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Housing Prices: Global Correction, Local Consequences Presentation by: Prakash Loungani This presentation draws on work-in-progress with my IMF colleagues Charles Collyns, Marcello Estevao and Deniz Igan. The views presented here are those of the authors and should not be attributed to the IMF.

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Housing prices global correction local consequences l.jpg

Housing Prices:Global Correction, Local Consequences

Presentation by:

Prakash Loungani

This presentation draws on work-in-progress with my IMF colleagues Charles Collyns, Marcello Estevao and Deniz Igan. The views presented here are those of the authors and should not be attributed to the IMF.

We thank Jair Rodriguez for excellent research assistance and Hites Ahir for helpful discussions.

George Washington University

Research Program in Forecasting

November 18, 2008


Outline l.jpg
outline

1. a global boom and bust

2. how much further will house prices fall?

  • consequences of house price declines

    a. adjustment of residential investment in OECD countries

    b. adjustment of unemployment in U.S. states


Data sets l.jpg
data sets

  • selected OECD countries, quarterly data,1970 to present (shorter time series in some cases)

  • ’51’ U.S. states, quarterly data,1975 to present


1 global boom and bust l.jpg

1. global boom and bust

oecd countries: prices & quantities






Globally a residential investment boom l.jpg
globally, a residential investment boom ...



Prices and quantities up together l.jpg

120

Change in Housing Prices and Residential Investment 00-06

100

ESP

FRA

80

GBR

DNK

IRE

60

SWE

CAN

ITA

NOR

Housing prices

USA

40

FIN

20

CHE

0

-20

0

20

40

60

80

100

DEU

-20

-40

Residential Investment

prices and quantities:up together ...


Prices and quantities down together l.jpg

3

Change in Housing Prices and Residential Investment 07-08

2

CHE

1

0

ITA

-35

-30

-25

-20

-15

-10

-5

0

5

10

-1

DEU

FRA

Housing prices

-2

SWE

GBR

-3

DNK

USA

FIN

-4

CAN

ESP

-5

IRE

NOR

-6

-7

Residential Investment

prices and quantities: down together ...


2 how much further will house prices fall l.jpg

2. how much further will house prices fall?

evidence from past cycles

evidence from short-run model

evidence from long-term relationships

a more careful look for U.S. (based on work by Deniz Igan)


Evidence from past cycles l.jpg
Evidence from past cycles

  • OECD (2005)

  • Claessens, Kose and Terrones (2008)









Price to rent ratio adjustment to benchmark l.jpg
price-to-rent ratio: adjustment to benchmark


3 consequences l.jpg

3. consequences

residential investment: OECD countries

unemployment: U.S. states (based on Estevao and Loungani)


3a residential investment l.jpg

3a. residential investment

What explains the cross-country variation in the impact of house price busts on residential investment?


Slide28 l.jpg
cross-country variation in residential investment impacts of housing busts: role of interest payment to GDP ratio


Slide29 l.jpg
cross-country variation in residential investment impacts of housing busts: role of mortgage debt- to-GDP ratio


Slide30 l.jpg
cross-country variation in residential investment impacts of housing busts: role of mortgage market characteristics


3b unemployment l.jpg

3b. unemployment housing busts:

What explains the cross-state and cross-region variation in the impacts of house price busts unemployment?



Slide33 l.jpg

Real Housing Prices and Unemployment Rates in the U.S. Regions

New England

12

360

(Index)

(In percent)

Housing Bust

Unemployment recession cycle

320

10

Unemployment rate (LHS)

Smoothed unemployment (LHS)

280

Previous peak

8

Trough

1988Q2

Real house price index (RHS)

240

6

200

4

1979Q1

160

1995Q1

2

120

1981Q4

0

80

Jan-76

Jan-79

Jan-82

Jan-85

Jan-88

Jan-91

Jan-94

Jan-97

Jan-00

Jan-03

Jan-06

Middle Atlantic

14

360

(Index)

(In percent)

Housing Bust

Unemployment recession cycle

12

320

Unemployment rate (LHS)

Smoothed unemployment (LHS)

10

280

Previous peak

Trough

Real house price index (RHS)

8

240

1988Q2

6

200

4

160

1979Q1

1995Q1

2

120

1981Q4

0

80

Jan-76

Jan-79

Jan-82

Jan-85

Jan-88

Jan-91

Jan-94

Jan-97

Jan-00

Jan-03

Jan-06

East North Central

14

360

(Index)

(In percent)

Housing Bust

Unemployment recession cycle

12

320

Unemployment rate (LHS)

Smoothed unemployment (LHS)

10

280

Previous peak

Trough

Real house price index (RHS)

8

240

6

200

4

160

1979Q2

2

120

1982Q4

0

80

Jan-76

Jan-79

Jan-82

Jan-85

Jan-88

Jan-91

Jan-94

Jan-97

Jan-00

Jan-03

Jan-06

Note: Real housing prices defined as the OFHEO home price index in a census division divided by the CPI

of the larger census region.

Sources: Office of Federal Housing Enterprise Oversight (OFHEO); Bureau of Labor Statistics; and Haver

Analytics.


Slide34 l.jpg

Real Housing Proces and Unemployment Rates in the U.S. Regions (cont.)

West North Central

12

360

(Index)

(In percent)

Housing Bust

Unemployment recession cycle

320

10

Unemployment rate (LHS)

Smoothed unemployment (LHS)

280

Previous peak

8

Trough

Real house price index (RHS)

240

6

200

4

160

1979Q2

1988Q2

2

1982Q3

120

1990Q4

0

80

Jan-76

Jan-79

Jan-82

Jan-85

Jan-88

Jan-91

Jan-94

Jan-97

Jan-00

Jan-03

Jan-06

1976Q1

1979Q1

1982Q1

1985Q1

1988Q1

1991Q1

1994Q1

1997Q1

2000Q1

2003Q1

2006Q1

South Atlantic

12

360

Unemployment: recession cycle

(Index)

(In percent)

Unemployment rate (LHS)

320

10

Smoothed unemployment (LHS)

Previous peak

280

Trough

8

Real house price index (RHS)

240

6

200

4

160

1979Q1

1989Q3

1993Q4

2

120

1990Q4

1995Q1

1981Q3

0

80

Jan-76

Jan-79

Jan-82

Jan-85

Jan-88

Jan-91

Jan-94

Jan-97

Jan-00

Jan-03

Jan-06

1976Q1

1979Q1

1982Q1

1985Q1

1988Q1

1991Q1

1994Q1

1997Q1

2000Q1

2003Q1

2006Q1

East South Central

360

14

(In percent)

Unemployment: recession cycle

(Index)

Unemployment rate (LHS)

320

12

Smoothed unemployment (LHS)

Previous peak

280

10

Trough

Real house price index (RHS)

240

8

200

6

160

4

1979Q1

1999Q1

1988Q1

120

2

2000Q2

1981Q4

1990Q4

0

80

Jan-76

Jan-79

Jan-82

Jan-85

Jan-88

Jan-91

Jan-94

Jan-97

Jan-00

Jan-03

Jan-06

Note: Real housing prices defined as the OFHEO home price index in a census division divided by the CPI

of the larger census region.

Sources: Office of Federal Housing Enterprise Oversight (OFHEO); Bureau of Labor Statistics; and Haver

Analytics.


Slide35 l.jpg

Real Housing Prices and Unemployment Rates in the U.S. Regions (cont.)

West South Central

12

360

(Index)

(In percent)

Housing Bust

Unemployment recession cycle

320

10

Unemployment rate (LHS)

Smoothed unemployment (LHS)

280

Previous peak

8

Trough

Real house price index (RHS)

240

6

200

4

160

1979Q1

1983Q1

2

120

1981Q1

1990Q4

0

80

Jan-76

Jan-79

Jan-82

Jan-85

Jan-88

Jan-91

Jan-94

Jan-97

Jan-00

Jan-03

Jan-06

1976Q1

1979Q1

1982Q1

1985Q1

1988Q1

1991Q1

1994Q1

1997Q1

2000Q1

2003Q1

2006Q1

Mountain

12

360

(Index)

(In percent)

Unemployment: recession cycle

Unemployment rate (LHS)

320

10

Smoothed unemployment (LHS)

Previous peak

280

Trough

8

Real house price index (RHS)

240

6

200

4

160

1983Q1

1987Q1

2

120

1985Q4

1990Q4

0

80

Jan-76

Jan-79

Jan-82

Jan-85

Jan-88

Jan-91

Jan-94

Jan-97

Jan-00

Jan-03

Jan-06

Pacific

12

360

Housing Bust

(Index)

(In percent)

Unemployment recession cycle

320

Unemployment rate (LHS)

10

Smoothed unemployment (LHS)

Previous peak

280

Trough

8

Real house price index (RHS)

240

6

200

1989Q4

4

160

1981Q2

2

120

1995Q1

1982Q3

0

80

Jan-76

Jan-79

Jan-82

Jan-85

Jan-88

Jan-91

Jan-94

Jan-97

Jan-00

Jan-03

Jan-06

Note: Real housing prices defined as the OFHEO home price index in a census division divided by the CPI

of the larger census region.

Sources: Office of Federal Housing Enterprise Oversight (OFHEO); Bureau of Labor Statistics; and Haver

Analytics.


Slide36 l.jpg

U.S. Regional Recessions Regions (cont.)

4

4

Unemployment rate (percent)

5

5

Average for regional recessions without

a housing bust

6

6

7

7

8

8

9

9

Average for regional recessions with a housing bust

10

10

-12M

Onset

12M

24M

36M

48M


Slide37 l.jpg

Regional Housing Busts and Unemployment Rates Regions (cont.)

30

50

Real House price index

Census division : Beginning to trough

(

cumulative percent change vis

-

à

-

vis

New England: 1988q2 - 1995q1

45

beginning of housing bust)

20

Middle Atlantic: 1988q2 - 1995q1

East North Central: 1979q2 - 1982q4

40

West North Central: 1979q2 - 1982q3

10

West South Central: 1983q1 - 1990q4

35

Pacific: 1989q4 - 1995q1

0

30

-10

25

20

-20

15

-30

10

-40

5

-50

0

-16Q

-12Q

-8Q

-4Q

0Q

4Q

8Q

12Q

16Q

20Q

24Q

28Q

32Q

36Q

40Q

44Q

Beginning

of cycle

16

Unemployment rate

Housing busts:

Census division: Beginning to trough

(around housing busts)

14

New England: 1988q2 - 1995q1

Middle Atlantic: 1988q2 - 1995q1

East North Central: 1979q2 - 1982q4

12

West North Central: 1979q2 - 1982q3

West South Central: 1983q1 - 1990q4

Pacific: 1989q4 - 1995q1

10

8

6

4

2

0

-16Q

-12Q

-8Q

-4Q

0Q

4Q

8Q

12Q

16Q

20Q

24Q

28Q

32Q

36Q

40Q

44Q

Beginning

of cycle

Note: Events are centered at a peak in the real housing prices that was followed by a bust in one of the nine Census

divisions. Real housing prices defined as the OFHEO home price index in a Census division divided by the CPI of the

larger Census region.

Sources: Office of Federal Housing Enterprise Oversight (OFHEO); Bureau of Labor Statistics; and Haver Analytics.


Slide38 l.jpg

Length of Regional Unemployment cycles. Regions (cont.)

Unemployment cycles (excluding cycles occurring around housing busts)

(In months)

Census division

Start 1/

Trough 2/

End 3/

Contraction 4/

Recovery 5/

Complete Cycle 6/

New England

Jul-81

Jun-82

Jan-84

11

19

30

New England

Apr-02

Apr-03

Mar-07

12

50

62

Middle Atlantic

Sep-81

Jan-83

Dec-84

16

23

39

Middle Atlantic

Nov-01

Dec-02

Jan-05

13

25

38

East North Central

Feb-91

May-92

Apr-94

15

23

38

East North Central

Oct-01

Jul-03

May-06

21

34

55

West North Central

Oct-90

Feb-91

Mar-94

5

37

42

West North Central

Oct-01

Jul-03

May-06

21

34

55

South Atlantic

Feb-81

Dec-82

Jan-85

22

25

47

South Atlantic

Nov-90

Mar-92

Dec-94

16

33

49

South Atlantic

Aug-01

Jul-03

Sep-05

23

26

49

East South Central

Jul-80

Jan-83

Jun-87

30

53

83

East South Central

Feb-91

Jul-91

Jul-93

5

24

29

East South Central

Sep-01

Aug-03

Sep-06

23

37

60

West South Central

Mar-82

Jul-83

May-84

16

10

26

West South Central

Jul-91

Jun-92

Jul-94

11

25

36

West South Central

Nov-01

Jun-03

Apr-06

19

34

53

Mountain

Dec-81

Jan-83

Dec-83

13

11

24

Mountain

Jan-85

Jan-87

Jun-88

24

17

41

Mountain

Sep-91

May-92

Sep-93

8

16

24

Mountain

Aug-01

Mar-03

Dec-05

19

33

52

Pacific

Sep-81

Jan-83

May-85

16

28

44

Pacific

Oct-01

May-03

Feb-05

19

21

40

Average

16

28

44

Unemployment cycles ocurring around housing busts

(In months)

Census division

Start 1/

Trough 2/

End 3/

Contraction 4/

Recovery 5/

Complete Cycle 6/

New England

Apr-90

Nov-91

Mar-96

19

52

71

Middle Atlantic

Jan-91

Jun-92

Aug-96

12

55

67

East North Central

May-80

Nov-82

Aug-86

30

45

75

West North Central

May-80

Nov-82

Sep-87

30

58

88

West South Central

Dec-84

Jul-86

Mar-89

19

32

51

Pacific

Mar-91

Nov-92

Dec-96

20

49

69

Average

22

49

70

1/ Point where actual unemployment rate is higher than smoothed unemployment rate. Unemployment rate

was smoothed using the HP filter.

2/ Period with highest unemployment rate during the cycle.

3/ Actual unemployment rate falls below smoothed unemployment rate.

4/ Number of months from the beginning of the cycle to the trough.

5/ Number of months from the trough to the end of the cycle (recovery).

6/ Amplitude of total cycle (contraction + recovery).


Slide39 l.jpg

Estimating the Effect of Past Changes in Real Housing Prices on Recession and Recovery Length using U.S. Regional Data.

Dependent variable:

Recession length (number of months)

Recovery length (number of months)

(1)

(2)

(3)

(4)

(5)

(6)

?

rhp

0.52

0.19

0.33

-0.04

-1

(0.59)

(0.58)

(0.47)

(0.42)

?

rin

-3.69

**

-2.57

*

-3.57

**

-2.88

**

-1

(1.27)

(1.27)

(0.92)

(0.92)

bust

*

?

rhp

-4.35

**

-2.93

*

-3.30

**

-1.90

*

-1

(1.12)

(1.22)

(0.88)

(0.88)

bust

*

?

rin

-0.31

0.31

0.69

1.24

-1

(2.23)

(2.07)

(1.60)

(1.49)

Number of observations

28

28

28

28

28

28

2

Adjusted R

0.35

0.31

0.43

0.34

0.41

0.51

?

rhp

= percent change in real housing prices in the 12 months leading to the recession.

-1

?

rin

= percent change in real regional income in the 12 months leading to the recession.

-1

Real housing price and regional income respectively measured as the OFHEO home price index and personal income in the division

divided by the CPI of the larger census region.

There are 9 Census divisions and 4 census regions.

Figures in parenthesis are standard errors. * means 5 percent level of significance and ** means 1 percent level of significance.


Slide40 l.jpg

Estimating the Effect of Past Changes in Real Housing Prices on Recession and Recovery Length using U.S. Regional Data.

Dependent variable:

Recession length (number of months)

Recovery length (number of months)

(1)

(2)

(3)

(4)

(5)

(6)

?

rhp

-0.57

-0.28

0.49

-0.39

-1

(0.56)

(0.51)

(0.43)

(0.38)

?

rin

-5.73

-4.79

-4.15

-3.24

**

**

**

**

-1

(1.33)

(1.53)

(1.00)

(1.13)

2

(

?

rhp

)

0.28

0.12

0.23

0.10

*

**

-1

(0.11)

(0.11)

(.08)

(0.08)

2

(

?

rin

)

0.62

0.50

0.26

0.13

*

-1

(0.30)

(0.33)

(0.23)

(0.25)

Number of observations

28

28

28

28

28

28

2

Adjusted R

0.18

0.40

0.39

0.21

0.43

0.45

?

rhp

= percent change in real housing prices in the 12 months leading to the recession.

-1

?

rin

= percent change in real regional income in the 12 months leading to the recession.

-1

Real housing price and regional income respectively measured as the OFHEO home price index and personal income in the division

divided by the CPI of the larger census region.

There are 9 Census divisions and 4 census regions.

Figures in parenthesis are standard errors. * means 5 percent level of significance and ** means 1 percent level of significance.


Housing bust magnifies impact of recessions on unemployment l.jpg
Housing bust magnifies impact of recessions on unemployment on Recession and Recovery Length using U.S. Regional Data.


Shock to employment l.jpg
Shock to employment on Recession and Recovery Length using U.S. Regional Data.

Response House Prices Response Employment

Response unemployment

Response labor force participation


Shock to house prices l.jpg
Shock to house prices on Recession and Recovery Length using U.S. Regional Data.

Response House Prices Response Employment

Response unemployment

Response labor force participation


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