The Unassuming Economist

From the Grumpy Economist:

“This beautiful graph comes from calculatedriskblog.com. (Courtesy Andy Atkeson who used it in a nice discussion of a great paper by Ivan Werning at the Minneapolis Fed Foundations of Monetary Policy conference.) 

The central lines that don’t move so much are the average rent. This is the quantity used by the Bureau of Labor Statistics to compute the consumer price index. The blue and yellow lines are the rent of new leases. 

The first thing this informs is the economic theory of “sticky prices.” Apartment rents are a classic “sticky price;” the rent is fixed in dollar terms for a year. So, landlords deciding how much rent to charge, and people deciding how much they’re willing to pay,  balance rents now vs. higher rents in the future. If everyone believes that inflation will be 10% over the next year, then it makes sense to raise the rent 5% now, and to pay the 5% higher rent, because  the savings at the end of the year balance the cost in the beginning. (Obviously, the economics are much more subtle than this, but you get the idea.) And Voila’, you see it. 

The graph also says there is some predictability and nomentum to inflation. Inflation should not be a surprise to forecasters. If you see rents on new leases much above average rents, it’s a pretty good bet that average rents will be rising in the future! This kind of phenomenon may be under exploited in formal inflation forecasting. 

And, on the continuing speculation whether inflation will go away with interest rates still substantially below current inflation, the graph does seem a leading indicator that the rational expectations model is winning.”

From the IMF’s latest report on Austria:

“The financial sector proved resilient during the pandemic but war- and housing-related risks have increased. (…) On the domestic front, house prices rose sharply and further deviated from fundamentals. Mortgage lending has risen considerably, much of which did not comply with Financial Market Stability Board (FMSB) recommendations on borrower-based limits.

(…)

Stricter enforcement of prudential guidelines is welcome, but a further tightening of borrower-based tools may be needed if housing-related systemic risks escalate. In response to risks from the residential real estate sector (RRE), the authorities—in line with staff recommendations—issued regulations to make binding upper limits for loan-to-value ratios (LTV), debt-service-to-income ratios (DSTI), and loan maturities, effective summer 2022. The existing guidance has also been adjusted to include a tighter upper DSTI limit for loans with variable rates. The authorities should carefully monitor the effectiveness of these measures and if vulnerabilities persist, additional macroprudential measures (such as a sectoral systemic risk buffer calibrated to RRE exposure) should be implemented. Depending on the evolution of the macroeconomic outlook and credit growth (currently slightly beyond prudential thresholds), the authorities could consider activating the counter-cyclical capital buffer (CCyB), which has thus far been kept at zero.

(…)

In the housing sector, the authorities plan to assess the effectiveness of the newly introduced legally binding borrower-based measures and stand ready to tighten further as needed. If the high credit growth does not fall to sustainable levels in the next 6-12 months, the authorities will have to consider activating the CCyB. The authorities stressed that retail deposits are adequately protected in the current DGSs. They deem that the mechanisms underpinning the conjoint solidarity and based on the principle of the DGS’s super seniority served financial stability appropriately in the liquidation of Sberbank Europe and recouping fully the outlays.”

From the IMF’s latest report on Estonia:

“The authorities estimate that the housing market was moderately overvalued in 2021, while house price growth accelerated further in early 2022, reflecting a combination of strong demand and limited supply. In March 2022, the government tightened the eligibility criteria of the housing loan support program to better target support. The central bank has announced an increase in the countercyclical capital buffer, moving it from zero to 1 percent effective in December 2022.

(…)

The macroprudential stance is appropriate, but careful monitoring of housing market developments is needed. The new countercyclical buffer framework, which will take effect in December 2022, entails a tighter effective stance. This appears appropriate given the continued upward momentum in house prices and credit, which was sustained even during the early phase of the war in Ukraine. The case for further macroprudential action should be continually re-assessed in line with cyclical and housing market conditions, which would depend on the evolution and impact of the war in Ukraine and for now is subject to large uncertainty. The monitoring of the housing market and related lending should pay particular attention to riskier loans such as those with debt-service-to-income ratios close to the regulatory limit. The government’s recent tightening of the eligibility criteria of the housing loan support program in March 2022 is a welcome step.”

On cross-country:

• As the U.S. Dollar Surges, American Buyers Splurge on European Homes. Favorable exchange rates and steady property prices have led to big interest in markets like London, Paris and Tuscany – Wall Street Journal

On the US—developments on house prices and rent:    

• Case-Shiller National House Price Index “Decelerated” to 18.0% year-over-year increase in June. FHFA: “[A] deceleration has appeared in the June monthly data” – Calculated Risk
• The Huge Upward Momentum in House Prices is Gone – Check Your City – Real Estate Decoded
• Home Price Growth Eased in June – NAHB
• Inflation Adjusted House Prices Declined in June. House Price-to-Rent Ratio also Declined in June – Calculated Risk
• U.S. house price inflation to plunge in 2023, fair value still a distant dream – Reuters
• A ‘buyers’ market’ for homes is still elusive in the US. Home prices are falling with tighter monetary policy, but higher interest rates don’t fix shortages – FT 
• American cities want rent control to rein in housing costs. Economists still think they are a bad idea – The Economist
• Pace of Rent Increases Continues to Slow. Higher Rents will continue to impact measures of inflation in 2022 – Calculated Risk
• July Rental Report: Nationwide Rent Holds Steady Despite Big-City Resurgence – Realtor
• Record-Breaking Rent Growth in Markets in the South and West – Harvard Joint Center for Housing Studies
• Stucco and Vinyl were the Most Common Siding Materials on New Homes in 2021 – NAHB

On the US—other developments:    

• The Housing Market Is in Recession. What It Means For Home Buyers. – Barron’s
• Shorting Zillow Is Your Best Bet in Housing This Year. Think the real-estate market is in for a price cut? The biggest one could still come to Zillow’s stock – Wall Street Journal
• Andra Ghent: Salt Lake City should sell golf courses to provide affordable housing. It is a lot cheaper to prevent people from becoming homeless than to help them afterward. – Salt Lake Tribune
• American Real Estate Was a Money Launderer’s Dream. That’s Changing. – New York Times  
• California rolls out a daring new housing policy to combat high home prices and increase supply – Fortune
• Big US mortgage lenders turn screws on smaller rivals as rates rise. United Wholesale and Rocket pursue aggressive strategies as others pull back or go out of business – FT
• Consumer Bankruptcy, Mortgage Default and Labor Supply – Philadelphia Fed
• 2022 Housing Markets Remain in Sellers Favor, but Conditions Are Changing. Home Sellers Are Contending with Slowing Real Estate Fundamentals – Realtor
• Everyone’s a Landlord—Small-Time Investors Snap Up Out-of-State Properties. With the help of recent technologies, laptop landlords are buying homes across the U.S. – Wall Street Journal
• Affordable Housing Developers Look to the White House for Help. Construction costs and labor shortages have made it harder to build affordable housing. Now the Biden administration is urging cities to use American Rescue Plan funds to boost supply. – Bloomberg     
• Goldman Says US Housing Downturn Has Further to Go as Rates Rise – Bloomberg
• Why Obama-Era Economists Are So Mad About Student Debt Relief. It exposes their failed mortgage debt relief policies after the Great Recession. – The American Prospect
• Yes, your house is wealth. In order to fix our dysfunctional housing politics, we must confront this economic fact. – Noah Smith
• New Estimates of the US Homeless Population – NBER
• Active vs Total Existing Home Inventory – Calculated Risk
• Private Residential Spending Slides in July – NAHB

On China:

• China’s Property Market Has Slid Into Severe Depression, Real-Estate Giant Says. Country Garden, which for years ranked as China’s top real-estate developer, reports 96% drop in first-half profit – Wall Street Journal
• China’s largest banks show wounds from property sector crisis – Reuters
• China’s AgBank Says Overdue Loans From Mortgage Boycott Double. Lender posts 5.8% profit gain in first half on lending boost. Sector faces tumult from slowing economy, property crisis – Bloomberg
• Pinched by Housing Downturn, Chinese Families Rein In Spending. More homeowners in China are reckoning with shrinking wealth amid a nearly year-long home-price decline, adding another drag on consumption – Wall Street Journal
• China’s property-driven growth model is broken. Beijing should prepare for a long and difficult economic transformation – FT
• Hong Kong tycoon calls bottom of China’s property slump. Adrian Cheng says his New World Development group will spend $1.5bn to buy land in the next year – FT
• Point of no return: crunch time as China tries to fend off property crash. With the global economy also at a crossroads, Beijing’s leadership faces a perilous test of nerve on its lending crackdown and zero-Covid strategy – The Guardian
• Chinese borrowers pile pressure on banks with early mortgage payments. Affluent property owners cut leverage as liquidity crisis hammers property sector and economy sputters – FT
• As China’s property crisis grows, is the global economy at risk? China’s house prices are falling as Beijing reins in sector, raising fears for economic growth at home and globally. – Al Jazeera  

On other countries:  

• [Australia] Australia’s house prices take biggest dive in 40 years. Property prices drop 1.6 percent in August in sharpest fall since 1983. – Al Jazeera and The Guardian
• [Australia] Australia’s property downturn puts home buyers in double mortgage bind – The Guardian
• [Canada] Canadian Housing Outlook: Testing the Foundation – TD
• [Israel] Bank of Israel’s Yaron on Policy, Inflation, Housing – Bloomberg
• [Netherlands] The Netherlands’ housing market remains fundamentally strong – Global Property Guide
• [United Kingdom] Alarm Bells Ring for UK Housing as Signs Point to Falling Prices. Inflation surge and higher interest rates are taking a toll. Industry survey shows buyer interest and price optimism waning – Bloomberg
• [United Kingdom] Equity release loans surge as older homeowners raise funds. Borrowers appear undeterred by rising interest rates – FT
• [United Kingdom] UK house price surge to end as cost of living crisis bites: Reuters poll – Reuters
• [United Kingdom] UK House Prices Rise More Than Forecast But Slowdown Anticipated – Bloomberg

From Noah Smith:

“Every so often I encounter the argument that owner-occupied housing isn’t a form of wealth. This would come as news to economists like Emmanuel Saez and Gabriel Zucman, who study wealth inequality for a living, and who definitely count owner-occupied home equity in their wealth numbers. It would also come as news to the U.S. Census Bureau, who finds that equity in owner-occupied housing represented the largest share of the wealth of households outside the top 1% as recently as 2015:

The definition of wealth here is just assets minus liabilities. An asset is anything you can sell for money. You can sell your house for money. Hence it is an asset. In fact, historically, it’s one of the assets with the best returns.

But I don’t want to make an argument from authority here. There are very good reasons we count owner-occupied housing as wealth, and they’re not too hard to understand.

To see why, first let’s make an analogy: a magic cupboard that gives you food.

The magic cupboard analogy

Suppose you had a magic cupboard that gave you three meals a day, free of charge. Furthermore, suppose there was a market for magic cupboards, and that you could sell your own for $1 million if you wanted to.

This magic cupboard represents a form of wealth. If you think it’s not, consider whether you would be poorer if your magic cupboard burned down or got stolen or stopped working. Yes, you would be poorer.

Some people might argue: “But you need food every day. If you sold your magic cupboard, you’d just have to use the money to buy food.” And indeed you would. You would have to go to the grocery store or go to restaurants, because you wouldn’t have a magic cupboard. You could use the cash from the sale of your magic cupboard to buy food at the store or at restaurants.

But now consider someone who doesn’t own a magic cupboard. They also have to eat every day. They have to go to the grocery store or go to restaurants. But unlike you if you sold your magic cupboard for cash, the person who didn’t start out with a magic cupboard has to work for the cash they need to buy food every day. Because they have to work for what you could just buy off of an asset sale, they’re poorer than you.

Thus, the magic cupboard is wealth.”

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