May 2009 Housing Prices, Housing Cycles, and Consumption Erik Hurst What Am I Going To Do? Note: Orazio and I coordinated a little bit. Start by talking about the ∂H component of the ∂C/∂H relationship . o How predictable are changes in housing prices? o Why do housing prices cycle?
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Housing Prices, Housing Cycles, and Consumption
Note: Orazio and I coordinated a little bit.
Start by talking about the ∂H component of the ∂C/∂H relationship.
o How predictable are changes in housing prices?
o Why do housing prices cycle?
o Why do housing prices increase more in one area relative to another for a given demand shock?
How do we identify casual relationships between ∂H and ∂C?
o Housing prices are not exogenously determined by God.
Should we expect ∂C/∂H to by symmetric with respect to H↑ and H↓?
U.S. persistent housing price declinesNominal House Price Appreciation: 1976 - 2008
U.S. persistent housing price declinesReal House Price Appreciation: 1976 - 2008
Fixed Supply (Short Run)
Fixed Supply (Short Run)
Fixed Supply (Short Run)
Demand shocks cause large price increases when supply is fixed
Supply Eventually Adjusts
Build on Vacant Land
Convert Rental or Commercial Property
Build Out (Suburbs)
Build Way Out (Create New Cities)
Some of these adjustments can take consider amounts of time.
Adjusted for Population Changes (2000-2005, State Level)
Adjusted for Population Changes (2005-2007, State Level)
Differential Supply Constraints Across Regions
Glaeser, Gyourko, Saiz: Geographical constraints (water, gradient of land, etc.)
Glaeser, Gyourko: Regulation
Formalizing Supply ConstraintsGuerrieri and Hurst “Endogenous Gentrification”
As prices become expensive in one area, people are willing to move to under-developed neighborhoods.
There is an inherent coordination problem in the formation of new neighborhoods (people have preferences to live around people who value similar amenities).
Process also is dependent on the uncertainty of the extent of the demand shock.
Both the uncertainty and the coordination can slow down the formation of new neighborhoods (which relax supply constraints).
Supply adjusts in the long run to temper changes in house prices. The supply adjustment may occur more slowly in some metro areas than others.
There is a large amount of heterogeneity within metro areas with respect to housing price changes.
As Orazio already discussed, even if the housing price changes are temporary, they could affect household consumption because it relaxes liquidity constraints.
If there is a wealth effect, how long will housing prices fall?
Using OFHEO price index, real housing prices rose by 44% between 1997 and 2006 (for the entire U.S.).
My model predicts that housing prices will fall by roughly 25-30% (in real terms) over the next 5-7 years.
So far, the real OFHEO price index has fallen by roughly 10-15% (from peak to current levels).
More “real” residential price declines to come!
Model predicts that nominal prices should stabilize by years end.
Most just run: C = f(H, X)
Some use different identification: Old vs. Young
Renters vs. Homeowners
Use exogenous variation in supply conditions across metro areas.
Have detailed data from Equifax on household financial characteristics (debt, homeownership, etc.) merged with income data (as zip code level) from IRS.
Use a combination of zip code and MSA level characteristics to isolate “supply” causes for housing price differentials.
Does not measure consumption – only total debt.
Comments: This estimate comes from using their instruments (one of which is the Siaz supply constraint measure).
They do not measure consumption.
Some of the equity removed could be used to form a business or remodel a house.
If it was all consumption, their result is HUGE: House price growth contributed an additional 2.3% to GDP every year between 2000 and 2006.
Their instruments are not perfect (but are pretty good).
MPD where much higher for young, households with low credit scores, and high initial credit card utilization.
Essentially zero MPD for older and non-liquidity constrained households.
Comments: Liquidity constraint story for housing wealth is consistent with other results in literature (Hurst and Stafford, JME).
Comment : Thinking about this default option is important in computing wealth effects of consumption during housing price declines.
Should we expect the results to be symmetric?
Will consumption fall from previous level (because they are now constrained)?
A few months (up to 9 months) of no housing payments.
Move to an equal size housing structure at lower monthly cost.
Wealth loss to those that own the housing debt!
Consumption response will be smaller (spread out the losses over their lives – MPC out of wealth loss will be small).
MPC out of housing wealth changes (using exogenous changes in housing wealth) will be much LARGE during housing booms than housing busts.
During housing busts, the option to default can provide liquidity (insurance) to constrained (poor) households. Insurance provided by households with lower MPC’s out of changes in wealth.
I am not sure.
Would be a good area for research.
Could be general equilibrium effects (make banks fail…causing firms to fail….causing income to fall ; create uncertainty).
These effects will be born by homeowners and non-homeowners alike.