The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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May 27, 2011

"Secret loans" that were not so secret

I confess to be more than a little surprised when yesterday's morning reading turned up the following headline, from Bloomberg's Bob Ivry:

"Fed Gave Banks Crisis Gains on Secretive Loans Low as 0.01%"

The crux of the story found its way to the Wall Street Journal's Real Times Economics blog:

"Credit Suisse Group AG, Goldman Sachs Group Inc. and Royal Bank of Scotland Group Plc each borrowed at least $30 billion in 2008 from a Federal Reserve emergency lending program whose details weren't revealed to shareholders, members of Congress or the public. The $80 billion initiative, called single-tranche open-market operations, or ST OMO, made 28-day loans from March through December 2008, a period in which confidence in global credit markets collapsed after the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc. Units of 20 banks were required to bid at auctions for the cash. They paid interest rates as low as 0.01 percent that December, when the Fed's main lending facility charged 0.5 percent."

I think a couple of clarifying points are in order. First, these transactions were hardly, in my view, "secretive." On March 7, 2008, the following was posted on the New York Fed's website (with similar information provided by the Board of Governors):

"The Federal Reserve has announced that the Open Market Trading Desk will conduct a series of term repurchase (RP) transactions that are expected to cumulate to $100 billion outstanding. This initiative is intended to address heightened pressures in term funding markets. These transactions will be conducted as 28-day term RP agreements in which primary dealers may elect to deliver as collateral any of the types of securities—Treasury, agency debt, or agency mortgage-backed securities—that are eligible as collateral in its conventional RP operations."

The magic words in the Bloomberg piece are apparently "details weren't revealed." While it is true that specific transactions with specific institutions were not published in real time, the overall results of the auctions (both total purchases and the lowest interest rate paid) were posted each day (as noted in the Bloomberg article), and the list of potential counterparties (the primary dealers) was (and is) available for all to see. I suppose we could have a reasonable debate about how much information is required to support the claim that "details" were made available. But I have a hard time with the notion that publicly announcing the program, offering details on size and prices in each day's transactions, and providing general information about the entities in the game constitutes "secretive."

Another aspect of the Bloomberg piece that I question is the claim that the transactions were "loans" provided under an "emergency lending program." That language is quite imprecise and evokes the thought of the lending programs that relied on the authority granted under "unusual and exigent circumstances" by section 13(3) of the Federal Reserve Act.

The Bloomberg article does not help in avoiding possible confusion on this point by including this passage:

"Congress overlooked ST OMO when lawmakers required the central bank to publish its emergency lending data last year under the Dodd-Frank law."

But as the New York Fed's public notice made clear at the time, this was not outside of the Fed's standard authorities—and not unprecedented (emphasis added):

"When the Desk arranges its conventional RPs, it accepts propositions from dealers in three collateral 'tranches.' In the first tranche, dealers may pledge only Treasury securities. In the second tranche, dealers have the option to pledge federal agency debt in addition to Treasury securities. In the third tranche, dealers have the option to pledge mortgage-backed securities issued or fully guaranteed by federal agencies in addition to federal agency debt or Treasury securities. With the special 'single-tranche' RPs announced today, dealers have the option to pledge either mortgage-backed securities issued or fully guaranteed by federal agencies, federal agency debt, or Treasury securities. The Desk has arranged single-tranche transactions from time to time in the past."

Finally, identifying the one auction where the Fed "paid interest rates as low as 0.01 percent" is misleading. To begin with, the 0.01 percent refers to the so called "stop-out" rate, which is the lowest rate paid by bidders in any particular auction. The operations in question were multi-price auctions, so the lowest rate cannot be assumed to be the average rate paid on the repo transactions. In any event, the program was terminated after two auctions when the stop-out rate hit the very low levels the Bloomberg article referred to.

More generally, the auction rates in these ST OMOs tracked short-term funding rates over the course of the program's existence:

The interest rates associated with all operations obviously fell as the provision of market liquidity became more aggressive after the failure of Lehman Brothers. You are free to object to that response, but singling out ST OMO as secretive or special in anyway isn't, in my opinion, justified.

Update: Felix Salmon weighs in.

Photo of Dave AltigBy Dave Altig
senior vice president and research director at the Atlanta Fed

May 27, 2011 in Federal Reserve and Monetary Policy, Financial System, Monetary Policy | Permalink


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David, firstly and above all, great blog. However, I am with Bloomberg on this one. The fact is that the transactions were so commercially sensitive that the details were necessarily obfuscated. Announcing the creation of the ST OMO, its expected cumulative total and auction rates is one thing.. Stating that a single dealer had borrowed in excess of $30bn in a single transaction, or that more than one dealer had done so at the same time, even without any names being publicised, would have been just too sensitive; thus the statements were framed to allow people to underestimate the size and concentration of the program. By definition this is acting in a secretive manner.

Posted by: Timothy Murphy | May 27, 2011 at 06:14 PM

I believe the larger point of the issue was that it was largely only European banks that used this facility extensively. The implication being that it was a backdoor bailout to the big European banks.

Posted by: mindrayge | May 28, 2011 at 03:20 AM

" To begin with, the 0.01 percent refers to the so called "stop-out" rate, which is the lowest rate paid by bidders in any particular auction. The operations in question were multi-price auctions, so the lowest rate cannot be assumed to be the average rate paid on the repo transactions."
Indeed, the weighted average was 0.104

Posted by: Alea | May 28, 2011 at 02:19 PM

Keep in mind the most publicized acronym of that time was TARP. I've done a fair amount of reading in my quest to discover how the American financial sector went on life support, and this is the first I've read anything around the ST OMO loans.

From the Bloomberg article: "The records don’t provide exact loan amounts for each bank. Smith, the New York Fed spokesman, would not disclose those details. Amounts cited in this article are estimates based on the graphs."

Sounds a bit secretive to me. If it's open record, why not divulge the amounts each bank got? What's the issue with that? It's actually quite important to know how much our most successful banks were borrowing at very low interest rates from the Fed during that dim and dark time. Or is Bloomberg just way off with that assertion?

From Dave Altig's response: "Another aspect of the Bloomberg piece that I question is the claim that the transactions were "loans" provided under an "emergency lending program." That language is quite imprecise..."

Are ST OMO loans regular occurrences? Or were they done to help banks survive an extraordinary time? If they're not regularly offered, it sounds like they were created to help banks in the months leading up to the crash - and that they were indeed a part of a massive Fed intervention to help banks stay afloat.

Frankly, since the crash, there are many Americans outside of bankers who could have used very low interest loans and the other extraordinary interventions offered by the Fed. But most Americans have to get their loans from the banks rescued by the Feds, and those banks charge their customers quite a lot more than .01%.

Posted by: Main Street Muse | May 29, 2011 at 09:32 PM

I agree and I have posted a similar objection on my blog - http://www.insidejob.com/profiles/blogs/is-st-omo-the-same-as :
The only legitimate objection to the Single-tranche RP program is that it was left out of the Dodd-Frank disclosure at the Fed's website. With so much anti-Fed feeling, its is important for the Fed to announce that it will treat Single-tranche RP just like the other Fed programs explicitly named in Dodd-Frank and post the data as quickly as possible.

Posted by: Michael Hirasuna | May 30, 2011 at 10:44 AM

Loans now become a need of not only business persons but also others too. Who wants to get loans on very low interests so they can easily fulfill their basic needs.

Posted by: business cas advance | June 01, 2011 at 07:19 AM

This is exactly how the dollar is losing its monetary value. The feds keep pumping cash into our economy with no backing. They keep flooding these useless paper dollars into our economy with no gold, and they don't expect inflation to occur???

This will keep happening until we hit a state of hyperinflation and then we will be so screwed when our salaries are the same, yet a loaf of bread will cost over $100!

Posted by: cash advance | June 11, 2012 at 12:37 PM

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May 19, 2011

The long and short (runs) of tax reform

In an earlier part of my career, I spent a fair amount of time thinking about fiscal policy issues. The evolution of my responsibilities eventually moved my attentions in a somewhat different direction, but you never really forget your first research love. With questions of debt, government spending, and taxes at the top of the news, it isn't hard for my old fondness for the topic to reemerge.

So, in that context, I had a somewhat nostalgic response to an item at Angry Bear, written by contributor Dan Crawford. In essence, the Crawford post formally (through statistical analysis) asks the question "How is GDP growth related to marginal tax rates (that is, the tax rate applied to your last dollar of income)?" More specifically, Crawford analyzes how gross domestic product (GDP) growth next year is related to the marginal tax rate faced by the average individual and the marginal tax rate faced by the highest-income taxpayers.

I don't intend to quibble with the specifics of that experiment per se but rather highlight an aspect of taxation and tax reform that I think should not be forgotten. That is, the short run is no place for a decent discussion of tax policy to be hanging out. To say that more formally, the largest effects of tax policy accrue over time, and it is probably not a good idea to be too focused on the immediate—say, next year's—effects of any given policy or change in policy.

The following chart is based on tax reform experiments in a paper I co-authored over a decade ago with Alan Auerbach, Larry Kotlikoff, Kent Smetters, and Jan Walliser. (Note that the chart does not appear in the paper, but I created it using data from the paper—a publicly available version of the paper can be found here.) The chart depicts the cumulative percentage increases in national income that would be realized (in our model) in the years following three different tax reforms.

The three experiments depicted in this chart were as follows:

"[The clean income tax] replaces the progressive taxation of wage income with a single rate that is also applied to capital income. In addition, the clean income tax eliminates the major federal tax-base reductions including the standard deduction, personal and dependent exemptions, itemized deductions, the deductibility of state income taxes at the federal level, and preferential tax treatment of fringe benefits...

"Our flat tax experiment modifies the clean consumption tax by including a standard deduction of $9500. In addition, housing wealth, which equals about half of the capital stock, is entirely exempt from taxation."

Parenthetically, the "clean consumption tax"

"...differs from the clean income tax by including full expensing of investment expenditures. This produces a consumption-tax structure. Formally, we specify the system as a combination of a labor-income tax and a business cash-flow tax."


"Our [flat tax with transition relief] experiment adds transition relief to the flat tax by extending pre-reform depreciation rules for capital in place at the time of the tax reform."

Here's what I want to emphasize in all of this. If the change in policy you might be considering involves a reduction in effective marginal tax rates (implemented via a combination of changes in statutory rates and adjustments in deductions and exemptions), the approach taken by Crawford in his Angry Bear piece is probably acceptable. The clean income tax reform is in the spirit of Crawford's calculations, and in our results the long-run impact on output is realized almost immediately. If, however, the tax reform involves changing the tax base in a fundamental way (in both versions of our flat tax experiments the base shifts from income to consumption), then the ultimate effects are felt only gradually. In our flat tax experiments, the longer-run effects on income are in the neighborhood of three times as large as the near-term effects.

All of the experiments described were done under the assumption of revenue neutrality, so questions of the right policy for budget balancing exercises weren't explicitly addressed. (Nor is it the nature of the experiment contemplated in the Angry Bear post.) Nonetheless, they do suggest that deficit reduction exercises that involve changes in tax rates and the tax base will have differential effects over time, and realizing the full benefits of tax reform may require a modicum of patience.

Note: A user-friendly description of the paper that the chart above is based on appeared in an Economic Commentary article published by the Cleveland Fed.

Update: Though the item at Angry Bear was posted by Dan Crawford, Mike Kimel actually wrote it. I apologize for the mistake and draw your attention to Kimel's follow-up post.

Dave Altig By Dave Altig
senior vice president and research director at the Atlanta Fed

May 19, 2011 in Deficits, Fiscal Policy, Taxes | Permalink


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Dan Crawford posted the analysis. Mike Kimmel wrote it. Just thought I should mention it.

Posted by: kharris | May 20, 2011 at 10:39 AM

So when does your theoretical chart reflect the dramatic plunge that has occurred in real nations with flat taxes (e.g. Iceland)? Must be in year 14, right?

Posted by: Devin | May 20, 2011 at 11:36 AM

Minor correction: Dan posted it, but Mike Kimel actually wrote it.

Posted by: Ken Houghton | May 20, 2011 at 12:20 PM


Hi. Thanks for mentioning the post. I modified it to take into account some of your comments. (New version here: http://www.angrybearblog.com/2011/05/tax-rates-and-economic-growth-over-ten.html)

Now I use the tax rates in any given year to explain annualized growth rates over the subsequent ten years. Additionally, I've included quadratic forms of both the top and bottom rates, which allows me to compute growth maximizing rates at both ends of the scale.

It turns out that the growth maximizing top marginal rate isn't much changed from the first post (i.e., 67%), but the optimal bottom marginal rate is zero. I think that indicates that using historical US data at least, a flat tax is a bad idea, as the top and bottom marginal rates would be identical if rates were flat.

With respect, given the choice between the outcomes predicted by a simulation, and historical outcomes, I'd go with the historical outcomes.

Best regards.

Posted by: Mike Kimel | May 24, 2011 at 07:23 PM

Dave, I would be interested is learning more as to why this is the case...i.e. why would a change into a flat tax have minimal short-term effects (yet meaningful long-term effects)?

Posted by: Chris | May 26, 2011 at 07:45 PM

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May 13, 2011

Just how out of line are house prices?

In Wednesday's post, I referenced commentary from several bloggers regarding the sizeable decline in housing prices reported by Zillow earlier this week. As I discussed yesterday, the rat-through-the-snake process of working down existing and prospective distressed properties is likely far from over, and how that process plays out will no doubt have an impact on how much prices will ultimately adjust.

Recently, Barry Ritholtz's The Big Picture blog featured an update of a New York Times chart that suggests there will be a significant adjustment going forward:

Prior to the crisis, I was persistently advised that the better way to think about the "right" home price is to focus on price-rent ratios, because rents reflect the fundamental flow of implicit or explicit income generated by a housing asset. In retrospect that advice looks pretty good, so I am inclined to think in those terms today. A simple back-of-the envelope calculation for this ratio—essentially comparing the path of the S&P/Case-Shiller composite price index for 20 metropolitan regions to the time path of the rent of primary residences in the consumer price index—tells a somewhat different story than the New York Times chart used in the aforementioned Ritholtz blog post:

According to this calculation, current prices have nearly returned to levels relative to rents that prevailed in the decade prior to the housing boom that began in the late 1990s.

Of course, the price-rent ratio is not the most sophisticated of calculations. David Leonhardt shows the results from other such calculations that suggest prices relative to rents are still elevated, at least relative to the average that prevailed in the 1990s. But the adjustment that would be required to bring current levels back into line with the precrisis average is still much lower than suggested by the Ritholtz graph.

How much farther prices fall is, I think, critical in the determination of how the economy will fare in the immediate future. Again, from President Lockhart:

"The housing sector also has indirect impacts on the economy. In particular, the direction of home prices is important for the economy because changes in home prices affect the health of both household and bank balance sheets. …

"The indirect influence of the housing sector on consumer activity and bank lending would almost certainly aggravate housing's impact on growth."

Here's hoping my chart is more predictive of housing prices than the alternative.

Update: The Calculated Risk blog does a thorough job and concludes that we don't have "to choose between real prices and price-to-rent graphs to ask 'how far out of line are house prices?' I think they are both showing that prices are not far above the historical lows."

Update: The Big Picture's Barry Ritholtz points me to his earlier argument against reliance on price-rent ratios.

Photo of Dave Altig By Dave Altig
senior vice president and research director at the Atlanta Fed

May 13, 2011 in Economic Growth and Development, Forecasts, Housing, Real Estate | Permalink


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I am trying to sell a house myself right now, and was shocked at the crash in housing values we see in our area (midwest). I'm seeing projections of 25% - 33% loss of value since 2006.

Unfortunately, I think prices have a ways to go before bottoming out. In my area, there are 18 months of housing stock on the market right now. We're competing with cheap foreclosures and short sales (both are at historic highs right now, I believe). In 2004, it took about 30 days to sell a house. Now it takes about 250 days. Try selling when you need to move immediately for a job opportunity.

Linking housing prices to rents might work in the "normal" environment. But we're so far outside of normal now that I think you're over-optimistic in your projections.

What historical period has had such a number of underwater mortgages? And isn't that all thanks to the models that assumed housing prices never diminished?

Economic models need to be revised to reflect current reality. Using a model that "is not the most sophisticated of calculations" won't get us out of this catastrophe. But it's certainly nice wishful thinking....

Posted by: Main Street Muse | May 13, 2011 at 11:52 AM

As long as we live in a world where interest rates never deviate from the current level, then "prices are in line with rent" If, however, for any reason interest rates may move towards long term trend lines...then it would be prudent to look at prices as a derivative of interest rates...in which case they are probably still far higher than a "normal" market could bare.

Posted by: Jay | May 13, 2011 at 12:59 PM

My neck of the woods, Sonoma, Calif property provides an indication of what direction other markets might experience when if ever foreclosure/distressed homes become a small percentage of the market. My upscale 55+ area has a good number of homes for sale and few are selling, prices continue to decline slowly but on a steady pace. Economist and others expect prices to hold or go up once the foreclosure process has run its course but the reality is that home prices are way out of line with income including price rent ratios. When using a price rent ratio use 100 times monthly rent as a baseline to get a good idea what local home prices should be. In my area most of these homes rent for about $1600 a month and owners try and sell between 350K and 500K, so based on the rent market these homes need to sell in the 160K range which is a long way from there bubble high of 650K or even current market prices which reflects a slow market. Maybe when and if these properties get down to reasonable price rent ratios they will sell.

Posted by: Ron Caldwell | May 13, 2011 at 04:30 PM

House price to rent is analogous to stock P/E ratio, and we know this can spend long periods of time well distant from its average value. So how much overshoot might we expect?

Posted by: dunkelblau | May 13, 2011 at 07:10 PM

"Here's hoping my chart is more predictive of housing prices than the alternative."

Isn't there something odd about senior employees of the Federal Reserve, the institution charged with primary responsibility for preserving the purchasing power of our currency, cheering (asset price) inflation?

Posted by: PatR | May 13, 2011 at 07:52 PM

Over and over again analysts use price/rent as if RENT was some kind of cosmic truth telling measure of value. Rents are quite volatile. Every bit as volatile as housing prices (if not more so). They very tremendously even within a small geographic area. The types and quality of rental housing also varies depending on when properties were built.

RIGHT NOW RENTS ARE WAY UP (in many areas) and vacancies are down. This is out of line with historical employment vs rent trends. These high rents obviously distort the price/rent ratio and there is no reason whatsoever to imagine that rent levels provide more truth of value than the housing prices themselves.

Posted by: Max Rockbin | May 13, 2011 at 11:30 PM

I think the above comments are a better indicator of what is really happening in today's real estate market than are models based upon historical data that is not likely to be repeated anytime soon.

I use proprietary software from foreclosureradar.com (I have no financial interest in the site) and the volume of REO inventory, both current and in the pipeline is staggering in California. As short sales and REO re-sales re-set the comparable prices, sellers are being forced to accept lower and lower prices because their homes otherwise won't appraise at the contracted sales price.

Based upon this data, prices are now back to 2000 and the "deals" can be had for 1996 prices. I suspect we have a few more years, and perhaps another recession, before it will be time again to buy.

Posted by: Jeff Goodrich | May 14, 2011 at 11:42 AM

The interesting thing about price to rent measures is how different they are geographically. The areas that are clearly in a housing oversupply situation are incredibly cheap to buy vs rent (think of renting as buying plus buying a put on the house struck at the market) whereas other areas that are in "relative" equilibrium are not at all cheap on a buy vs rent measure. As an example take a look on zillow at the price of a three bedroom house in Dearborn Mi. How this all sorts itself out will be an interesting experiment. In the absence of easy (IE: high LTV-No doc) lending, the most reasonable hypothesis is much lower prices.

Posted by: Steve Fulton | May 14, 2011 at 12:03 PM

In parts of metro-Denver, rents are above my value to rent formula: value/income = 1 percent. I have used this formula for over 40 years so I haven't purchased but only a few Denver properties in the last 20 years. Now I am purchasing properties again but one has to be keenly aware of declining value neighborhoods and rising expenses but property taxes are declining.

Posted by: ron glandt | May 14, 2011 at 12:37 PM

@Main Street Muse. The price to rent ratio is just that, a ratio independent of interest rates at the time. I believe your suggestion is more in line of a housing affordability index, which takes into consideration the interest rate and therefore monthly payment at the time. Using that measure of affordability, buying a house is actually more affordable now than in the past because of current low rates. In other words, we are back to long term trend in price to rent ratio, but still below long term trend in interest rates, which indicates we have some padding to absorb an increase to historical 7%.

Another thought about the "bottom." Distressed properties pulling prices down significantly. Agreed. But, doesn't the price of new construction ultimately determine the long term "price point" of the market with "used" homes selling on average 15-20% below new construction for the same quality and square footage? Assuming a continued expansion in the population, the recycling of current inventory, or washing out of the shadow inventory will only last so long before new houses must be built. New construction has an absolute cost in terms of labor and commodities. Would be interesting to see a trend line of the cost of new construction per square foot over time.

Posted by: Virginia | May 14, 2011 at 04:15 PM

Property prices in desirable parts of California probably will never stabilize at 100 months rent because of combination of premiums buyers are willing to pay and the distortions caused by prop 13. However, long-term prices have tracked around 4x income and hit around 10x during the bubble. So that might predict a $650K bubble house going for about $250k

Posted by: doug liser | May 15, 2011 at 10:42 AM

Erik Hurst from the University of Chicago uses a different methodology than Case-Schiller. He says CS overstates moves.

Based on his predictions of a couple of years ago, we only have around 10% left on a macro basis. Individual markets might be different.

Posted by: Jeff Carter | May 15, 2011 at 11:19 AM


Posted by: MILE | May 16, 2011 at 12:27 AM

I am rather puzzled as to what the rent valuations are based on. AFIK there is no mechanism that requires landlords to report to any centralized statistical agency what rents their tenants are actually paying, along with information that would permit comparison to actual sale prices for comparable homes. Here in the northwest suburbs of Chicago, at bubble peak there were hardly any single-family homes for rent, and none comparable to mid- to high-end properties. Homes that in the past might have been rentals had been bought up by flippers and were being rehabbed -- or torn down to be replaced with million-dollar McMansions.

Now, there is a glut of homes for rent, but nearly all at prices that reflect not what the market will pay, but rather what the homeowner needs to pay their mortgage and taxes. As the owners are not business-people and are in a state of denial, they refuse to lower the asking rent, preferring zero income to any income less than mortgage plus taxes. So one finds the same homes on the MLS rental pages six months, nine months, or even more. Recently, one sees an occasional reduction in asking rent --- but not enough to move the property. I suspect that many of the homes that have disappeared from the MLS rental listings have disappeared not because they were rented, but because they were finally foreclosed upon. But if they were rented, I suspect it was at a monthly rate well below the asking rent.

So if the rents used for the price-to-rent ratio calculation are the MLS asking rents, they are probably significantly overstated.

Moreover, since the market is obviously not clearing at the rents being currently being asked, actual rents will have to end up significantly lower than the rents currently being paid for the homes that do rent, if the additional homes (which are effectively a "shadow inventory") are ever going to actually be rented.

Posted by: jm | May 16, 2011 at 03:24 AM

Zillow is half the problem. They estimate my house on the basis of never seeing it, nor ever seeing the improvements I've made. They have a statistical model they follow, but I own a ranch house on a full ace, and in my area there are probably 1 or 2 similar houses for sale, so there is no statistically valid sample to put into their model.

The other half is the estimators that do the same thing. They don't look at a house, they don't have a valid statistical sample, so there numbers are irrelevant.

The value of a house is what a buyer and seller say it is. The only other basis to use is build or rebuild cost. So, let's be honest, the system is the problem.

If you really want to solve he problem, reenact Glass Steagall, thereby forcing the banks to lend money in order to make a profit instead of gambling on derivatives. They don't lend, they die. As Ben Johnson said, "The prospect of hanging has a way of concentrating the mind."

Posted by: Don Hiorth | May 16, 2011 at 08:30 AM

@Virginia - "Using that measure of affordability, buying a house is actually more affordable now than in the past because of current low rates."

If you are a first time buyer, this could be an okay time to buy - but prices are still significantly higher than in the late 1990s, and it seems that they will continue to decline through the next 12 - 18 months. And employment uncertainties/wage stagnation could make buying a bit tricky today.

If you are NOT a first time buyer, but a homeowner looking to sell, the price to rent ratio is irrelevant. The market value of your home has tanked significantly in the last few years. That's a serious decline in the net worth of a middle-class home owner.

Posted by: Main Street Muse | May 16, 2011 at 12:20 PM

But when bubbles burst don't prices normally overshoot to the downside? If house prices are "average" now, wouldn't this suggest that they still have a lot further to fall?

Posted by: John Smith | May 17, 2011 at 07:17 AM

The price/rent ratio probably should not compare the price to rent of equivalent houses. I am a renter now, but if I ever do decide to buy a house, I would buy a house much larger than the one I am renting now.

Posted by: skr | May 31, 2011 at 05:15 PM

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May 11, 2011

Is housing hurting the recovery?

Though the week is only half over, I'm going to nominate Stan Humphries and Zillow as bearers of the week's most distressing economic news:

"Home values fell three percent in the first quarter of this year, marking a pace of decline not seen since 2008 when the housing recession was at its worst. Home values fell one percent between February and March and 8.2 percent from March 2010."

Calculated Risk provides a handy table of how prices have affected equity values in homes by locale, as the Zillow Real Estate Research blog predicts the price-decline end is not so near:

"Previously, we anticipated a bottom in home values by the end of 2011. But with values falling by about 1 percent per month so far, it's unlikely that will happen. We now believe a bottom will come in 2012, at the earliest."

At The Curious Capitalist, on the other hand, Stephen Gandel says he's not so sure:

"To be sure, housing prices have fallen this year. But the Zillow numbers out today make the housing market look worse than it is. The problem is with how Zillow tracks home prices. Unlike other measures of the housing market, Zillow's numbers are not based on actual sales, but on estimates of what its model thinks your house, along with every other house in America is worth. Zillow's model is similar to how an appraiser figures out what your house is worth. It looks at past sales of houses that are similar to yours and then guesses what your house is worth. But by the time those sales are fed into Zillow's system they are months old. … If the housing market is turning, Zillow is going to miss it."

Is the housing market turning, particularly with respect to prices? Tough to say. If you want your glass half full, these words from the New York Fed's Liberty Street Economics might be the tonic for your tastes:

"This post gives our summary of the 2011:Q1 Quarterly Report on Household Debt and Credit, released today by the New York Fed. The report shows signs of healing in household balance sheets in the United States and the region, as measured by consumer debt levels, delinquency rates, foreclosure starts, and bankruptcies…

"Delinquency rates are generally down…

"New foreclosures fell nationally and in the region. About 368,000 individuals in the United States had a foreclosure notation added to their credit report between December 31 and March 31, a 17.7 percent decrease from the 2010:Q4 level. New foreclosure rates fell from 0.19 percent to 0.15 percent for all individuals nationwide…"

What may be the most important aspect of the report is highlighted by the Financial Times's Robin Harding: "…fewer new mortgages going bad, and some bad mortgages getting better." In fact, for the first time since the crisis began, the percentage of mortgages transitioning from 30 to 90 days delinquent to current exceeds the percentage transitioning to seriously delinquent (90-plus days).

There is, of course, plenty of material for the housing-price bears. For example, the flow of seriously delinquent mortgages is quite elevated.

According to estimates from CoreLogic, the supply of "distressed" homes is greater than 15 months at the current pace of sales:

Kevin Drum thinks this all adds up to problems for the recovery (hat tip Free Exchange):

"Most analysts now expect that the housing market won't bottom out until sometime next year. Until that happens, it's unlikely that that the sluggish economic recovery we're seeing right now will improve much."

The view here at the Atlanta Fed—and the answer to the question posed in the title of this post—was provided earlier today by our president, Dennis Lockhart, in a speech given to the Atlanta Council for Quality Growth:

"…can we have high-quality growth while the residential real estate and commercial real estate sectors continue to be so weak? Not completely, in my opinion. The recovery will progress, but it will not be robust until we work through the economy's serious imbalances, including those in the real estate sector.

"As I look ahead, I think the most reasonable assumption is that improvement of the real estate sector will lag an otherwise improving economy. But I am encouraged by the fact that the economy is increasingly on firmer footing."

I will let you decide whether that glass is half-empty or half-full.

Photo of Dave Altig By Dave Altig
senior vice president and research director at the Atlanta Fed

May 11, 2011 in Economic Growth and Development, Forecasts, Housing, Real Estate | Permalink


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the accelerating decline in housing prices is really old news, and its not just zillow that's been reporting it; corelogic reported a 1.5% decline in March, which put their index 4.6% below the 2009 lows; the NAR index has fallen 7% YTD, and is also 4.6% below last years reading; and just last week, clear capital declared an official double dip, after their index fell 4.9% from the previous quarter and 5.0% YoY...

Posted by: rjs | May 12, 2011 at 05:49 AM

I'm voting for half empty. And I think it will take more than just a year before housing recovers to the point it will have a significant positive impact on the economy. So I’m projecting a slow choppy recovery for the U.S. economy.

Posted by: Phil Aust | May 16, 2011 at 11:44 AM

US government has stimulate the economy with 4.5 trillions of dollars or so and its only stimulated the economy half cos it bail out the big co. only . The main contributor of US economy , consumers are left in debt . They need to be bailed out so that economy will be balanced.

Posted by: Win | May 24, 2011 at 12:29 AM

I'm going to have to agree with the half empty comment. I think it is true that we are a long ways away from the economy going up. Not only is housing suffering, but business owners as well. Hopefully change will come soon.

Posted by: Stephanie | June 01, 2011 at 03:07 PM

Another hand for half empty. It's really hard to recover from economic downfall. I don't think housing is the mainstream of this. Rapid growth of population and cost cutting also affect the chance of regaining it back.

Posted by: makati for rent | August 03, 2011 at 08:38 PM

Im agree with the half empty comment and also the rapid growth of population and cost cutting affect of our economy downfall.

Posted by: cavite housing | August 22, 2011 at 12:15 AM

Housing has definitely hurt our economy, people are unable to pay rents and loans of there houses

Posted by: iphone 6 | February 12, 2012 at 12:49 PM

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May 04, 2011

Is offshoring behind U.S. employment's current problems?

In a week loaded with important economic news, no piece of data will garner more justifiable attention than Friday's April employment report. The importance of that report was driven home by Chairman Bernanke's comments at last week's press conference (emphasis added):

"REPORTER: Mr. Chairman, given what you know about the pace of the economy now, what is your best guess for how soon the [Committee] needs to begin to withdraw its extraordinary stimulus for the economy.

"CHAIRMAN BERNANKE: Well, currently as the statement suggests, we are in a moderate recovery. We will be looking very carefully first to see if that recovery is indeed sustainable, as we believe it is. We will also be looking very closely at the labor market. We have seen improvement in the labor market in the first quarter relative to last year. We would like to see continued improvement, more job creation going forward. At the same time we are also looking very carefully at inflation. The other part of our mandate."

In February and March payrolls expanded by an average of 205,000 jobs each month, a pace that is probably sufficient to make progress toward reducing the still-elevated unemployment rate. But at that pace it will take about three years before we see the same number of jobs that existed as of December 2007.

The significant lag between gross domestic product recovery and employment recovery has been particularly extreme in the wake of the most recent recession, but this pattern was a characteristic of the previous two recessions as well. You know the facts: In the post-WWII recessions up to 1989, the average time it took to regain recession-generated job losses was 10 months. The recovery time expanded to 23 months and 38 months in the recoveries following the 1990–91 and 2001 recessions. And we are on track to shoot past those records this time around.

Explanations abound, but one popular belief is that the answer hides somewhere within the somewhat ambiguous phenomenon labeled "globalization." A few weeks back, David Wessel of the Wall Street Journal provided some pretty compelling facts:

"U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers, have been hiring abroad while cutting back at home, sharpening the debate over globalization's effect on the U.S. economy.

"The companies cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million, new data from the U.S. Commerce Department show. That's a big switch from the 1990s, when they added jobs everywhere: 4.4 million in the U.S. and 2.7 million abroad."

Two obvious questions: What jobs are we talking about, and what is the meaning of the differential in job growth? Is this a story of "offshoring"—the shifting, if you will, of jobs to foreign locales for production that still fundamentally satisfies U.S. demand? Or is it more a reflection of the different pace of growth in foreign markets relative to U.S. markets?

It's difficult to come to definitive conclusions on these questions, but we do have some information about the types of jobs that underlie the aggregate job-growth picture drawn in Wessel's statistics. Here's what we know based on data from the U.S. Bureau of Economic Analysis's International Economic Accounts from 1999 to 2008:


A couple of things jump out. First, among U.S. multinational employers, some industries added U.S. employees, and some shed them. On net, these corporations lost 1.903 million U.S. jobs from 1999–2008. During this same period, manufacturing multinationals in the United States lost 1.938 million jobs (see the table). Also, foreign employment in manufacturing represented less than 13 percent of U.S. employment losses and only 10 percent of the total foreign employment gains generated by those multinationals.

By industry, the largest U.S. job losses after the manufacturing industries were created by finance and insurance firms. But, as the table shows, foreign employment in these types of firms also fell. In fact, there were only two types of industries listed above—manufacturing and information—in which foreign employment by U.S. multinationals grew while U.S. employment fell.

Finally, the largest category of foreign job gains was "other industries," which breaks down as follows:


Sixty-nine percent of the foreign employment growth by U.S. multinationals from 1999 to 2008 was in the "other industries" category, and 87 percent of that growth was in three types of industries: retail trade; administration, support, and waste management; and accommodation of food services. Some fraction of these jobs, no doubt, reflect "offshoring" in the usual sense. But it is also true that these are types of industries that are more likely than many others to represent production for local (or domestic) demand as opposed to production for export to the United States.

We certainly don't present this information as a definitive answer to the question about the role of offshoring in the slow U.S. jobs recovery. But if you forced us to choose between global or domestic factors as the place to look for solutions as we struggle with persistent underperformance in U.S. labor markets, we'd choose the latter.

Update: At the Street Light blog, Kash Mansori looks at the issue focusing on the global distribution of sales. Different take, similar conclusion.

Photo of Dave Altig By Dave Altig
senior vice president and research director at the Atlanta Fed

May 4, 2011 in Economic Growth and Development, Employment, Labor Markets | Permalink


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Does the data for "Foreign Employees of US Multinationals" include the employees of foreign companies contracted for work that the multinationals used to do themselves?

Posted by: David | May 04, 2011 at 03:13 PM

Doesn't this analysis miss the fact that companies will often partner with an offshore supplier when transferring work from the US? It seems like that could hide quite a bit of growth

Posted by: Twonius | May 04, 2011 at 03:58 PM

I've looked at this a bit, and it seems that automation is the primary cause of the loss of manufacturing jobs.

Thanks for this blog by the way. Do any other Fed branches have blogs?

Posted by: Carl Lumma | May 04, 2011 at 04:30 PM

The biggest problem is jobs were lost and that would be mostly due to the overvalued dollar. That depresses both jobs and domestic investment.

Posted by: Lord | May 04, 2011 at 06:59 PM

Q: What do finance and insurance have in common?

A: They are heavily computerized. Work in those two particular industries is more productive since the advent of information technology. This additional productivity means fewer people doing more work.

Q: What do finance and insurance have in common with manufacturing?

A: All three have been revolutionized by the advent of information technology, and particularly its expansion to include communication technology on a global scale, and in the case of manufacturing, the now common use of industrial automation. Manufacturing companies are able to produce with far fewer people and with less skilled people, and are now commonly able to leverage far less costly labor markets around the world on a far more timely basis (time is an essential element of productivity).

This shouldn't so hard to see. Yes, offshoring has caused job loss, but even that shares the same characteristic: global communications technology has allowed global corporate communications and thus global management and similar activities such as customer support, logistics, etc., which in turn have allowed real time global operations on a broad scale. This is not evolutionary - it's revolutionary.

In this model of "creative destruction", the significant technology being reduced if not replaced by information and communications technology is human intellectual labor itself. And this is happening with no loss of productive capacity.

Posted by: John | May 05, 2011 at 11:39 AM

I guess Foxconn must be a US multinational, then.

Posted by: Moopheus | May 05, 2011 at 02:19 PM

I've had the same question. When the media announces corporate hirings and new jobs, are these payroll jobs domestic or foreign?

Similar question is when a multinational company announces better sales figures, are those domestic or global sales? I believe it's global sales. So just because a multinational corporation is bringing in more money, doesn't mean the U.S. is doing better, but could mean other countries are doing a lot better.

Posted by: snakyjake | May 05, 2011 at 06:30 PM

For my solely US based insurance company, most information technology functions are contracted out off shore.

I would re-ask David's question. "Does the data for "Foreign Employees of US Multinationals" include the employees of foreign companies contracted for work that the multinationals used to do themselves?"

Posted by: RobertInAz | May 06, 2011 at 03:17 PM


Productivity gains that reduce the labor needed in U.S. manufacturing is a big driver of job loss in the U.S. Which in and of itself isn’t a bad thing. The problem is to get those people who lose their jobs retrained and back into the labor force.

Rather than extending unemployment benefits (that reduce incentives to work) that money would be better spent on retraining programs that put people back to work as quickly as possible.

Posted by: Phil Aust | May 16, 2011 at 03:03 PM

Wow! "retraining programs!" That is brilliant. Why didn't anyone think of that before?

Posted by: Edward Ericson Jr. | May 17, 2011 at 04:39 PM

of kinks to work out, but Microsoft has lead the way this year with dynamic viral marketing and for their first venture into a new, highly competitive market.

Posted by: prefabrik | May 28, 2011 at 12:46 PM

"But if you forced us to choose between global or domestic factors as the place to look for solutions as we struggle with persistent underperformance in U.S. labor markets, we'd choose the latter..."

I agree. Add to that changing business strategies to adapt to the changing markets.

Posted by: teamlauncher | October 25, 2011 at 01:00 AM

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