The Unassuming Economist

From Works in progress:

“Ireland had arguably the world’s largest housing bubble and crash in the 2000s, with prices quadrupling in the decade to 2007, even while supply soared, before crashing by more than half between 2007 and 2012. Unsurprisingly, this extreme experience has been the subject of much research. Housing has become a critical economic, social and political issue in many cities across the high-income world. At its worst, it even threatens the very concept of living standards in high-income countries, gobbling up a third or even half of the disposable incomes of individuals and households in some locations. But it wasn’t always like this. Adjusting for inflation, the price of housing in high-income countries underwent ups and downs in the century to the 1960s but the trend was largely stable. Though the timing varies by country, it has only been in the last half-century or so that the price of housing has shot up like a hockey stick.

As the world’s largest economy, the United States has been the highest-profile market to make this transition, along with a number of other countries that have followed the same patterns. Ireland is at the extreme end. Like a Rorschach test, people look at Ireland and see whatever suits them most in making arguments about housing and economic policy.

But many of these arguments rely on simplistic myths about what happened. Contrary to many of these claims, Ireland was not a story of overbuilding caused by laissez-faire policy, or an experience that defied standard economics. Ireland built very few ghost towns – housing excesses, where they occurred, were a product of government tax policy, rather than irrational markets. And supply and demand perform very well in explaining the trends. Failing to understand these basics will mean we are susceptible to making the same mistakes all over again.

I have spent much of the last fifteen years studying the Irish housing system, following it from the heights of the Celtic Tiger bubble to the following crash and the subsequent decade of rising prices. There are, to my mind, three myths that have emerged about the Irish housing market that muddy the waters in our understanding of housing markets not just there but everywhere.”

From Works In progress:

“There’s a pattern that we frequently see in the development of a new technology. Initially, the practical functionality is limited by the technology itself – what’s built and used is close to the limit of what the technology is physically capable of doing. As the technology develops and its capabilities improve, there’s a divergence between what a technology can physically do and what it can economically do, and you begin to see commercialized versions that have lower performance but are more affordable. Then, as people begin to build within this envelope of economic possibility, capability tends to get further constrained by legal restrictions, especially if the new technology has any (real or perceived) negative externalities.

Cars and speed limits provide an illustrative example. The first production car, the Benz Velo, was also the fastest car, with a top speed of about 12 miles per hour. The technology quickly improved, and by the 1940s the fastest production cars were capable of traveling over 100 miles per hour, with specially built test cars achieving nearly 375 miles per hour.

“Economic” speed lagged behind this – the maximum speed of the most popular car of 1952 (the Buick Roadmaster) was 91 miles per hour. And because traveling at high speeds has negative externalities (excess crashes, pedestrian safety, etc.), states began to enact speed limits as car speed increased that further capped how fast cars would be allowed to travel. The first speed limit in the US appeared in Connecticut in 1901, limiting speed in cities to 12 miles per hour (the most popular car sold that year, the Oldsmobile Curved Dash, topped out at around 20 miles per hour).

Construction technology also shows this dynamic, with engineering, economic, and legal maximums diverging. The economic height of buildings is lower than what’s physically capable of being built, and once that economic height rises high enough we will start to see legal restrictions spring up that further limit building height.

A brief history of building height

Civilization has been putting up buildings for long enough that we find buildings hitting their economic and legal limits even in ancient history. Roman builders were capable of constructing buildings over 150 feet (48 meters) in height, or about 13 modern storeys – the Colosseum is 159 feet (48.4 meters) tall, and the Pantheon is 141 feet (43 meters) tall. Economic height lagged behind this – textual evidence suggests that Roman residential buildings (insulae) maxed out at around 7 or 8 storeys, with 5 or 6 storeys being more common. Legal limits were sometimes even lower: to reduce the risk of collapse (which was apparently not uncommon) various emperors issued edicts limiting the maximum building height. Augustus limited the height of buildings to 70 Roman feet (slightly greater than an imperial foot), which was then further restricted by Trajan to 60 feet.”

Continue reading here.

On cross-country:

• Housing affordability and responses during times of stress: A preliminary look during the COVID-19 pandemic – Contemporary Economic Policy

On the US:    

• Something Has to Give in the Housing Market. Or Does It? There appears to be no quick reprieve coming for rising prices: “It’s not a bubble, it really is about the fundamentals.” – New York Times
• A growing share of Americans say affordable housing is a major problem where they live – Pew Research Center
• Housing-Market Risks in U.S. Are Clustered Around NYC, Chicago. Attom data rank areas by affordability, level of foreclosures. Outside of California, the West is the least fragile market – Bloomberg 
• Available Homes Shrink More Than 30% in Hottest Housing Markets. It would take less than a week to sell all the inventory in Seattle, and about 9 days for San Jose and Denver at current prices, according to Redfin. – Bloomberg
• The YIMBYs are starting to win a few. Slowly but surely, progressives are realizing that they need to build, build, build – Noahpinion
• Austin’s Mayor Seeks $500 Million Bond to Help Ease Housing Crunch – Bloomberg
• Homes Above $800,000 Drive Bidding Wars in the U.S. Housing Market. Nearly two-thirds of pricey homes had competition in December, while supply remains tight due to low mortgage rates and booming demand. – Bloomberg
• Short term rentals are an opportunity for some, but are impacting affordable housing – NPR
• Blackstone’s new real estate play: the rent-to-buy market. Home Partners believes it has created an alternative path to home ownership. But is it really more like another corporate landlord? – FT
• Cincinnati Agency Buys Nearly 200 Rental Homes, Thwarting Private Investors. City plans to upgrade rental homes and sell to tenants in affordable-housing effort – Wall Street Journal
• A Progressive Real Estate Firm Faces Accusations of Discrimination. Redfin has staked its reputation on making a racist industry more equitable. Critics say it has been denying services to Black homebuyers and sellers. – Bloomberg 
• Mortgage denial rates by race in 2020 – Axios
• Study: 20% of Black mortgage applicants in Ga. rejected – Axios
• Black Mortgage Applicants Denied 84% More Often than White Borrowers – Zillow 
• Rising mortgage rates could slow house price surge – Axios
• To Senator Toomey: The Process of Exiting GSE Conservatorship Is Not So Simple – Harvard Joint Center for Housing Studies
• New State Rule Would Force Suburbs to Legalize Thousands of New Apartments Near T Stops – StreetsblogMASS
• Fraud and the financial crisis – AEA
• Housing finance: Insights on the new normal – American Enterprise Institute
• Good news for buyers? New-home construction activity increases, amid a surge in building permits. U.S. home builders face a growing backlog of construction projects they haven’t started work on, which should continue to pump supply into the housing market in 2022 – MarketWatch
• Multi-family housing boosts U.S. homebuilding; supply constraints seen unrelenting – Reuters
• Boom in Home Remodeling May Peak in 2022 – Harvard Joint Center for Housing Studies

On China

• Slowdown in Chinese town highlights potential pitfalls of property reforms. Homeowners’ struggles demonstrate challenge of cooling sector without damaging wider economy – FT
• China Considers Major Step to Ease Developer Cash Crunch. Regulators mull policy package to ease crisis: person familiar. Government is fine-tuning industry crackdown as economy slows – Bloomberg
• China’s Home Market Slump Persists on All Fronts, Hurting Growth – Bloomberg
• China’s GDP growth slows as Covid restrictions and property woes hit demand. Central bank cuts lending rate as economy expands 4% year on year in fourth quarter – FT
• China’s Economy Is Slowing, a Worrying Sign for the World. Economic output climbed 4 percent in the last quarter of 2021, slowing from the previous quarter. Growth has faltered as home buyers and consumers become cautious. – New York Times
• China’s Spreading Property Debt Crisis Pressures Xi to Ease – Bloomberg
• Xi Reshapes China Property Market Paving Way for State Dominance. Officials seeking to quash speculation, limit financial risk. State-owned developers seen taking over the key industry – Bloomberg
• China Experts Map Out Endgame for Xi’s Revamped Property Sector. State-owned firms seen taking control of real estate market. Transition will be ‘long and painful,’ Bocom’s Hao Hong says – Bloomberg
• How Too Many Boys Skew China’s Economy. The government’s fight to control housing prices and insulate the economy is bound up with some very fundamental human impulses—and decisions made decades ago – Wall Street Journal

On other countries:  

• [Canada] Housing demand in Canada: A novel approach to classifying mortgaged homebuyers – Bank of Canada
• [Canada] We don’t expect an increase in interest rates to have a huge impact on housing supply: CHBA CEO – Bloomberg
• [Canada] House hunters in Canada face tightest market on record. There are so few homes for sale in Canada that people are starting to call it a housing crisis. – Al Jazeera
• [Czech Republic] EU’s Hottest Property Market Fuels Aggressive Czech Rate Hikes – Bloomberg
• [France] Working from home and corporate real estate – VoxEU
• [Germany] Bundesbank warns German lenders of complacency as house prices soar. Credit risks have been ‘underestimated’, vice-president Claudia Buch tells FT – FT
• [Ireland] Rising rents and surging prices trigger ‘collapse’ in home ownership. Housing in Ireland is ‘severely unaffordable’, report by Parliamentary Budget Office says – The Irish Times
• [Italy] The Agglomeration of Urban Amenities: Evidence from Milan Restaurants – NBER
• [New Zealand] New Zealand Home Price Increases Show Signs of Moderating – Market Watch
• [New Zealand] New Zealand’s house prices skyrocketing – Global Property Guide
• [Slovak Republic] Slovak Republic’s house price growth accelerating – Global Property Guide
• [United Kingdom] UK mortgage demand cools amid economic concerns. Would-be homebuyers confound forecasters and turn cautious, BoE survey – FT
• [United Kingdom] The big idea: could fixing housing fix everything else, too? From inequality to pollution, Britain’s housing crisis sits at the root of a surprising range of problems – The Guardian
• [United Kingdom] Mortgage values fall from nutty 2020 high but new homebuyers are still feeling the pain. Surge in mortgages during pandemic suggests house prices will continue to grow for first half of 2022 – at least – The Guardian
• [United Kingdom] UK house prices rise annual 10.0% in November – Reuters
• [South Africa] Rate Hikes Unlikely to Weigh on South Africa Home Buying in 2022 – Bloomberg
• [Taiwan] Taiwan Central Bank Chief Repeats Stance on Rates-Housing Link – Bloomberg 

From a new paper by Stephen Malpezzi:

“The global SARS-CoV-2/COVID-19 Pandemic has disrupted public health, economies, and housing markets since early 2020. The shock has called forth a number of policy responses, such as moratoria on foreclosures and evictions, attempts to regulate rents and prices, and a range of subsidies on both supply and demand sides. This paper reviews the state of housing markets and discusses the expected efficacy of alternative policy measures taken or contemplated. Recognizing the provisional nature of any paper written during a large and durable ongoing shock, suggestions for additional research are provided.”

From a paper by John M. Griffin:

“From the very start of the 2008 housing and financial crisis, close observers suspected widespread fraud lay behind the rapid meltdown in the US mortgage market. But even a decade after the fact, there was little consensus among economists as to whether that was the root cause.

In a paper in the Journal of Economic Literature, author John M. Griffin synthesizes the broad array of literature on the role of residential mortgage-backed securities (RMBS) securitization and finds that conflicts of interest among banks, ratings agencies, and other key players were a key driving force behind the financial crisis.

Griffin says that the process of creating and selling complex financial assets based on home loans was closely linked to the housing bubble—and shot through with malfeasance. 

In the run-up to the crisis, underwriters facilitated wide-scale fraud by knowingly misreporting key loan characteristics, credit rating agencies catered to investment banks by inflating their ratings on both mortgage-backed securities and collateralized debt obligations, originators engaged in mortgage fraud to increase market share, and real estate appraisers inflated their appraisals in order to gain business. 

As credit was extended to those who could not afford loans, house prices boomed and subsequently crashed when homeowners started defaulting. However, this supply of fraudulent credit was not uniform across US zip codes.

Griffin illustrated variation in mortgage fraud using zip code data from California, which had the greatest number of mortgage originations during the period. Figure 1 from his paper shows that the state’s housing prices decreased as loans from dubious originators increased.

The y-axis is the percent change in the Federal Housing Finance Agency house price index (HPI) per zip code from 2007 to 2010, and the x-axis is the fraction of misreported loans per zip code from 2003 to 2007. The size of each point represents the number of zip codes.

The chart shows a strong negative relationship between misreporting and the home price bust. California zip codes with more than 15 percent fraudulent origination experienced home price decreases of 44.6 percent on average, whereas zip codes with less than 3 percent fraudulent originators only experienced 5.4 percent price decreases. 

While other factors such as excess credit and speculation could be drivers, Griffin says that numerous studies since the crisis point toward fraud as a central explanation.”