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Housing and the macroeconomy Jeff Fuhrer, EVP and senior policy advisor Federal Reserve Bank of Boston N ovember 28, 2012. Outline for our time today. Recap of the housing crisis, and review of a few subprime myths and facts Quick look at the current state of the housing markets

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Housing and the macroeconomyJeff Fuhrer, EVP and senior policy advisorFederal Reserve Bank of BostonNovember 28, 2012


Outline for our time today
Outline for our time today

  • Recap of the housing crisis, and review of a few subprime myths and facts

  • Quick look at the current state of the housing markets

  • Review the macroeconomic backdrop to housing

  • Primer on recent Federal Reserve actions


Subprime facts and myths why an lmi mortgage program might make sense
Subprime “facts” and mythsWhy an LMI mortgage program might make sense

  • The subprime population is too high risk, and should not get mortgages

    • Historical default rates for subprime about 2% in US

  • Subprime mortgages are “exotic”: Option-ARMs, Neg-Ams, IO, etc.—we should stay away from such predatory products

    • NO: In fact, VERY FEW of subprimes were this type of mortgage

    • Almost all were 2/28 or 3/27 ARMS

  • OK, but that’s why they defaulted—the ARM resets!

    • NO: Little or no evidence of any reset effect

    • (In fact, many reset to lower interest rates)

  • Securitization was a bad idea—Subprime MBS securities all lost huge amounts, and were a dumb idea

    • NO: In fact, losses on AAA “vanilla” MBS < 10%


Default rates
Default rates

Normal times: subprime rates are higher, but manageable

Crisis times:

Everyone is

in a mess

Source: Mortgage Bankers Association, Haver Analytics


Resets not the problem
Resets—not the problem

  • No link between reset date and default

  • Defaults increased in 2007/8—because house prices fell, unemployment rose

  • Thus the rapid increase in prime defaults as well (not shown)

Source: Foote and Willen (2012)


Did securitization work a look at mbs performance
Did securitization work?A look at MBS performance

Losses much worse on CDOs

Losses less than 10% on AAA

Why: Credit protection worked

Private label RMBS

Foote and Willen (2012)


How is housing doing now
How is housing doing now?

  • Better—permits are rising, inventories are lean

Source: Census Bureau, Haver Analytics


How is housing doing now1
How is housing doing now?

  • Prices are flattening or turning up modestly

Source: FHFA, Core Logic, Haver Analytics


How is housing doing now2
How is housing doing now?

  • Vacancies have improved nationwide (less so in VT, NH)

  • Still a lot of REO/property held off the market

Source: Census Bureau, Haver Analytics



We have to start with labor markets
We have to start with labor markets

Source: Bureau of Labor Statistics, Haver Analytics


Why is unemployment so stubbornly high it s not job loss these days
Why is unemployment so stubbornly high?It’s not job loss these days

Recession ends

Source: Bureau of Labor Statistics, Haver Analytics


It s the failure to create new jobs
It’s the failure to create new jobs

Recession ends

Source: Bureau of Labor Statistics, Haver Analytics


This also explains the remarkable length of unemployment spells
This also explains the remarkable length of unemployment spells

Source: Bureau of Labor Statistics, Haver Analytics


Supports and drags contribution of components to growth versus historical average
Supports and Drags spellsContribution of components to growth versus historical average

Source: Bureau of Economic Analysis, Haver Analytics


Supports and drags contribution of components to growth versus historical average1
Supports and Drags spellsContribution of components to growth versus historical average

  • Consumer spending has been fair to middling, given overall strength

  • And you know about housing!

Source: Bureau of Economic Analysis, Haver Analytics


The pattern of support is switching about now
The pattern of support is switching about now spells

Source: Census Bureau, Michigan Survey Research Center, Federal Reserve Board, Haver Analytics


Why this shift
Why this shift? spells

  • Household wealth has improved a bit (housing values, stock market)

  • The “fiscal cliff” matters less to households?

  • But it matters to businesses

  • The global slowdown affects export-dependent businesses, consumers less so


Inflation remains well contained
Inflation remains well-contained spells

Source: Bureau of Economic Analysis, Haver Analytics


Key risks
Key Risks spells

Source: Wall Street Journal, Haver Analytics


Federal reserve actions extensions of conventional policy
Federal Reserve Actions: spellsExtensions of conventional policy

Congressionally-mandated goals

(Dual Mandate)

Price stability

(low and stable inflation)

Maximum sustainable employment

Primary policy instrument

Alternative Policy Instruments

Federal Funds rate

(overnight bank rate)

QE

“Forward Guidance”

Long-term interest rates, stock prices, exchange rate

X


How does qe work
How does QE work? spells

  • We buy long-term assets

    • Removes them from circulation in private markets

    • But private agents still want them

    • So they’re willing to accept them for a lower yield

  • Bottom line: we’re trying to reduce long-term rates

Private Markets’

Securities

Fed’s Securities


In summary
In summary spells

  • The recovery has been frustratingly slow

  • Our tools to address weakness are somewhat limited

  • But we are doing what we can

  • Recently, we have paid particular attention to employment shortfalls

    • Not because we don’t care about inflation

    • But because the gap between the goal for employment is so large


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