University of Southern California. The conference brought together researchers from a wide range of fields to discuss recent developments in the research on housing. Organized into 7 sessions of similar thematic overlap, 7 invited speakers, and 17 contributing speakers presented their papers over two days. The presenters came from a diverse background, and represented academic institutions, and central banks from America, Europe, and Australia.

On the relationship between housing and credit…

After the opening remarks by INET Director M. Hashem Pesaran, the first session focused on the relationship between housing and credit. Matteo Iacoviello (Federal Reserve Board) led the discussion presenting his joint work with Ricardo Nunes and Andrea Prestipino, titled “Optimal Credit Market Policy”. The authors advocated a simple countercyclical housing tax to avoid excessive under/overborrowing (presentation). Edward Kung (UCLA, “Interest Rates and Housing Market Dynamics in a Housing Search Model” with Elliot Anenberg) provided new evidence on the role of mortgage rates in the housing market. Xiaoqing Zhou (Bank of Canada, “Home Equity Extraction and the Boom-Bust Cycle in Consumption and Residential Investment”) questioned the common view that higher mortgage loans contributed to higher consumption arguing that their main use was to finance housing investments (presentation). Further contributions to this important topic were given by Isaac Gross (Oxford University, “Anticipated Changes in Household Debt and Consumption”) who suggested that households that anticipate a house purchase may have low or even negative marginal propensities to consume, and discussed possible implications of tax credits for first-time home buyers.

Note: Home equity and consumption. Taken from: Zhou (2018), Home Equity Extraction and the Boom-Bust Cycle in Consumption and Residential Investment

On crises and housing market dynamics…

Crises and housing market dynamics were at the center of the second session which started with Chandler Lutz (Copenhagen Business School). His paper “A Crisis of Missed Opportunities? Foreclosure Costs and Mortgage Modification During the Great Recession” (joint with Stuart Gabriel and Matteo Iacoviello) investigates the housing impacts of the 2000s crisis-period California Foreclosure Prevention Laws. Tom Schmitz (Bocconi University, “The Financial Transmission of Housing Bubbles: Evidence from Spain”, with Alberto Martin and Enrique Moral-Benito) documented both crowding-out, and crowding-in effects of the Spanish housing bubble on the credit market (presentation). The session concluded with Jacob Cosman (Johns Hopkins) whose paper “Concentration and market cycles in the production of new housing” (with Luis Quintero) sheds new light on the impact of increasing concentration in local residential construction markets on housing cycle dynamics (presentation).

On housing regulation and migration…

In the third session “Issues in Housing Regulation and Migration”, Morris Davis (Rutgers) presented new evidence on “Gross Migration and Urban Population Dynamics” (joint with Jonas Fisher and Marcelo Veracierto). Andrii Parkhomenko (USC) discussed “The Rise of Housing Supply Regulation in the US: Local Causes and Aggregate Implications”, and highlighted the connection between housing supply regulations, and aggregate productivity. Christoph Hedtrich presented a model that studies the relationship between living costs, and investment in automation (“Automation, Spatial Sorting, and Job Polarization”, with Jan Eeckhout and Roberto Pinheiro). In the last presentation, Wukuang Cun (USC) spoke on “Land Use Regulations, Migration and Rising House Prices Dispersion in the US” (joint with Hashem Pesaran).

Note: Historic evolution of home value inequality. Taken from: Albouy et al (2018), Housing Inequality

Note: Regulation and House Prices. Taken from: Parkhomenko (2018), The Rise of Housing Supply Regulation in the U.S.: Local Causes and Aggregate Implications

On neighborhood dynamics…

The last session of the day concerned issues in neighborhood dynamics. David Albouy (UIUC) presented new facts on historical housing inequality and constructed measures based on data from censuses dating back to 1930 (presentation). The results show evidence for a post WWII “great compression” in housing consumption, and highlighted the importance of within-MSA inequality (“Housing Inequality” with Aditya Aladangady and Mike Zabek). Jeffrey Brinkman (Fed Philadelphia, “Freeway Revolts!” with Jeffrey Lin) highlighted the heterogeneous effects of transportation infrastructure in the context of freeway construction. Amine Ouazad (HEC Montreal, “Dynamic Location Choice, Housing Market Frictions, and Real Estate Dynamics” with Romaine Ranciere) contributed with a paper that studies the impact of credit market frictions on neighborhood location choice. Lastly, Lorenzo Neri’s (Queen Mary University) paper on “School Performance, Score Inflation and Economic Geography” (joint with Erich Battistin) measured the effect of a noisy measure of school quality on housing prices.

On regional heterogeneity and the macroeconomy…

The second day of the conference started with a session on regional heterogeneity and the macroeconomy. Joseph Vavra (Chicago Booth) presented his joint research with Martin Beraja, Andreas Fuster, and Erik Hurst on “Regional Heterogeneity and the Refinancing Channel of Monetary Policy” where they argue that the distribution of housing equity plays a crucial role in the economy’s response to interest rate declines. Knut Are Aastveit’s (Norges Bank and BI Norwegian Business School) paper “Asymmetric Effects of Monetary Policy in Regional Housing Markets” (with Andre Anundsen) suggests that regional house price responses to monetary policy vary over the business cycle, and depend on housing supply elasticities. Francois Gerolf (UCLA, “Property Tax Shocks and Macroeconomics” with Thomas Grjebine) collects data on tax on housing property for OECD countries to measure the impact of property tax shocks on the macroeconomy. Natalia Bailey (Monash University, “Quasi Maximum Likelihood Estimation of Spatial Model with Heterogeneous Coefficients” joint with Miquele Aquaro and Hashem Pesaran) contributed to methodological advances by introducing heterogeneous coefficients in spatial econometric models.

On housing finance risks…

In a session on housing finance risks, Rodney Ramcharan (USC Marshall) presented his paper “Bank Balance Sheets and Liquidation Values” where he investigates the role of bank balance sheets in shaping the liquidation value of real estate collateral. In joint work with Lu Han “Financing Risk and Information Bias in Housing Markets”, Seung-Hyun Hong (University of Illinois) compares sales prices between all-cash transactions, and mortgage transactions in Los Angeles, and identifies financing risk and information bias as new sources of housing market frictions. You Suk Kim’s (Board of Governors of the Federal Reserve System) paper “The Effect of Government Mortgage Guarantees on Home Ownership” (with Serafin Grundl) finds that government mortgage guarantees have a very small effect on home ownership.

On homeownership and demography…

The conference concluded with a session on homeownership and demography. Jorge de la Roca’s (USC) paper “City of Dreams” (with Gianmarco Ottaviano and Diego Puga) highlighted that imperfect assessment of one’s own ability can lead to the observed fact that there is little sorting on ability between cities. In the last presentation of the conference called “Homeownership and Housing Transitions: Explaining the Demographic Composition” (with Eunseong Ma), Sarah Zubairy (Texas A&M) presented new evidence on uneven composition of homeownership rates during its surge from 1995-2005.

In conclusion, the conference reflected the variety of research approaches to the important topic of housing, and its related fields. Both microeconomists and macroeconomists as well as econometricians contributed to the program. The methods presented at the conference ranged from macroeconomic models to microeconomic analysis of historic data to econometric analysis of spatial heterogeneity. This reflected the spirit of the USC Dornsife Institute for New Economic Thinking to consider novel, and diverse approaches to the analysis of significant research questions.

On the US:

• Why America Needs More Social Housing – American Prospect
• Housing: A shortage of cities – City Observatory
• Is Housing a Good Investment? Where You Stand Depends on Where You Sit – Federal Reserve Bank of New York
• Home Remodeling Expected to Remain Strong and Steady into 2019 – Harvard Joint Center for Housing Studies

On other countries:

• [Canada] Not In My Neighbor’s Back Yard: External Effects of Density – University of British Columbia
• [Canada] The Propagation of Regional Shocks in Housing Markets: Evidence from Oil Price Shocks in Canada – Centre for Economic Policy Research
• [China] Effect of land prices on the spatial differentiation of housing prices: Evidence from cross-county analyses in China – Journal of Geographical Sciences
• [Korea] Housing Dynamics in Korea – OECD
• [United Arab Emirates] Abu Dhabi’s housing market cools down – Financial Times
• [United Kingdom] Building more homes requires more than planning tweaks – Financial Times
• [United Kingdom] London house prices mark first annual drop since 2009 – Financial Times

Photo by Aliis Sinisalu

From a new IMF Working Paper by Richard Koss and Xinrui Shi:

“The sharp rise of house prices in China’s Tier-1 cities has fostered a great deal of commentary about the possibility of bubbles forming there. However, China’s unique housing market characteristics make it difficult to assess the macroeconomic severity of bursting bubbles, even if they exist. These include the setting of land supply and prices by the government, among many others. The presence of overbuilt “ghost cities” greatly complicates the ability of traditional macroeconomic policies to address these concerns. This paper looks at proposals to shore up the mortgage underwriting and legal infrastructure to help China withstand the impact of falling prices, should this occur.”

On cross-country:

• For Home Prices in London, Check the Tokyo Listings – IMF
• Global Investors, House Price Dispersion, and Synchronicity – IMF
• Housing as a Financial Asset – IMF
• The Global Housing Crisis – The Atlantic
• Global Residential Cities Index – Q4 2017 – Knight Frank

On the US:

• Housing Recoveries without Homeowners: A Global Perspective – Federal Reserve Bank of St. Louis
• The Housing Supply Puzzle: Part 1, Divergent Markets – Federal Reserve Bank of St. Louis
• The Housing Supply Puzzle: Part 2, Rental Demand – Federal Reserve Bank of St. Louis
• The Unfulfilled Promise of the Fair Housing Act – The New Yorker
• The Fair Housing Act at 50: Not Sufficiently Powerful to Reverse Residential Racial Segregation – Social Education
• The Fair Housing Act at 50 – Harvard Joint Center for Housing Studies
• VIDEO: Housing Segregation In Everything – NPR
• American Houses Keep Getting Bigger — And so Does American Debt – Mises Institute
• What is holding back housing? – Business Economics
• What Would it Take for Housing Subsidies to Overcome Affordability Barriers to Inclusion in All Neighborhoods? – Harvard Joint Center for Housing Studies
• How Will the New Tax Law Affect Homeowners in High Tax States? It Depends – Federal Reserve Bank of New York
• Have Incomes Kept Up with Rising Rents? – Harvard Joint Center for Housing Studies
• A change to California’s housing supply law could spur a big expansion in home building – Los Angeles Times
• A Small Fix for the Housing Crunch Is in Your Backyard – Bloomberg

Photo by Aliis Sinisalu

From IMF’s Global Financial Stability Report – April 2018:

“Housing is an important asset class for households and investors. In a typical economy, housing wealth, on average, accounts for roughly one-half of total national wealth and can fluctuate considerably over time (Piketty 2014). Real estate investors often borrow to purchase housing assets, making mortgage payments and receiving rental income and potential capital gains. Publicly traded real estate investment trusts have become available in many countries, allowing investors to invest indirectly in the real estate market. In addition, institutional investors have been increasing their direct exposure to residential real estate in recent years (see Figure 3.3 in the main text).

Investing in housing assets can yield considerable returns in the long term, but is subject to significant variation over time. In many advanced economies, the average annual real return on housing assets between 1950 and 2015 lies between 5 percent and 8 percent,comparable in magnitude to that of equity investment but with a lower standard deviation (Jordà and others 2017). In the shorter term, however, the expected returns on housing assets can vary significantly over time and are affected by the risk appetite of financial market investors as well as other behavioral factors (for example, Cheng, Raina, and Xiong 2014; Brunnermeier and Julliard 2008).”

Continue reading here.