One Good Thing About Estimated Current Housing Values: Reality

Economists are digging into housing market questions with gusto. Here's a look of some of the things they're finding. Here's Taisei Kaizoji:

In this chapter we investigate root causes of the recent U.S. housing bubble which has been caused a serious downturn in U.S. economic growth since autumn of 2008. We propose a simple model of housing markets in order to indicate the possible determinants of recent housing prices. Utilizing the model, we verify a number of hypotheses which have been proposed in the recent literature on the housing bubbles. We suggest that the main causes of the housing bubble from 2000 to 2006 are (i) non-elastic housing supply in the metropolitan areas, and (ii) declines in the mortgage loan rate and the housing premium by the massive mortgage credit expansion. We also suggest that these factors were strongly influenced by policies that governments and the Federal reserve Board performed.

Seems straightforward, but this does make one wonder why there was a global housing bubble. Certainly, steps could have been taken to limit the bubble's inflation at a national level, but low interest rates and housing price appreciation were not limited to America.

Next up we have Atif R. Mian and Amir Sufi:

Using individual-level data on homeowner debt and defaults from 1997 to 2008, we show that borrowing against the increase in home equity by existing homeowners is responsible for a significant fraction of both the sharp rise in U.S. household leverage from 2002 to 2006 and the increase in defaults from 2006 to 2008.

Employing land topology-based housing supply elasticity as an instrument for house price growth, we estimate that the average homeowner extracts 25 to 30 cents for every dollar increase in home equity. Money extracted from increased home equity is not used to purchase new real estate or pay down high credit card balances, which suggests that borrowed funds may be used for real outlays (i.e., consumption or home improvement). Home equity-based borrowing is stronger for younger households, households with low credit scores, and households with high initial credit card utilization rates.

Homeowners in high house price appreciation areas experience a relative decline in default rates from 2002 to 2006 as they borrow heavily against their home equity, but experience very high default rates from 2006 to 2008. Our estimates suggest that home equity-based borrowing is equal to 2.8% of GDP every year from 2002 to 2006, and accounts for at least 34% of new defaults from 2006 to 2008.

Emphasis mine. Libertarians will bristle, but it seems like paternalistic policies may be called for here, or justified by the negative externalities of housing defaults. There are clearly some households which have trouble using credit without getting themselves into serious problems.

And finally, from Hugo Benitez-Silva, Selcuk Eren, Frank Heiland, and Sergi Jimenez-Martín, we have this:

Self-reported home values are widely used as a measure of housing wealth by researchers employing a variety of data sets and studying a number of different individual and household-level decisions. The accuracy of this measure is an open empirical question, and requires some type of market assessment of the values reported.

In this study, we examine the predictive power of self-reported housing wealth when estimating housing prices, utilizing the portion of the University of Michigan’s Health and Retirement Study covering 1992–2006. We find that homeowners, on average, overestimate the value of their properties by between 5% and 10%. More importantly, we are the first to establish a strong correlation between accuracy and the economic conditions at the time of the property’s purchase. While most individuals overestimate the value of their property, those who buy during more difficult economic times tend to be more accurate, in some cases even underestimating the value of their house.

We find a surprisingly strong, likely permanent, and in many cases long-lived effect of the initial conditions surrounding the purchase of properties, and on how individuals value them. This cyclicality of the overestimation of house prices provides some explanation for the difficulties currently faced by many homeowners, who were expecting large appreciations in home value to rescue them in case of increases in interest rates, which could jeopardize their ability to live up to their financial commitments.

Emphasis again mine. This is cause for some optimism. It suggests that those currently buying homes will tend to have a more accurate view of their homes' values now and well into the future. This may serve as an anchor on housing prices for a generation, which would be welcome news.

This article originally appeared on The Economist.com

Comments

[markfl:]

Really Mr. Avent, must every contribution from you be an economist.com cut and paste job? As a rule I do not make comments of the kind I'm now writing, but you've published 5 articles today on SA and all were mirrored material from The Economist.

Frankly, the comments (or lack) show it. For the near future I'm inclined neither to read nor comment on your articles, absent some effort from you to actually write unique content for SA.

Aug 25 05:45 PM

[j-dub:]

Schills don't EVER think-they can't.

They recite


On Aug 25 05:45 PM markfl wrote:

> Really Mr. Avent, must every contribution from you be an economist.com
> cut and paste job? As a rule I do not make comments of the kind I'm
> now writing, but you've published 5 articles today on SA and all
> were mirrored material from The Economist.
>
> Frankly, the comments (or lack) show it. For the near future I'm
> inclined neither to read nor comment on your articles, absent some
> effort from you to actually write unique content for SA.

Aug 25 07:11 PM

[johngonole:]

Libertarians would say that if we would just let the credit card companies and banks who loaned to those who can't or won't manage their debts properly fail, then there would no longer be financial institutions left to loan again to those folks. The brutal realities of a free market won't allow irresponsibility. But everytime we take another step in relieving people of their responsibilities the failures just get larger and larger.

I need a beer. This isn't rocket science.

Aug 26 01:04 AM

[Michael Clark:]

We had a housing Boom BECAUSE the banks (with government pressure to do so) loaned money to those who were not qualified to borrow. Without this, we would not have had a BOOM. We would have had housing appreciation of 1-2% a year -- and we would have had no depression.

Now, wages, salaries, and total jobs are declining. People can afford less. The Fed is holding down rates artificially so that housing prices won't come down. People with less money cannot afford to buy expensive houses -- unless the banks want to make bad loans again.

Isn't this clear to people who are calling a housing bottom.

Denial: the first stage of the Death process. And we are still in denial.

Ok, we've been through the correction. Sorry. More correction to come.

A personal anecdote: My sister-in-law in Portland, Oregon bought her house in 1988 for $71,000. This was a modest three-bedroom house in a modest part of Portland. She and her husband had just emigrated from Vietnam; both she and her husband were working jobs starting at close to minimum wage. She had $3000 in savings and borrowed another $4000 from her mother to secure a 10% down-payment. In 2007, this house was valued at $700,000. In 2008, Portland housing declined about 10%. A house that has increased in value from $71,000 in 1988 to $630,000 in 2008 has increased 787% in twenty years. A couple making $30,000 in 1988 should be making $236,100 in 2008 in order to keep up with the suggested rate of housing inflation. Obviously my relatives don't make $236,100....so they could not afford their own house today if they were starting out. And this modest home was a 'starting-out' kind of home.

Historical (pre-bubble) housing price gains averaged about 2.5% per year. If this is assumed for my sister-in-law's house, her $71,000 house bought in 1978 should be worth approximately $107,000 now. Portland housing has lost about 17%. If this is applied to my sister-in-law's house, instead of $700,000, it is now worth about $574,000. This is some $400,000 over the normal historical returns we would assume, had we not been Greenspanned by the housing bubble. If we assume that housing prices needed to return to historical norms for this bubble to be overcome, my sister-in-law's house would still need to shed 73% of its current value.

I guess I don't see how my sister-in-law's house has reached a bottom, especially considering that wages and salaries are on a descending arc.

I don't think I'd trust the cheerleaders until real sanity came back into our markets and into the words of our political leaders.

Aug 26 03:01 AM

[mallarde:]

Good comment, M. Clark. A couple caveats, though. In the West, it is now much more crowded, and there is more competition for housing. Thus, we might not (sadly, IMO) return completely to the norm.

But I agree that housing has a long way to go. I mean, in West L.A. in the nicer parts condos are still more than double, DOUBLE prices a mere nine years ago. It is insane. It feels like a stomach drop at the top of a roller coaster climb. You know the plunge has to come... any moment...

Aug 26 03:28 AM

[TBill:]

All real estate is local. I haven't seen the figures to see WHERE housing prices are improving, but I think it is at the low end. From what I can see, high end housing, especially away from the foreclosure implosions, owners are clinging to their asking prices. This results in lots of inventory for sale, and low sales volume. I would expect the high end to crack at some point, while at the same time the low end trends higher.

Aug 26 11:45 AM

[Larrysyr:]

When the loans are packaged into MBS, the link between the loan originator and the borrower is broken. The originator doesn't care whether the loan gets repaid, only whether it can be sold to the secondary market.

I suspect the libertarian approach would be to endorse the securitization of these loans as an operation of free markets. I'm don't disagree with this perspective, but the actual reality is that bad actors get enough rewards in most situations to entice others to follow the lead.

The rational ideal would be that if you make bad loans, Darwinian selection would weed you out of the lending pool. The incentives in markets, however, are not calibrated to such rational outcomes. The incentives are skewed heavily toward short-term results. The accumulation of these short-term results over a long-term time frame can be highly counter-productive.


On Aug 26 01:04 AM johngonole wrote:

> Libertarians would say that if we would just let the credit card
> companies and banks who loaned to those who can't or won't manage
> their debts properly fail, then there would no longer be financial
> institutions left to loan again to those folks. The brutal realities
> of a free market won't allow irresponsibility. But everytime we
> take another step in relieving people of their responsibilities the
> failures just get larger and larger.
>
> I need a beer. This isn't rocket science.

Aug 26 03:08 PM

[bbro:]

Libertarians live in neverland...oh wait we did it was called the 1890's...


On Aug 26 03:08 PM Larrysyr wrote:

> When the loans are packaged into MBS, the link between the loan originator
> and the borrower is broken. The originator doesn't care whether the
> loan gets repaid, only whether it can be sold to the secondary market.
>
>
> I suspect the libertarian approach would be to endorse the securitization
> of these loans as an operation of free markets. I'm don't disagree
> with this perspective, but the actual reality is that bad actors
> get enough rewards in most situations to entice others to follow
> the lead.
>
> The rational ideal would be that if you make bad loans, Darwinian
> selection would weed you out of the lending pool. The incentives
> in markets, however, are not calibrated to such rational outcomes.
> The incentives are skewed heavily toward short-term results. The
> accumulation of these short-term results over a long-term time frame
> can be highly counter-productive.

Aug 26 05:13 PM

[joof:]

Libertarians live in Fantasyland ... A world of perfect markets, rational actors, perfect information, trust , honesty, transparency, stable currencies, instant communications and where agents act literally for the benefit of their principals ( not for a moment incorporating the agent's own self interest). There are no monoplies, conspiracies, public goods or externalities in the magical domain

I want to move there soon. Where is it?

Definitely not bubbleland America circa 2003-07

Aug 27 08:43 PM