The Unassuming Economist

From the IMF’s latest report on Hungary:

“Efforts to scale back house purchase incentives and to address supply constraints are needed to mitigate market pressures. In 2018, housing price growth was in double digits, especially in Budapest, partly supported by high wage growth, fiscal incentives, and labor scarcity in the construction sector (Figure 3). Budapest house prices appear high compared to fundamentals. Given that a large part of purchases is paid for with private savings, including by foreign citizens, and is done for investment purposes, tightening of macroprudential measures (loan-to-value and debt service-to-income (DSTI) may not be sufficient to contain house price inflation, but can reduce the likelihood of risky mortgages. Moderating price increases would therefore be helped by reviewing the various fiscal incentives for house purchases, basing them on means-testing and targeting, reducing impediments to doing business to spur construction, improving transportation network and commuting options, and improving urban planning to increase housing supply over time. In the context of money laundering risks in the sector, staff also encouraged the authorities to continue their AML/CFT efforts, as Hungary remains on enhanced follow-up based on Moneyval’s 2016 assessment, including by continuing to monitor large purchases of luxury real estate.

The authorities launched several initiatives to reduce the mortgage interest rate risk. While most new housing loans now have longer interest fixation periods—likely facilitated by the MNB Certified Consumer-Friendly Housing Loans and the DSTI requirements—there is still a high portion of existing housing loans with variable rates. The MNB thus agreed with banks that they inform their clients about the interest rate risk and offer to convert to fixed-rates.3 Thus far, the impact of this measure has been limited. To contain potential risks from FX exposure of some of the commercial real estate companies, the MNB has announced that beginning in 2020 a small riskweight would be also assigned to FX performing project loans when calculating the systemic risk buffer.

The authorities are monitoring housing prices, especially in Budapest, even though they are still much lower than in comparable cities in Western Europe. They also noted that assessment models do not capture the fact that many of these purchases are for investment and generate rental income. They agree that additional tightening of macro prudential measures is unlikely to have a significant impact. There is preliminary evidence that the introduction of the retail bond MÁP+ coincided with a decline in apartment sales transactions in Budapest. Some of the MNB’s proposals—included in the MNB’s Competitiveness Program, like tightening the rules for purchases of residences for investment purposes and expanding construction capacity, could help moderate the market.”

From National Association of Realtors:

“The South and Midwest regions have accounted for an increasing fraction of existing home sales since 2012 while the shares of the North and West regions have declined, according to the October 2019 existing home sales estimates of the National Association of REALTORS®. The South region’s share of existing home sales increased from 36% in 2000 to 43% (as of October 2019), while the Northeast region’s share from 18% to 13% during the same period. The West region’s home sales share has slightly fallen from 23% to 21% while the Midwest region’s share has remained the same at 24%.  However, since 2011, the Midwest region has been gaining market share, from 21% to 24%. The share of the West region rose to as high as 27% in 2011 but started declining in 2012, to just 21%  in 2019.”

Continue reading here.

On the US:

• A profile of profiles Harvard’s Edward Glaeser – IMF
• Affordable housing in Los Angeles: Delivering more—and doing it faster – McKinsey & Company
• 2019 Millennial Homeownership Report: More Millennials Are Preparing For A Life of Renting – Apartment List
• Studies: Single-family rentals can limit access to housing – Cornell University
• AEI Housing Market Indicators release on August 2019 data – American Enterprise Institute
• Public Housing Becomes the Latest Progressive Fantasy – The Atlantic
• This is exactly how much housing speculation can affect household income and employment – MarketWatch
• House Prices, Investors, and Credit in the Great Housing Bust – New York University
• Rapid Re-Housing in High Cost Markets – Urban Institute

On other countries:

• [Germany] A fall in house prices would not devastate Germany’s economy – Financial Times
• [Germany] Germany’s house price growth accelerates – Global Property Guide
• [Portugal] Portugal’s housing market is strengthening – Global Property Guide
• [Slovak Republic] Slovak Republic’s house price rises continue – Global Property Guide
• [United Kingdom] Fewer property cash buyers as downsizers stay put – Financial Times

On cross-country:

• Global Cities and Local Housing Market Cycles – The Journal of Real Estate Finance and Economics

On the US:

• Economic Consequences of Housing Speculation – NBER
• The Plight of the Urban Planner – The New Yorker
• Fintech Lending and Mortgage Credit Access – Federal Reserve Bank of Philadelphia
• Opinion: This home mortgage disaster is ready to punish housing markets – MarketWatch
• Elizabeth Warren updates housing plan with focus on renters – Curbed
• Elizabeth Warren released a plan to lower the cost of renting a home by 10%—here’s how – CNBC
• Is the Housing Market Going into a Recession? – EconoTimes
• What Happens When Black People Search for Suburban Homes – New York Times
• In 2020, home sales to rise but refinancing to dip, mortgage bankers say – Washington Post
• In Las Vegas, the house owner doesn’t always win. – Brookings
• Democratic Candidates Acknowledge Poor Housing Supply, But Not How Government Causes It – Reason

On other countries:

• [Australia] Mortgage Arrears – Reserve Bank of Australia
• [Italy] The Italian house price conundrum – Financial Times
• [India] Foreign investors flock to commercial projects as India’s residential market struggles – Quartz

Global Housing Watch Newsletter: November 2019

In this interview, Sarah Quinn talks about her new book: American Bonds: How Credit Markets Shaped a Nation.  She is an Associate Professor of Sociology at the University of Washington and is currently a Member of the Institute for Advanced Study.

Hites Ahir: What are you trying to accomplish in writing this book?

Sarah Quinn: Starting out, I wanted to understand why people in the U.S. government decided to support a market for securitization at the end of the 1960s. We usually think of the promotion and development of cutting-edge technologies as something that happens outside of the government. So I wanted to know: Why was the government involved? Why had officials decided that securitization was a good idea? That is, why did that technology make sense as a policy option at that time?

I went to the archives in search of an answer. Almost immediately, internal governmental memos revealed that the programs supporting securitization were part of an entire web of federal credit programs. Those programs still exist. They direct the flow of credit to specific groups and industries by buying and selling loans, insuring and guaranteeing debt, and promoting and experimenting with new ways of lending. I soon realized that in order to make sense of governmental support for securitization in the 19060s, I needed to situate that policy within the larger system of credit support, and understand the role that entire system was playing in the U.S. political economy.  As of 2017 the U.S. government officially owned or guaranteed 3.8 trillion U.S. dollars in loans, which is the equivalent of about a third of non-financial sector private debt. That number goes up to 8.5 trillion U.S. dollars if you include Fannie Mae or Freddie Mac, which are currently under governmental conservatorship but are not officially on budget.

What I came to understand at the end of the study was that the federal credit programs are themselves part of a much larger, much older political tradition. Since the founding era—but in very different ways at different times— U.S. lawmakers have used land give-aways and easy credit in an effort to provide economic opportunity without having to tax and spend, which is to say, without having to openly redistribute wealth. Land and credit allocation were also popular policy tools because they could be often easier to get through America’s fragmented, contentious, veto-ridden ridden political system. Once you understand this pattern, it becomes clear that government involvement in the fledgling securitization market of the 1960s was not unusual, but in fact typical of how American politics and American markets actually work.

HA: In a nutshell, what did you learn about the history of credit programs?

SQ: In the 19^th century, credit programs were sometimes used in an ad hoc, temporary manner. They were really a backstop to support other policies (like the building of the Transcontinental Railroads). This changed with the Federal Farm Loan Act of 1916, which created a new system of farm credit from the ground up. In the 20^th century, credit allocation emerged as a primary lever or policy tool in its own right.

Credit support has historically been concentrated in a few core industries: agriculture, housing, and higher education. It has also been used creatively but less extensively in other domains. Credit support can be a form of foreign policy: United States Agency for International Development (USAID) loans money to other countries, for example. And credit programs are a form of social policy, as when Federal Emergency Management Agency (FEMA) uses mortgage guarantees to support rebuilding after natural disasters. The credit programs are also an important part of how the government bails out troubled industries and companies.

When it comes to the economy, it is crucial to understand that credit programs are also institution builders. The farm and home loan programs helped popularize the long-term amortized mortgage in the U.S. The FHA in the 1930s pioneered new forms of commercial lending. The Export-Import bank demonstrated the viability of business lending abroad. After World War II, the U.S. Small Business Administration helped expand the venture capital industry from a niche business. So the legacy of the credit programs is not just in how many loans are directly funded or guaranteed by them, but how they have helped change the rules of the game in credit markets.

HA: In the book you say: “Credit programs are fiscally light. They can yield big results for low costs.” Could you elaborate on this?

SQ: When the government issues a loan, that generates revenue as the loan is paid back. A guarantee (or insurance for a loan) only costs money in case of default. Think about it this way: if a rural community needs a hospital, it is cheaper for the government to guarantee a loan for a private company to build that hospital than it is for the government to build the hospital itself. These relatively low costs are one of the things that makes credit programs attractive as a policy tool.

HA: In the book, you also say that “the late 1960s had identified dangers of securitization”. Could you elaborate on this?

SQ: The private securitization market was floundering in the 1960s. Some companies were trying to figure out how to make the market work, but for a variety of reasons they were not successful. At the same time, the U.S. government held around $30 billion U.S. dollars in loans through the credit programs, and some agencies started selling certificates backed by pools of those loans as a form of off budget financing. As costs of the Vietnam war and the Great Society programs mounted, the Johnson Administration pushed to sell certificates backed by these loan pools—early forms of securitization—as a form of off budget financing. A political fight erupted about the sale of these certificates, and the nature of these certificate sales was intensively debated. Anyone reading through these debates in retrospect will see clear warnings about the potential for loan pools to hide risks, to obscure budget numbers, and to incentivize bad behavior.

HA: One of the chapters in the book looks at the boom in mortgage bonds in the 1920s and the bust in the early 1930s. Could you briefly describe this period?

SQ: In the 1920s there was a commercial real estate boom. Skyscrapers were going up, but at the time there weren’t many institutional investors in place who could fund such large buildings. So a set of brokers and new bond houses started to divide up big mortgages into smaller bonds that they sold to middle class families. For $100 dollars a small investor could own a piece of the Waldorf Astoria. The market boomed and then went bust. The crash was a disaster for the small investors who invested their savings in these bonds.

HA: When the housing market crashed in the 1930s, what was the reaction from policymakers and mortgage sellers and brokers?

SQ: There were extensive public hearings about what happened, and at that point laws were changed to prevent small investors from buying those kinds of bonds. The idea was that small investors couldn’t really protect themselves from exploitation from brokers. The U.S. Securities and Exchange Commission (SEC) concluded that the power dynamics were too uneven to be resolved, and to the extent that family savings would go into mortgage markets from that point onward, it would through the savings and loans, which were very carefully regulated.

Most of the mortgage brokers of the 1930s failed in the Depression. The few who survived did so by transforming into brokerage arms for the insurance companies. A profound risk aversion from sellers that lingered after the Great Depression combined with a new generation of rules and regulations around lending to totally wash out the private mortgage bond market throughout the postwar era. That’s the background for why the U.S. government felt a need to help create a more vibrant securitization market at the close of the 1960s in the first place.

In the book I argue that the securitization market that emerged in the 1960s was a really different mortgage bond market than the ones that came before in the 1830s, 1880s, and 1920s. The securitization market that emerged in the 1960s reflected much of the social logic of the credit programs that incubated it. This iteration of securitization reflected a world where there was a clear role for the federal government in the mixed economy; it reflected a world where the centrality of homeownership in the U.S. political economy was taken-for-granted; and it reflected a world where financiers were gaining more and more power, influence, and advantages when it came to their role in mortgage markets.