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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 DragsContribution 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 DragsContribution 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

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

why this shift
Why this shift?
  • 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

Source: Bureau of Economic Analysis, Haver Analytics

key risks
Key Risks

Source: Wall Street Journal, Haver Analytics

federal reserve actions extensions of conventional policy
Federal Reserve Actions:Extensions 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?
  • 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
  • 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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