Decline In House Prices Research Articles

International Real Estate Review

Canadian and U.S. real estate markets have compared similarly along dimensions such as inflation, mortgage interest rates, population and income growth and other measures. With respect to house prices, however, the series have moved in similar ways at some times, but then significantly diverged by the second quarter of 2007. For example, Canadian and U.S. house price indices reached essentially identical levels in 1987Q2, 1995Q1 and 2007Q2. As a consequence of the U.S. financial crisis and precipitous decline in house prices, the U.S. and Canadian indices have sharply diverged. Our paper examines whether or not the house price indices were driven by fundamentals during these time periods, or whether they diverged from fundamentals. We find that the U.S. house prices closely aligned with fundamentals until the mortgage markets crashed in 2008. We find that Canadian house prices continue to align with fundamentals. However, there have been some significant market changes between the two countries and key housing market measures indicate that Canadian markets are now moving along some paths similar to those taken by the U.S. prior to the crash.

Negative Equity and Housing Investment

Housing is a depreciating asset. The rate of depreciation depends on the degree to which households engage in housing investments. Housing investment expenditures economy-wide are sizable, averaging 45 percent of the value of new home construction over the past twenty years. The housing bust and recession coincided with a significant decline in housing investment. Using Consumer Expenditure Survey data from 2007 to 2012, we find that negative equity households reduce their housing investments by roughly 75 percent. The large increase in negative equity due to declining housing prices during the housing bust resulted in a cumulative decline of housing investment expenditures from 2006 to 2010 of $ 51.2 billion.

Global Imbalances, Housing Prices, and Partisan Fiscal Policies

In recent years, global imbalances have channeled the excess savings of surplus countries toward the real estate markets of deficit countries. By consequence, the deficit countries that attracted lots of foreign capital experienced large run-ups in house prices while the surplus countries that exported capital exhibited flat or slow house price growth. We use new house price data to show that house prices are strongly associated with capital inflows, particularly through debt bonanzas. We argue that international capital flows affect the fiscal policy preferences of both voters and political parties by way of their impact on housing prices. Where capital inflows are large and housing prices are rising, we expect voters to respond by demanding both lower taxes and less publicly-provided social insurance because rising house prices allow homeowners to “self insure” against income loss. By contrast, declining house prices produce greater demands for social insurance, particularly among those most exposed to housing market risk. We present evidence from two cross-national surveys that supports this claim, including a ‘before and after’ analysis of the housing crash in Eastern Europe. Finally, we show that the connection between house prices and social policy also manifest itself in government spending outcomes, mediated by partisan control.

From Divestment to Due Resolution:King Learand the New York Fabulists, 1989-92

I would unstate myself to be in a due resolution.-Gloucester in King Lear (1.2.102-03)before even a frame of the godfather part iii had been screened in late 1990, Francis Ford Coppola made a highly publicized connection between his new film and Shakespeare's King Lear. In Peter Cowie's book on Coppola, the director is quoted thus:Michael Corleone's instincts were always to be legitimate, so it would be odd now, when he's almost in the King Lear period of his life, if his prime aim and purpose were not indeedto become legitimate. The result is a very classical piece, in the tradition of a Shakespeare play. Before I began writing I read a lot of Shakespeare, looking for inspiration to Edmund in King Lear, Lear himself, Titus Andronicus, even Romeo and Juliet. (242)Filmmakers and film publicists like to throw this kind of allusion around, and it is worth noting that when Coppola recorded a commentary track over the film for the 2001 DVD release, although he spoke fleetingly and lovingly of Shakespeare and Hamlet in particular, he made no specific reference to King Lear at all. Nevertheless, the Lear allusion was picked up in reviews of the film in the early 1990s and has persisted in critical work on the influence of Shakespeare in Hollywood cinema ever since (Mizejewski 28-31;Rothwell 220-21, 226; Risko; Griggs, "Western Elegy"; Griggs, "Humanity"). The emphasis on themes of guilt, aging, renunciation, illness, family destruction, and redemption (or at least reconciliation) in The Godfather Part III indicates the usefulness of a comparison with King Lear. Furthermore, the timing of the film's production and release during the recession of the early 1990s-when the global economy was beset by mounting unemployment, home repossessions, high interest rates and mortgage default statistics, declining house prices, and stagnant housing sector construction-suggests ways in which the comparison might be even more fruitful and of more general use (Kamery; Eberts and Groshen). King Lear is, after all, a play that is very much concerned with economic crisis in both the contemporary and classical senses of those words.To elaborate on the context of Francis Coppola's high-profile "Lear dropping" and the global recession in which he made the allusion, it is important to point out that the late 1980s and early 1990s were notable years in King Lear's stage production history. For a tragedy by Shakespeare that is critically almost sacrosanct, it is not subject to nearly the same regularity of stage and screen production as Hamlet, Macbeth, or Romeo and Juliet. In the English summer of 1990 alone, however, there were three major stage productions of the play running at the same time-namely, those of Kenneth Branagh's Renaissance Theatre Company, the Royal National Theatre, and the Royal Shakespeare Company. These productions followed stage adaptations of Shakespeare's play by Tadashi Suzuki (The Tale of Lear) in the United States and Japan and by Barry Keefe (King of England) at Stratford Upon Avon in 1988, as well as the overdue UK premiere of Aribert Reimann's opera Lear for the English National Opera in 1989, a Hindi adaptation directed by Amal Allana performed in Delhi the same year, and finally, a New York production directed by Lee Breuer and a production of Howard Barker's Seven Lears at London's Royal Court Theatre, both in early 1990.1As Shakespeare's apparently recession-proof tragedy was dominating the stage and Coppola was contemplating his new Corleone film, Coppola was also participating in the omnibus production New York Stories (1989) with Martin Scorsese and Woody Allen. What is interesting about this spiritual rather than literal (Bjorkman 202) union in the financial capital of the world in the early 1990s is what came after it for each of the filmmakers. Following New York Stories each of these New York fabulists released a film about crime-GoodFellas (1990), The Godfather Part III, and Crimes and Misdemeanors (1989)- and followed that with a fairy tale of magic, fantasy, and the extremities of desire: Alice (1990), Cape Fear (1991), and Bram Stoker's Dracula (1992) (Thompson and Christie 165; Keyser 199). …

Effect of High Gasoline Prices on Low-Density Housing Development

Real estate development in suburban and exurban fringe areas defined the latest housing boom in the United States. The development of vast subdivisions of greenfield parcels in counties distant from urban cores and employment centers led to an upward trend in driving distances. A gradually developing and then dramatic run-up in the price of oil from 2003 to 2008 precipitated a gasoline price shock. The convergence of rising gasoline prices and a glut of newly constructed, low-density tract housing led to an equally dramatic decline in new housing starts in areas far from center cities and the older suburbs. Whereas the gasoline price shock affected the number of housing starts, the recession is responsible for the decline in housing prices; the two concepts act independently of one another. By correlating gasoline prices, housing starts in rural counties as compared to urban centers, vehicle efficiency, and vehicle miles traveled data, I have determined that the demand for sprawl development declines substantially as the price of gasoline rises over time. Households not seeking to move are not likely to move purely because of changes in gasoline prices; however, people who have plans to change residence take gasoline prices into account when choosing a new neighborhood. The recent global peak oil production milestone acknowledged by the International Energy Agency (IEA) has significant implications for transportation costs and, therefore, the future efficacy of auto-oriented suburban housing development. Whether these emerging trends continue into the future remains to be seen.

The Impact of Housing Markets on Consumer Debt: Credit Report Evidence from 1999 to 2012

We investigate the impact of large swings in the housing market on nonmortgage borrowing, including student, credit card, auto, and home equity debts. For this purpose, we use CoreLogic geographic house price variation, matched with rich data on consumer liabilities from the Equifax-sourced FRBNY Consumer Credit Panel. The length and timing of our panel allow us to study the consumer debt portfolio response to house price changes during a boom-and-bust cycle of historic magnitude as well as during more ordinary times. In first-differenced instrumental variables estimation, we find that during 1999-2001, homeowners substituted out of nonhousing (largely credit card) debt and into home equity-based debt at a nearly dollar-for-dollar rate in response to house price increases. During the housing boom of 2002-06, however, homeowners abandoned the practice of substituting into less costly debt as equity grew, and instead increased obligations across the board. From 2007-12, sample homeowners experienced a 23 percent average house price decline, and withdrew from home equity debt without adding to non-housing debt. We observe substantial heterogeneity in this pattern: Substitution in both 1999-2001 and 2007-12 ranges from 50 cents to more than dollar-for-dollar for older and prime borrowers, while the decidedly nonprime borrow more modestly, show less evidence of substitution, and shed large amounts of all types of debt from 2007-12. Finally, difference-in-differences and FD-IV estimates are consistent with both 1) a 2012 relative debt overhang of at least $1,800 on average, despite little remaining home equity advantage, for homeowners who experienced a more pronounced boom-and-bust cycle and 2) little substitution out of home equity debt into student loans in response to recent house price declines.

From Wall Street to Main Street: The Impact of the Financial Crisis on Consumer Credit Supply

This paper studies how the collapse of the asset backed securities (ABS) market during the financial crisis of 2007-2009 affected the supply of credit to the broader economy using a new dataset that describes unique interbank relationships within the credit union industry. This industry is important for consumer finance, and we find that ABS related losses at correspondent credit unions are associated with a large contraction in the supply of consumer credit and a hoarding of cash among downstream credit unions. We also find that this contraction in credit supply was concentrated among downstream credit unions that began the crisis with lower capital asset ratios, and that it may have amplified the initial decline in house prices. These results suggest that capital regulation might shape the ability of financial institutions to transmit securities price volatility onto the real economy.

Time-Varying Effects of Housing and Stock Prices on U.S. Consumption

This paper applies a time-varying parameter vector autoregressive (TVP-VAR) approach to estimate the relative effects of housing and stock prices on US consumption over time. We use annual data from 1890 to 2012 and find that over different horizons and over time, generally the housing price positively affects consumption while the stock price negatively affects consumption. These opposite responses to changes in housing and stock prices suggest different mechanisms through which wealth affects consumption. Further, the housing price effect proves larger in absolute value than the stock price effect after 1980. Between 1980 and 2007, housing wealth generally exerted a larger effect on consumption. This sub-period includes the 1997/2002 asset price boom/bust where house prices continued to rise moderately as stock prices fell. Finally, the co-occurrence of the decline in both housing and stock prices during the 2007-2009 episode produced bigger effects of the housing price for the first five years of the impulse responses while the higher magnitude of the stock price effect appears in the 6-year horizon. These findings suggest that the magnitude of the relative price effects differs with both time and horizons and also depends on whether prices increase or decrease.

Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program

The main rationale for policy intervention in debt renegotiation is to enhance such activity when foreclosures are perceived to be inefficiently high. We examine the ability of the government to influence debt renegotiation by empirically evaluating the effects of the 2009 Home Affordable Modification Program that provided intermediaries (servicers) with sizeable financial incentives to renegotiate mortgages. A difference-in-difference strategy that exploits variation in program eligibility criteria reveals that the program generated an increase in the intensity of renegotiations while adversely affecting effectiveness of renegotiations performed outside the program. Renegotiations induced by the program resulted in a modest reduction in rate of foreclosures but did not alter the rate of house price decline, durable consumption, or employment in regions with higher exposure to the program. The overall impact of the program will be substantially limited since it will induce renegotiations that will reach just one-third of its targeted 3 to 4 million indebted households. This shortfall is in large part due to low renegotiation intensity of a few large servicers that responded at half the rate than others. The muted response of these servicers cannot be accounted by differences in contract, borrower, or regional characteristics of mortgages across servicers. Instead, their low renegotiation activity--which is also observed before the program--reflects servicer specific factors that appear to be related to their preexisting organizational capabilities. Our findings reveal that the ability of government to quickly induce changes in behavior of large intermediaries through financial incentives is quite limited, underscoring significant barriers to the effectiveness of such polices.

Credit frictions and consumption dynamics in an open economy

This paper incorporates a collateral constraint and a banking sector into the New Keynesian dynamic stochastic general equilibrium (DSGE) model. With the presence of credit frictions and interest rate rigidity, we examine the dynamics between housing prices, housing consumption and interest rates in response to policy shocks and exchange rate shocks. Unanticipated monetary contraction and currency depreciation decrease collateral-constrained households' housing consumption in accordance with lower home prices, less availability of domestic borrowing and lower lending rates. Compared to a closed economy, policy shocks have larger spillover effects on housing consumption in an open economy since the availability of foreign borrowing magnifies the impact of declining housing prices.

A Brief Examination of Previous House Price Declines

Homeowners, business leaders, and government officials are keenly interested in knowing how long the current decline in house prices will last. The length and depth of house price declines and the strength of subsequent recoveries play important roles in business cycles. Although the Federal Housing Finance Agency (FHFA) does not forecast price movements, the agency’s house price index (HPI) provides a great deal of information concerning historical price declines. This paper provides a brief examination of house price declines in the United States and focuses on select areas that have experienced sharp price declines. The depth and duration of declines have varied significantly across areas, and inflation-adjusted prices have generally taken several years to rebound to previous levels.

How housing slumps end

We construct a simple model of the end of housing slumps. We show that the probability that real housing prices stop falling is higher the smaller was the pre-slump house price run-up; the greater has been the cumulative house price decline, the faster is GDP growth, and, most importantly, the lower are mortgage interest rates. Slumps are longer where the construction sector is more responsive, allowing booms to create larger supply overhangs, but shorter the more developed are financial markets and institutions, enabling new buyers to access credit and enter the market. Falling house prices can lead to lower private sector credit flows, in turn limiting the scope for new home purchases and creating the danger of a vicious spiral of slumping housing prices and distressed financial institutions. This suggests that policymakers should take steps to break the link between the housing market problems and banking problems by intervening to recapitalize distressed banking systems while using quantitative easing and credit easing to lower mortgage interest rates and help revive the housing market directly. — Agustin S. Benetrix, Barry Eichengreen and Kevin H. O'Rourke

Housing, Monetary Policy, and the Recovery

While the economy shows signs of strength, the recovery remains tepid relative to economic upswings following deep recessions of the past. This weakness has occurred despite an aggressive monetary response by the Federal Reserve which has adopted even unconventional tools to reduce long term interest rates. A variety of factors have been blamed for the tepid recovery, including the financial crisis of 2008, uncertainty over policy, and high levels of indebtedness.In this report, we focus on weakness in housing. Our analysis makes two broad points. First, weakness in housing and residential investment is a main impediment to a robust recovery. Second, problems related to housing have affected the transmission of monetary policy. More specifically, the unprecedented decline in house prices and residential investment has introduced headwinds that may require a more aggressive monetary response than in normal downturns. Further, problems related to housing markets may reduce the sensitivity of real economic activity to the interest rates that monetary policy can affect. Or in the parlance of textbook intermediate macroeconomics, housing problems have likely shifted the IS curve leftwards and steepened the slope of the curve by introducing a gap between policy rates and effective rates. For both of these reasons, problems related to housing introduce significant challenges to monetary policy-making.

Alternative Loan Modification Programs for Distressed and Non-Performing Loans

An overarching theme from the panel is that in light of the unprecedented declines in home prices and subsequent changes in borrower behavior, it is important to selectively use principal reduction to reduce losses and lower mod re-default rates—and that it is possible to do so while mitigating moral hazard risk. The extent of principal reduction required depends on the use of auxiliary services, some based on behavioral economics and others designed to protect against future house price decline. <b>TOPICS:</b>Credit risk management, legal and regulatory issues for structured finance

Housing Starts Forecast of Retail Sales through the 2007-2009 Recession

The expansion following the 2001 recession was in part stimulated by a boom in housing market investments. Many economists were concerned that a severe drop in residential investments would cause a recession throughout the economy because of residential investment's relationship to the gross domestic product and financial markets, and that a decline in housing prices would negatively impact consumer spending. A severe decline in the housing market and the illiquidity in the financial market were both evident by the third quarter of 2007. Some models based on historical data were showing the certainty of a recession in 2007. The best predictors of recessions are respectively interest rate spread, unemployment claims, and building permits. Building permits/new private housing units are a leading economic indicator whereas retail sales are a component of manufacturing and trade sales, which is a coincident economic indicator because it is highly correlated to GDP. This study attempts to use housing starts and past values of retail sales to forecast out-of-sample retail sales values through the period of January 1998 to August 2010, which is inclusive of the recent 2007-2009 recession. If housing Starts are found to be predictive of retail sales, then they are a predictor of a coincident indicator of recessions. This forecast is done in the framework of neural network modeling referenced to robust regression analysis. It was expected that the neural network models would produce better forecasts as ascertained by correlation, root mean square error, and Theil inequality coefficient performance metrics, but the overall result was mixed.

Economic Policy Uncertainty and Small Business Expansion

Small businesses continue to report problems obtaining the financing they need. Because small business owners may rely heavily on the value of their homes to finance their businesses (through mortgages or home equity lines), the fall in housing prices might be one of the causes of their difficulty. We analyze information from a variety of sources and find that homes do constitute a significant source of capital for small business owners and that the impact of the recent decline in housing prices is significant enough to be a real constraint on small business finances.

Are Recoveries from Banking and Financial Crises really so Different?

This paper studies the behavior of recoveries from recessions across 59 advanced and emerging market economies over the past 40 years. Focusing specifically on the performance of output after the recession trough, we find little or no difference in the pace of output growth across types of recessions. In particular, banking and financial crisis do not affect the strength of the economic rebound, although these recessions are more severe, implying a sizable output loss. However, recovery does change with some characteristics of recession. Recoveries tend to be faster following deeper recessions, especially in emerging markets, and tend to be slower following long recessions. Most recessions are associated with a slowing, if not outright decline in house prices, but recessions with large declines in house prices also tend to have slower recoveries. Long recessions and those associated with poor housing-market outcomes can lead to sustained output losses relative to pre-crisis trends. Consistent with microeconomic studies showing permanent income loss to job-losing workers during recessions, we find that the sustained deviation in output from trend is associated with a reduction in labor input, especially linked to declines in employment and labor-force participation following recessions. On net, our results imply that the output/employment gap following a severe, long recessions is considerably smaller than is typically assumed by standard macro models, which in turn may have substantial implications for macroeconomic policy during recoveries.

Prepayment and Delinquency in the Mortgage Crisis Period

We study the interaction of borrower mortgage prepayment and mortgage delinquency during the period between 2001 and 2010. We show that when house prices flattened and began their subsequent decline, borrowers had increasingly slow prepayments and that this decline in prepayment rates roughly coincided with the sharp increase in their delinquency rates. Low credit score borrowers, in particular, display a pronounced negative correlation between default rates and prepayment rates. Shortfalls of actual prepayment rates from predicted rates based on an estimated prepayment model suggest that, in addition to the effects of declining house prices, tighter lending standards also may have played a role in weak prepayment activity.

A Quantitative Analysis of the US Housing and Mortgage Markets and the Foreclosure Crisis

The authors construct a quantitative equilibrium model of the housing sector that accounts for the homeownership rate, the average foreclosure rate, and the distribution of home-equity ratios across homeowners prior to the recent boom and bust in the housing market. They analyze the key mechanisms that account for these facts, including the preferential tax treatment of housing and inflation. The authors then use the model to gain a deeper understanding of the recent housing and mortgage crisis by studying the consequence of an unanticipated increase in the supply of housing (overbuilding shock). They show that the model can account for the observed decline in house prices and much of the increase in the foreclosure rate if two additional forces are taken into account: (i) the lengthening of the time to complete a foreclosure (during which a defaulter can stay rent-free in his house) and (ii) the tightening of credit constraints in the market for new mortgages.

The effects of land transfer taxes on real estate markets: evidence from a natural experiment in Toronto

Taxes levied on the sale or purchase of real estate are pervasive but little studied. By exploiting a natural experiment arising from Toronto's imposition of a Land Transfer Tax (LTT) in early 2008, we estimate the impact of real estate transfer taxes on the market for single family homes. Our data show that Toronto's 1.1% tax caused a 15% decline in the number of sales and a decline in housing prices about equal to the tax. Relative to an equivalent property tax, the associated welfare loss is substantial, about $1 for every $8 in tax revenue. The magnitude of this welfare loss is comparable to those associated with better known interventions in the housing market. Unlike many possible tax reforms, eliminating existing LTTs in favour of revenue equivalent property taxes appears straightforward.