Falling House Prices Research Articles

Anglo-American Credit Scoring and Consumer Debt in the Subprime Mortgage Crisis of 2007 as Models for Other Countries?

The system of credit scoring has been built up in recent times on the basis of a compromise struck between individuality and surveillance in ways that boosted consumption through consumer debt. This paper considers the role of credit scoring in the recent financial crisis, concluding that even if credit scoring had worked as intended under its own terms, the practice would not have been enough to limit the defaulting of mortgage borrowers under conditions of falling house prices. The broader economic problem is the crippling amount of consumer debt involved; hence the paper places credit scoring in the larger explanatory framework of consumer debt and, more generally, consumerism in its more problematic form. The sorting accomplished by credit scoring is open to abuses in the marketplace, unless it is tempered by the application of guardrails by a regulatory authority. As cultures beyond the Anglo-American sphere adopt this practice, guardrails like those applied to credit scoring in America are needed; as even the current U.S. Administration has acknowledged, the existing guardrails will have to be complemented by stricter social standards. The paper provides a derivation of the theoretical background on credit scoring as surveillance, and includes a literature survey.

Anglo-American Credit Scoring and Consumer Debt in the Subprime Mortgage Crisis of 2007 as Models for Other Countries?

The system of credit scoring has been built up in recent times on the basis of a compromise struck between individuality and surveillance in ways that boosted consumption through consumer debt. This paper considers the role of credit scoring in the recent financial crisis, concluding that even if credit scoring had worked as intended under its own terms, the practice would not have been enough to limit the defaulting of mortgage borrowers under conditions of falling house prices. The broader economic problem is the crippling amount of consumer debt involved; hence the paper places credit scoring in the larger explanatory framework of consumer debt and, more generally, consumerism in its more problematic form. The sorting accomplished by credit scoring is open to abuses in the marketplace, unless it is tempered by the application of guardrails by a regulatory authority. As cultures beyond the Anglo-American sphere adopt this practice, guardrails like those applied to credit scoring in America are needed; as even the current U.S. Administration has acknowledged, the existing guardrails will have to be complemented by stricter social standards. The paper provides a derivation of the theoretical background on credit scoring as surveillance, and includes a literature survey.

Housing Wealth Isn’t Wealth

Abstract A fall in house prices due to a change in fundamental value redistributes wealth from those long housing (for whom the fundamental value of the house they own exceeds the present discounted value of their planned future consumption of housing services) to those short housing. In a closed economy representative agent model (the special case when the birth rate is zero, of the Yaari-Blanchard OLG model used in the paper), there is no pure wealth effect on consumption from a change in house prices if this represents a change in their fundamental value. When the birth rate is positive, higher fundamental house prices driven by the housing demand of future generations will boost current consumption. There is a pure wealth effect on consumption from a change in house prices even in the representative agent model, if this reflects a change in the speculative bubble component of house prices. Two other channels through which a fall in house prices can affect aggregate consumption are (1) redistribution effects if the marginal propensity to spend out of wealth differs between those long housing (the old, say) and those short housing (the young, say) and (2) collateral or credit effects due to the collateralisability of housing wealth and the non-collateralisability of human wealth. A decline in house prices reduces the scope for mortgage equity withdrawal. For given sequences of future after-tax labour income and interest rates, a fall in house prices will then depress consumption in the short run while boosting it in the long run.

Subprime Mortgage Default

Using data on privately-securitized subprime ARMs (adjustable rate mortgages) originated between 1997 and 2008 and observed between 2000 and 2008, and so covering the start of the subprime crisis, this paper constructs a reduced-form credit risk model of default, and then uses contractual properties of the loans to infer the market’s price of default risk at various times of origination. Treating the hazard of default as a process rather than a single realization for each period of origination permits the probability of default to be calculated without knowledge of the still unfolding hazard realization, allowing one to adopt the same position as lenders, who also cannot foretell the future. It is empirically determined that a change in the inherent nature of borrowers caused some deterioration in their default behavior, a change which we can first detect by late 2004, but of which, evidence indicates, the secondary mortgage market became aware at about the same time. The large rise in defaults in 2007 cannot, therefore, be attributed to any surprise other than the unexpectedly large fall in housing prices.

Credit Supply and the Price of Housing

We show that since 1994, branching deregulations in the U.S have significantly affected the supply of mortgage credit, and ultimately house prices. With deregulation, the number and volume of originated mortgage loans increase, while denial rates fall. But the deregulation has no effect on a placebo sample, formed of independent mortgage companies that should not be affected by the regulatory change. This sharpens the causal interpretation of our results. Deregulation boosts the supply of mortgage credit, which has significant end effects on house prices. We find evidence house prices rise with branching deregulation, particularly so in Metropolitan Areas where construction is inelastic for topographic reasons. There is also evidence the fall in house prices after 2006 is most pronounced in least regulated states. We document these results in a large sample of counties across the U.S. We also focus on a reduced cross-section formed by counties on each side of a state border, where a regression discontinuity approach is possible. Our conclusions are strengthened.

Challenging times for mental health services

We are living in significant and challenging times for mental health services across the world. On the one hand, many countries are in the middle of comprehensive reforms of their mental health systems, and these require funding (WHO Europe, 2008). On the other, they are affected by the global financial crisis as regional and national economic recessions threaten to herald a social crisis in many countries. Governments have had to come up with multi-billion-dollar rescue packages. At an individual level, debt status is already high in many countries, owing to falling house prices and high consumption levels, combined with rising commodity prices during the past few years, before the onset of the recession. At a public level, countries will be forced to make stringent cuts in public sector expenditure.

Headlong into the Polanyian Dilemma: The Impact of Middle-Class Moral Panic on the British Government's Response to the Sub-prime Crisis

This article focuses on the discursive construction in Britain of a middle-class moral panic occasioned by the distress caused to self-styled ‘responsible mortgage borrowers’ by falling house prices. In the context of the move towards asset-based welfare the sub-prime crisis manifested itself most obviously in the popular consciousness as a threat to housing market wealth. The Labour government used the political space opened up by the narrative of middle-class moral panic in order to protect banks' balance sheets from the consequences of their own failed investments in mortgage-backed securities. The ensuing arrangements immunised banks from the implications of market self-regulation in the first-phase response to the sub-prime crisis while simultaneously allowing them to continue to impose the experience of market self-regulation on their customers. An increasingly asymmetric approach to banking regulation has arisen analogous to that which Karl Polanyi associated with the contradictory co-existence of market and non-market forms.

The risk of falling house prices in Italy

This paper shows that Italian house market is less exposed to price shocks than the American one. Variations in the house price index in real terms have been studied along with the affordability ratio and the relation between house prices and rent levels for the period 1995–2004 in Italian provinces. Comparison with US data reveals greater overpricing in the US during the expansion phase (2000–2004). Although a speculative bubble in all US metropolitan areas considered does not emerge, US financial and economic structural factors make the US real estate sector more exposed to price shocks. To test the compatibility of Italian house prices with fundamentals an econometric model is designed to analyze the provincial house prices from 1995 to 2003.

A New Metric to Gauge Household Economic Stress: Improving on the Misery Index

We present an improvement on the Misery Index that quantifies the economic stress that households are feeling today. Much of the economic stress in households today stems from the decline in household wealth that has come as a result of falling house prices, so we have added a measure of house price change to the Misery Index. Deteriorating economic conditions in most U.S. regions through the first three quarters of 2008 have resulted in increasing household economic stress as all components of the expanded Household Economic Stress Index increased. The components are the rate of change in the consumer price index, the unemployment rate, and rate of change in house prices. The authors show that this intuitive and simple index is useful in analyzing mortgage delinquencies both nationally and regionally.

Making Sense of the Subprime Crisis

This paper explores the question of whether market participants could have or should have anticipated the large increase in foreclosures that occurred in 2007 and 2008. Most of these foreclosures stemmed from loans originated in 2005 and 2006, leading many to suspect that lenders originated a large volume of extremely risky loans during this period. However, the authors show that while loans originated in this period did carry extra risk factors, particularly increased leverage, underwriting standards alone cannot explain the dramatic rise in foreclosures. Focusing on the role of house prices, the authors ask whether market participants underestimated the likelihood of a fall in house prices or the sensitivity of foreclosures to house prices. The authors show that, given available data, market participants should have been able to understand that a significant fall in prices would cause a large increase in foreclosures although loan-level (as opposed to ownership-level) models would have predicted a smaller rise than actually occurred. Examining analyst reports and other contemporary discussions of the mortgage market to see what market participants thought would happen, the authors find that analysts, on the whole, understood that a fall in prices would have disastrous consequences for the market but assigned a low probability to such an outcome.

Housing Wealth Isn't Wealth

A fall in house prices due to a change in fundamental value redistributes wealth from those long housing (for whom the fundamental value of the house they own exceeds the present discounted value of their planned future consumption of housing services) to those short housing. In a representative agent model and in the Yaari-Blanchard OLG model used in the paper, there is no pure wealth effect on consumption from a change in house prices if this represents a change in fundamental value. There is a pure wealth effect on consumption from a change in house prices if this reflects a change in the speculative bubble component of house prices. Two other channels through which house prices can affect aggregate consumption are (1) redistribution effects if the marginal propensity to spend out of wealth differs between those long housing and those short housing and (2) collateral or credit effects due to the collateralisability of housing wealth and the non-collateralisability of human wealth. A decline in house prices reduces the scope for mortgage equity withdrawal. For given sequences of future after-tax labour income and interest rates, this may depress consumption in the short run while boosting it in the long run.

MONETARY POLICY, CREDIT EXTENSION, AND HOUSING BUBBLES: 2008 AND 1929

ABSTRACT Asset‐market bubbles occur dependably in laboratory experiments and almost as reliably throughout economic history—yet they do not usually bring the global economy to its knees. The Crash of 2008 was caused by the bursting of a housing bubble of unusual size that was fed by a massive expansion of mortgage credit—facilitated, in turn, by the longest sustained expansionary monetary policy of the past half century. Much of this mortgage credit was extended to people with little net wealth who made slender down payments, so that when the bubble burst and housing prices declined, their losses quickly exceeded their equity. These losses were transmitted to the financial system—including banks, investment banks, insurance companies, and the institutional and private investors who provided liquidity to the mortgage market through structured securities. It seems that many of these institutions became insolvent; it is certain that they became illiquid. Liquidity loss and solvency fears created a feedback cycle of diminished financing, reduced housing demand, falling housing prices, more borrower losses, and further damage to the financial system and eventually the stock market and the real economy. There are important parallels with the housing and financial‐market booms that led up to the Crash of 1929 and the Great Depression.

The Housing Meltdown: Why Did it Happen in the United States?

The crisis enveloping global financial markets since August 2007 was triggered by actual and prospective credit losses on US mortgages. Was the United States just unlucky to have been the first to experience a housing crisis? Or was it inherently more susceptible to one? I examine the limited international evidence available, to ask how the boom-bust cycle in the US housing market di ered from elsewhere and what the underlying institutional drivers of these di erences were. Compared with other countries, the United States seems to have: built up a larger overhang of excess housing supply; experienced a greater easing in mortgage lending standards; and ended up with a household sector more vulnerable to falling housing prices. Some of these outcomes seem to have been driven by tax, legal and regulatory systems that encouraged households to increase their leverage and permitted lenders to enable that development. Given the institutional background, it may have been that the US housing boom was always more likely to end badly than the booms elsewhere.

Consumption, Housing Wealth and Financial Crises

This note reviews recent Institute work on the factors that might affect the future evolution of consumption. Drawing on Barrell and Davis (2007), it discusses the evidence for the effects of housing wealth on consumption, and shows that there has been strong and well supported evidence for a link for some time. This evidence suggests that a fall in house prices will cause consumption growth to slow. The discussion also covers evidence from Barrell, Davis and Pomerantz (2006) on the effects of financial crises on consumption behaviour. They suggest that there are large and significant negative effects on consumption during banking crises that are over and above the effects on consumption of the crisis-induced changes in income and wealth. Much of this work is embedded in our structural model, NiGEM, and it is possible to estimate the effects of house price declines and financial crises on consumption and income using the model. The note also gives a set of ready reckoners for the impacts of house price declines on output and of a given associated fall in the level of housing wealth on the level of consumption.

Regional Housing Market Spillovers in the US: Lessons from Regional Divergences in a Common Monetary Policy Setting

In this paper, we seek to quantify the importance of state-level housing price spillovers and interest rate shocks to house price developments in the United States. The econometric approach involves an application of the recently developed global VAR (GVAR) as presented in Dees, DiMauro, Pesaran, and Smith (2005) and Pesaran, Schuermann, and Weiner (2004) to the 31 biggest US states over the period 1986-2005. Such an approach allows not only for the empirical derivation of the impact of common shocks (such as interest rate shocks) on US house price developments, but also for an analysis of the importance of interstate housing price spillovers. Beyond real house prices and real income per capita, each state-specific vector error correction model also includes nation-wide variables - measured as a weighted average of other states. These individual state models are then linked in a consistent and cohesive manner. Impact elasticities indicate strong interregional linkages for both real house prices and real income per capita. An analysis of generalised impulse responses indicates that the importance of housing price spillovers is state dependent, with shocks occurring in states with relatively lower land supply elasticities having much stronger spillover effects that those in the other states. As regards real interest rates, the impact appears to be relatively small with an increase of 100 basis points in the real 10-year government bond yield resulting in a long run fall in house prices of between 0.5 and 2.5%. This would suggest, in line with DelNegro and Otrok (2005) that the decline in long-term interest rates is not the primary factor that has driven the recent surge in house prices in the United States.

Letter: Must Homeowners Lose Wealth When House Prices Fall?

Paradoxically, Eric Rasmusen argues that a fall in house prices might actually raise the wealth of homeowners.

UK Assessment: How damaging would a housing market crash be for UK growth?

There is increasing speculation that the recent boom in house prices is about to burst. Having effectively doubled since the start of this decade according to the Nationwide and Halifax indices, a number of commentators are predicting a fall in house prices of up to 20% over the next couple of years. And, indeed, in a recent interview with the Financial Times, the Governor of the Bank of England, Mervyn King, said the MPC sees more of a chance of a house price fall than there was a year ago. In this assessment, we ask what impact would such a crash have on the wider economy?

The Rise of the Skilled City

The Rise of the Skilled City Edward L. Glaeser and Albert Saiz Between 1980 and 2000, the population of metropolitan areas where less than 10 percent of adults had college degrees in 1980, grew on average by 13 percent. Among metropolitan areas where more than 25 percent of adults had college degrees, the average population growth rate was 45 percent. For more than a century, in both the United States and Great Britain, cities with more educated residents have grown faster than comparable cities with less human capital.1 There is no consensus, however, on the causes or implications of this relationship. Why have people increasingly crowded around the most skilled? Why does education seem to be a more and more important ingredient in agglomeration economies? Three disparate, but not incompatible, visions of the modern city offer different answers to these questions. The Consumer City view—cities are increasingly oriented around consumption amenities, not productivity—tells us that skills predict growth because skilled neighbors are an attractive consumption amenity. The Information City view—cities exist to facilitate the flow of ideas—tells us that we should expect cities to be increasingly oriented around the skilled because the skilled specialize in ideas. The Reinvention City view—cities survive only by adapting their economies to new technologies—tells [End Page 47] us that human capital predicts city growth because human capital enables people to adapt well to change.2 Understanding why skills predict city growth will help us determine if cities thrive because of consumption, information, or reinvention. We use four approaches to address the possibility that the rise of the skilled city is the result of a spurious correlation between local skills and other urban characteristics. First, we show that controlling for a wide range of other factors makes little difference to the impact of local skills on subsequent city growth and that local human capital is essentially unrelated to many of the most important local amenities such as weather variables. Second, we show that the metropolitan-area human capital effect is robust to including metropolitan-area fixed effects. Third, we examine the connection between the number of colleges per capita in 1940 and growth between 1970 and 2000. The pre-World War II number of colleges seems considerably more exogenous than current skill levels, and it still correlates strongly with growth in the modern era.3 Fourth, we examine the timing of skills and growth and test whether skilled workers flock to cities that are growing. Individuals with low education are particularly prone to live in declining cities, but exogenous differences in positive growth rates do not predict changes in the percentage of the population with a college education.4 Reverse causation from growth to education seems to be present only in a handful of declining metropolitan areas and cannot account for much of the relevant effect. Overall, the evidence supports the view that skills induce growth. Following Jesse Shapiro, we present a framework for understanding the connection between skills and growth.5 The framework tells us that production-led growth should increase nominal wages and housing prices, while consumption-led growth should cause real wages to fall. Rising nominal wages are a sufficient condition for productivity growth, and declining real wages are necessary for the amenity story to be of relevance. [End Page 48] Our empirical work shows that productivity drives the connection between skills and growth. At the metropolitan level, we find that education levels have a positive impact on future wage and housing price growth. With almost any reasonable set of parameter values, the connection between education and population growth is the exclusive result of rising productivity and has less to do with rising amenity levels. Indeed, real wages may be rising in high-education metropolitan areas, which suggests that consumer amenities are declining—in relative terms in high-skill areas. At the city level, the results are less clear. In small municipalities within metropolitan areas, low levels of human capital predict urban decline and falling housing prices. At the city level (not at the metropolitan-area level), it is the bottom end of the human capital distribution that matters. The prevalence of high school dropouts predicts...

Comments

The Rise of the Skilled City Edward L. Glaeser and Albert Saiz Between 1980 and 2000, the population of metropolitan areas where less than 10 percent of adults had college degrees in 1980, grew on average by 13 percent. Among metropolitan areas where more than 25 percent of adults had college degrees, the average population growth rate was 45 percent. For more than a century, in both the United States and Great Britain, cities with more educated residents have grown faster than comparable cities with less human capital.1 There is no consensus, however, on the causes or implications of this relationship. Why have people increasingly crowded around the most skilled? Why does education seem to be a more and more important ingredient in agglomeration economies? Three disparate, but not incompatible, visions of the modern city offer different answers to these questions. The Consumer City view—cities are increasingly oriented around consumption amenities, not productivity—tells us that skills predict growth because skilled neighbors are an attractive consumption amenity. The Information City view—cities exist to facilitate the flow of ideas—tells us that we should expect cities to be increasingly oriented around the skilled because the skilled specialize in ideas. The Reinvention City view—cities survive only by adapting their economies to new technologies— [End Page 47] tells us that human capital predicts city growth because human capital enables people to adapt well to change.2 Understanding why skills predict city growth will help us determine if cities thrive because of consumption, information, or reinvention. We use four approaches to address the possibility that the rise of the skilled city is the result of a spurious correlation between local skills and other urban characteristics. First, we show that controlling for a wide range of other factors makes little difference to the impact of local skills on subsequent city growth and that local human capital is essentially unrelated to many of the most important local amenities such as weather variables. Second, we show that the metropolitan-area human capital effect is robust to including metropolitan-area fixed effects. Third, we examine the connection between the number of colleges per capita in 1940 and growth between 1970 and 2000. The pre–World War II number of colleges seems considerably more exogenous than current skill levels, and it still correlates strongly with growth in the modern era.3 Fourth, we examine the timing of skills and growth and test whether skilled workers flock to cities that are growing. Individuals with low education are particularly prone to live in declining cities, but exogenous differences in positive growth rates do not predict changes in the percentage of the population with a college education.4 Reverse causation from growth to education seems to be present only in a handful of declining metropolitan areas and cannot account for much of the relevant effect. Overall, the evidence supports the view that skills induce growth. Following Jesse Shapiro, we present a framework for understanding the connection between skills and growth.5 The framework tells us that production-led growth should increase nominal wages and housing prices, while consumption-led growth should cause real wages to fall. Rising nominal wages are a sufficient condition for productivity growth, and declining real wages are necessary for the amenity story to be of relevance. [End Page 48] Our empirical work shows that productivity drives the connection between skills and growth. At the metropolitan level, we find that education levels have a positive impact on future wage and housing price growth. With almost any reasonable set of parameter values, the connection between education and population growth is the exclusive result of rising productivity and has less to do with rising amenity levels. Indeed, real wages may be rising in high-education metropolitan areas, which suggests that consumer amenities are declining—in relative terms in high-skill areas. At the city level, the results are less clear. In small municipalities within metropolitan areas, low levels of human capital predict urban decline and falling housing prices. At the city level (not at the metropolitan-area level), it is the bottom end of the human capital distribution that matters. The prevalence of high school dropouts...

Damned If You Don't, Damned If You Do: Crime Mapping and its Implications in the Real World

A small but growing North American trend is the publication of maps of crime on the Internet. A number of web sites allow observers to view the spatial distribution of crime in various American cities, often to a considerable resolution, and increasingly in an interactive format. The use of Geographical Information Systems (GIS) technology to map crime is a rapidly expanding field that is, as this paper will explain, still in a developmental stage, and a number of technical and ethical issues remain to be resolved. The public right to information about local crime has to be balanced by a respect for the privacy of crime victims. Various techniques are being developed to assist crime mappers to aggregate spatial data, both to make their product easier to comprehend and to protect identification of the addresses of crime victims. These data aggregation techniques, while preventing identification of individuals, may also be inadvertently producing maps with the appearance of 'greater risk' in low crime areas. When some types of crime mapping have the potential to cause falling house prices, increasing insurance premiums or business abandonment, conflicts may exist between providing a public service and protecting the individual, leaving the cartographer vulnerable to litigation.