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.

June 09, 2016

It’s Not Just Millennials Who Aren't Buying Homes

In recent years, much attention has been focused on the growing tendency of millennials to rent. Theories for the decrease in homeownership among young adults abound. They include rising student debt levels that crowd out additional borrowing, a tendency to live in more urban areas where the cost to buy is relatively high, a generally tougher credit environment, and even shifts in the perception of homeownership in the wake of the housing bust. The ideas have been widely debated, and yet no single factor seems to neatly explain the declining share of the millennial population opting to buy a house. (See this webcast by the Atlanta Fed's Center for Real Estate Analytics for a discussion of these issues.)

To the extent that these factors are true, they may be affecting the decisions of other generations as well. Chart 1 below shows the overall average homeownership rate and homeownership rates by age group from 1982 to 2015. It's clear that homeownership rates have declined for everyone during the past 10 years, not just for millennials.

In fact, homeownership among young Generation Xers has fallen by a bit more than the millennial generation since the housing peak—declining 11 percentage points since 2005 compared with a decline of 9 percentage points for those under 35 years old.

Another interesting point of comparison is the mid-1980s to mid-1990s, a period in which the United States had a relatively stable share of owner-occupied housing of around 64.0 percent. During the subsequent housing boom, the homeownership rate climbed to a peak of 69 percent in 2004, only to fall back down to 63.7 percent in 2015, a level similar to that prevailing before 1995. However, each age group under age 65 has a somewhat lower homeownership rate than their same-aged peers had during the 1986–94 period.

Chart 1: Homeownership Rates by Age

The fact that the average U.S. homeownership rate is close to rates seen in the mid-1980s and mid-1990s while homeownership rates within age groups (under 65) are currently lower than their respective averages in the mid-1980s to mid-1990s suggests that factors other than age may be affecting the average person's decision to buy or rent.

To investigate what else may be going on, charts 2 and 3 show homeownership rates by family type and race. Between 2005 and 2015, the trend mirrors what's happening by age group. The tendency to own a home has been falling for all family types and races over the past decade. In general, economic incentives (or cultural attitudes) appear to have shifted the population toward renting and away from buying.

However, the picture is quite different when you compare homeownership rates by family type and race to the pre-1995 period. While homeownership rates within age groups are generally lower today, married couples, one-person households, and nonmarried, multiperson households were all more likely to own their home in 2015. Homeownership rates across race (except for blacks) were also higher in 2015 than in 1994.

Chart 2: Homeownership Rates by Type of Family

Chart 3: Homeownership Rates by Race or Ethnicity

So how do we interpret the fact that the overall homeownership rate is close to its average in the 1986 to 1994 period? Are millennials to blame? Yes. But so is everyone else under the age of 65. The data suggest that whatever is affecting millennials' homeownership decisions is applicable to older individuals as well. Further, it seems there are other, possibly larger, factors affecting homeownership, such as the changing face of America. Although homeownership rates by family types and racial groups are a bit above the level seen in 1994, the average person in 2015 was about as likely to live in a home that is owned or being bought. Thus, the shift in the distribution of the population toward racial groups and family types (and likely other factors) that tend to have lower homeownership rates is likely exerting an important influence on the overall homeownership rate.

June 9, 2016 in Housing, Real Estate | Permalink


Very interesting trends. One question though: you say "The fact that the average U.S. homeownership rate is close to rates seen in the mid-1980s ... suggests that factors other than age may be affecting the average person's decision to buy or rent." Could not that just be because of demographic changes in the US (The population is on average older, and older people have higher homeowner rates) so that in fact it is all age related?

Posted by: Layne | June 09, 2016 at 07:07 PM

The sharp Race / Ethnicity disparities in homeownership that you chart raise the question whether trends in the distribution of household income and wealth would explain most of the decline in homeownership.

Posted by: Cardinal Lulio | June 11, 2016 at 10:06 AM

home prices are back to peak bubble levels. actual homebuyers have been crowded out. isn't that what inflation - and the goal of QE/Fed - is all about?

Posted by: ugh | July 07, 2016 at 06:14 PM

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August 01, 2014

What's behind Housing's June Swoon?

The housing market appears to have endured a particularly cruel month in June. Fairly good numbers on existing home sales provided some antidote to a second consecutive monthly decline in housing starts and a sharp decline in new home sales. But that palliative is less comforting than it might otherwise be given the fact that existing sales were still 2.3 percent below the June 2013 rate, and budding optimism diminished further with this week's unexpected drop off in the pace of pending home sales.

In her recent remarks before the Senate Committee on Banking, Housing, and Urban Affairs and before the House Committee on Financial Services, Federal Reserve Chair Janet Yellen took particular note of ongoing weakness in residential real estate:

The housing sector, however, has shown little recent progress. While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year's increase in mortgage rates, and readings this year have, overall, continued to be disappointing.

The statement following the conclusion of this week's meeting of the Federal Open Market Committee provided an exclamation point to Chair Yellen's commentary:

Information received since the Federal Open Market Committee met in June indicates that ... recovery in the housing sector remains slow.

The housing market was a bright spot in the economy from early 2012 to mid-2013, and there's no shortage of conjecture on why it has morphed into a source of concern. Reasonable hypotheses include reduced affordability brought on by higher mortgage rates and real estate prices, tighter lending conditions and ongoing balance sheet issues for households (think student debt), and supply constraints associated with rising construction costs and lot availability (at least in the most desirable locations, as examples here and here discuss).

In a March post in the Atlanta Fed's SouthPoint, affordability issues—specifically, interest rates and prices—constituted two of the top three explanations given by our broker and builder contacts in the Southeast for recent slower growth in the housing market. Earlier, we had examined the affordability issue in an Atlanta Fed Real Estate Research post. In it, we decomposed the affordability index that the National Association of Realtors (NAR) produces each month. We used our decomposition to show that the rebound in housing prices in 2012 served as a huge drag on affordability and, after six years of contributing to affordability, mortgage interest rates became a drag in mid-2013.

How—and why—has the affordability index changed since we last checked? The chart below provides an update through May 2014 (the latest date for which we have the data necessary for our decomposition):

On a year-over-year basis, affordability has fallen as a result of rising prices and last summer's uptick in interest rates. Still, affordability remains high by precrisis standards. And given that we have recently passed the anniversary of the first "taper talk," the impact of the interest rate component should fade if rates remain stable and thus become similar to, if not below, year-ago levels. Likewise, house price growth has decelerated and will continue to be less of a drag on affordability as measured by NAR.

It may be fair to attribute some of the recent softness in housing to affordability. But in light of the still relatively high readings of our index, it seems likely that the main culprits are one or more of the other factors discussed above.

Photo of Carl HudsonBy Carl Hudson, director of the Atlanta Fed's Center for Real Estate Analytics, and


Photo of Jessica DillJessica Dill, senior economic research analyst in the Atlanta Fed's research department


August 1, 2014 in Housing, Real Estate | Permalink


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October 18, 2013

Why Was the Housing-Price Collapse So Painful? (And Why Is It Still?)

Foresight about the disaster to come was not the primary reason this year’s Nobel Prize in economics went to Robert Shiller (jointly with Eugene Fama and Lars Hansen). But Professor Shiller’s early claim that a housing-price bubble was full on, and his prediction that trouble was a-comin’, is arguably the primary source of his claim to fame in the public sphere.

Several years down the road, the causes and effects of the housing-price run-up, collapse, and ensuing financial crisis are still under the microscope. Consider, for example, this opinion by Dean Baker, co-director of the Center for Economic and Policy Research:

...the downturn is not primarily a “financial crisis.” The story of the downturn is a simple story of a collapsed housing bubble. The $8 trillion housing bubble was driving demand in the U.S. economy in the last decade until it collapsed in 2007. When the bubble burst we lost more than 4 percentage points of GDP worth of demand due to a plunge in residential construction. We lost roughly the same amount of demand due to a falloff in consumption associated with the disappearance of $8 trillion in housing wealth.

The collapse of the bubble created a hole in annual demand equal to 8 percent of GDP, which would be $1.3 trillion in today’s economy. The central problem facing the U.S., the euro zone, and the U.K. was finding ways to fill this hole.

In part, Baker’s post relates to an ongoing pundit catfight, which Baker himself concedes is fairly uninteresting. As he says, “What matters is the underlying issues of economic policy.” Agreed, and in that light I am skeptical about dismissing the centrality of the financial crisis to the story of the downturn and, perhaps more important, to the tepid recovery that has followed.

Interpreting what Baker has in mind is important, so let me start there. I have not scoured Baker’s writings for pithy hyperlinks, but I assume that his statement cited above does not deny that the immediate post-Lehman period is best characterized as a period of panic leading to severe stress in financial markets. What I read is his assertion that the basic problem—perhaps outside the crisis period in late 2008—is a rather plain-vanilla drop in wealth that has dramatically suppressed consumer demand, and with it economic growth. An assertion that the decline in wealth is what led us into the recession, is what accounts for the depth and duration of the recession, and is what’s responsible for the shallow recovery since.

With respect to the pace of recovery, evidence supports the proposition that financial crises without housing busts are not so unique—or if they are, the data tend to associate financial-related downturns with stronger-than-average recoveries. Mike Bordo and Joe Haubrich, respectively from Rutgers University and the Federal Reserve Bank of Cleveland, argue that the historical record of U.S. recessions leads us to view housing and the pace of residential investment as the key to whether tepid recoveries will follow sharp recessions:

Our analysis of the data shows that steep expansions tend to follow deep contractions, though this depends heavily on when the recovery is measured. In contrast to much conventional wisdom, the stylized fact that deep contractions breed strong recoveries is particularly true when there is a financial crisis. In fact, on average, it is cycles without a financial crisis that show the weakest relation between contraction depth and recovery strength. For many configurations, the evidence for a robust bounce-back is stronger for cycles with financial crises than those without...

Our results also suggest that a sizeable fraction of the shortfall of the present recovery from the average experience of recoveries after deep recessions is due to the collapse of residential investment.

From here, however, it gets trickier to reach conclusions about why changes in housing values are so important. Simply put, why should there be a “wealth effect” at all? If the price of my house falls and I suffer a capital loss, I do in fact feel less wealthy. But all potential buyers of my house just gained the opportunity to obtain my house at a lower price. For them, the implied wealth gain is the same as my loss. If buyers and sellers essentially behave the same way, why should there be a large impact on consumption? *

I think this notion quickly leads you to the thought there is something fundamentally special about housing assets and that this special role relates to credit markets and finance. This angle is clearly articulated in these passages from a Bloomberg piece earlier in the year, one of a spate of articles in the spring about why rapidly recovering house prices were apparently not driving the recovery into a higher gear:

The wealth effect from rising house prices may not be as effective as it once was in spurring the U.S. economy...

The wealth effect “is much smaller,” said Amir Sufi, professor of finance at the University of Chicago Booth School of Business. Sufi, who participated in last year’s central-bank conference at Jackson Hole, Wyoming, reckons that each dollar increase in housing wealth may yield as little as an extra cent in spending. That compares with a 3-to-5-cent estimate by economists prior to the recession.

Many homeowners are finding they can’t refinance their mortgages because banks have tightened credit conditions so much they’re not eligible for new loans. Most who can refinance are opting not to withdraw equity after the first nationwide decline in house prices since the Great Depression reminded them home values can fall as well as rise...

Others are finding it difficult to refinance because credit has become a lot harder to come by. And that situation could worsen as banks respond to stepped-up government oversight.

“Credit is going to get tighter before it gets easier,” said David Stevens, president and chief executive officer of the Washington-based Mortgage Bankers Association...

“Households that have been through foreclosure or have underwater mortgages or are otherwise credit-constrained are less able than other households to take advantage” of low interest rates, Fed Governor Sarah Bloom Raskin said in an April 18 speech in New York.

(I should note that Sufi et al. previously delved into the relationship between household balance sheets and the economic downturn here.)

A more systematic take comes from the Federal Reserve Board’s Matteo Iacoviello:

Empirically, housing wealth and consumption tend to move together: this could happen because some third factor moves both variables, or because there is a more direct effect going from one variable to the other. Studies based on time-series data, on panel data and on more detailed, recent micro data point suggest that a considerable portion of the effect of housing wealth on consumption reflects the influence of changes in housing wealth on borrowing against such wealth.

That sounds like a financial problem to me and, in the spirit of Baker’s plea that it is the policy that matters, this distinction is more than semantic. The policy implications of an economic shock that alters the capacity to engage in borrowing and lending are not necessarily the same as those that result from a straightforward decline in wealth.

Having said that, it is not so clear how the policy implications are different. One possibility is that diminished access to credit markets also weakens policy-transmission mechanisms, calling for even more aggressive demand-oriented “pump-priming” policies of the sort Dean Baker advocates. But it is also possible that we have entered a period of deep structural repair that only time (and not merely government stimulus) can (or should) engineer: deleveraging and balance sheet repair, sectoral resource reallocation, new consumption habits, new business models driven by both market and regulatory imperatives, you name it.

In my view, it’s not yet clear which policy approach is closest to optimal. But I am fairly well convinced that good judgment will require us to think of the past decade as the financial event it was, and in many ways still is.

*Update: A colleague pointed out that my example describing housing price changes and wealth effects may be simplified to the point of being misleading. Implicitly, I am in fact assuming that the flow of housing services derived from housing assets is fixed, a condition that obviously would not hold in general. See section 3 of the Iacoviello paper cited above for a theoretical description of why, to a first approximation, we would not expect there to be a large consumption effect from changes in housing values.

David Altig By Dave Altig, executive vice president and research director at the Atlanta Fed

October 18, 2013 in Economic conditions, Housing, Pricing, Real Estate | Permalink


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A primary residence's home price reflects the economic value to a homeowner of living in an area. The major part of the economic value of living somewhere is future expected earnings. The home price will not exceed the economic value to the marginal buyer. When expectations of future earnings decline home prices will decline across the board.

Using housing wealth is just intertemporal substitution. Refinancing is self-financing with homeowners self-qualifying themselves for the mortgage debt. Bank restrictions can limit refinancing but most homeowners will not refinance if they belive they cannot afford to repay the debt or sell above mortgage amounts.

Home price appreciation and the ability to pay back the refinancing or first mortgage debt depend on expectations of a continuation of wage growth to the borrower, or future homebuyer (if one expects to sell prior to debt payoff). A decline in expected wage growth rates (productivity) will cause home prices to decline, unemployment to increase and wages to stagnate.

Wage and GDP growth are linked to capital investment and there has been a sharp decline in US capital investment, which is continuing. If the decrease in capital investment was anticipated (expected), then whatever shock caused the decline in investment is also causing the continuing slow recovering.

Home price decline and the continuing slow recovery have common causes.

Posted by: Milton Recht | October 18, 2013 at 06:24 PM

For those of us between 20-40, first time buyers or up-graders, high land/building prices are very much a drag on our budget. This also includes high rents for the businesses we are starting.

My parents were able to buy their first house in their early twenties on a single blue collar income with a 40% down payment that took only a few years to accumulate. That seems utterly utopian among my peers.

In the long term, high housing prices is a drag on the economy. Do high gasoline prices help people because they feel their cars' tank is worth more?

The only people benefiting from rising house prices are people speculating, those who buy or build with the intent to sell.

Posted by: Benoit Essiambre | October 19, 2013 at 08:45 AM

Mr. Altig, the reason housing mattered so much in the late 2000s, and more than it had in previous times, was precisely because the housing "wealth effect" was just about the only thing normal people had going for them.

While wealth seemed to be increasing in the financial sector, much of that, as we learned, was piggy-backed on the notion that houses would always increase in value--and on the widespread idea that any loan was a good loan because you could bundle it and sell it off.

Much of the rest of the country's GDP improvements came in tech, but tech lately tends to destroy the wealth of everyday people as it automates and outsources their jobs.

That's why the late 1990s/early 2000s real estate boom needs to be seen as a response to a fading job market. The end of job security and the ever-declining wages for ordinary workers meant millions of people taking up the business of flipping houses.

The bubble's runup cannot be understood except in this context. Most people did not want to become mortgage fraudsters. But economic circumstances changed to make house-flipping and mortgage fraud the most (and mostly the only) lucrative option for people who used to be bank tellers and salesmen and low-level software developers.

And right: there has as yet been no policy changes designed to either increase wages or create honest jobs for everyday people. Absent action on this concern, the only question before us is, What will bubble next?

Posted by: Edward Ericson Jr. | October 21, 2013 at 03:35 PM

A couple of issues not mentioned abut the "wealth effect":

During the bubble, many folks bought houses with little or no downpayment. Many bought houses with loans that were not really affordable for them in the long term because of the terms of the loan or the because the actual issuance of the loan was, shall we say, irregular. So when rates rose or prices went down, they had no buffer.

Many who had houses they could afford or even paid off took the wealth effect somewhat literally and spent it, in the form of equity loans, thanks to the same low rate, loose terms, and irregularities. The "wealth" they had just spent turned out to be a short-lived ephemeral delusion, but the debt was durable.

Posted by: MacCruiskeen | October 22, 2013 at 07:24 AM

During the peak of the housing bubble, consumers were taking out $100B/month in new debt:


I find it stunning that people still don't understand this basic aspect of the reality of the erstwhile "Bush Boom".

It was all borrowed money! Trillions! Flowing to millions of households, and creating millions of jobs via this stealth stimulus.

But it was all ponzi-based, as the specuvesting was being supported by more and more "suicide" lending products and outright fraud at all levels of the FIRE sector, from customer-facing brokers to the ratings agencies stamping AAA on CDOs.

What got the housing appreciation train going in 2002 was Greenspan's lower interest rates and the 2001-2003 tax cuts, which empowered homebuyers to bid up the cost of housing more.

Momentum kept the game going in 2004, but the smart money started getting out in 2005, leaving the field to idiots stampeded into buying then or being priced out forever (plus millions of specuvestors like Casey Serin playing with OPM).

Drop $100B/month onto the middle class again and we'd have a helluva great economy again, like we did in 2004-2005.

Posted by: Troy | October 23, 2013 at 10:01 PM

Don't forget the fraudulent nature of the house price increases in much of the country.

In many many places, loans were issued and properties flipped because lenders and/or borrowers were blatantly writing fraudulent loan paperwork. Prices were inflated above sustainable economic value as a result. Those who sold received ill-gotten gains; those who bought and held were forced to pay higher prices than they should have - they were robbed. Those who flipped paper received ill-gotten gains; those who bought the AAA-rated bonds and didn't get their interest or principal back were robbed. Those who borrowed against the higher, fraudulent prices, thinking that rising prosperity and declining rates would make refinancing later affordable, were tricked too. In fact, never in the course of human events have so many been robbed so badly, by so few.

Wondering why the eventual collapse was so painful is a ludicrous pastime for "economists". The net worth of the overwhelming majority of Americans is entirely in their home equity. Or was. Many folks lost their entire net worth. Rebuilding that takes time in the best of circumstances, and even more so now, given the structural problems in the economy. Furthermore, many of these folks were burned so badly that they will refuse to partake in a repeat.

The Federal Reserve, among many other institutions, was AWOL when it should have been regulating to prevent all of this. Greenspan is recently on record claiming that fraud is a law-enforcement issue, not a Federal Reserve issue. That is nonfeasance. The Fed has regulatory powers and anything that leads to "bezzle" on the balance sheets (to borrow a term from J.K. Galbraith) is also a regulatory issue because it means banks haven't got the capital base they claim to have. There was plenty of evidence available to those willing to look for it.

I suspect that 100 years from now, History is not going to look kindly on anything the Fed did from about 2002-present.

Posted by: Sustainable Gains | October 24, 2013 at 12:18 AM

You should look at Richard Koo's work on balance sheet recessions to get an understanding of the dynamic.

Simply put, if a household or business owns assets financed by debt,and that asset has declined in value, the household reduces consumption and increases savings/reduces debt to reduce the risk of default.

It is important to understand because debt is reduced under these circumstances irrespective of the interest rate.

Posted by: RichL | October 24, 2013 at 04:43 PM

Here's a table, compiled by former Fed Governor Larry Lindsey, that explains much of the pain from the housing-bubble collapse. The lower 75% of households (by wealth) have still not recovered their peak wealth.


This is consistent with what I wrote above; glad to see someone with the right background is looking into this.

Too bad it's too late; the next bubble is already upon us, and no one in a position of authority was willing to take away the punchbowl early enough.

Posted by: Sustainable Gains | November 18, 2013 at 02:43 PM

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March 11, 2013

You Say You’re a Homeowner and Not a Renter? Think Again.

As we’ve said before, we’re suckers for cool charts. The latest that caught our eye is the following one, originally created by the U.S. Bureau of Labor Statistics (BLS). It highlights the relative importance assigned to the various components of the consumer price index (CPI) and shows where increases in the index have come from over the past 12 months.

Consumer Price Index Components

It probably won’t surprise anyone that the drop in gasoline prices (found in the transportation component) exerted downward pressure on the CPI last year, while the cost of medical care pushed the price index higher. What might surprise you is the size of that big, blue square labeled “housing.” Housing accounts for a little more than 40 percent of the CPI market basket and, given its weight, any change in this component significantly affects the overall index.

This begs the question: In light of the recent strength seen in the housing market—and notably the nearly 10 percent rise in home prices over the past 12 months—are housing costs likely to exert more upward pressure on the CPI?

Before we dive into this question, it’s important to understand that home prices do not directly enter into the computation of the CPI (or the personal consumption expenditures [PCE] price index, for that matter). This is because a home is an asset, and an increase in its value does not impose a “cost” on the homeowner. But there is a cost that homeowners face in addition to home maintenance and utilities, and that’s the implied rent they incur by living in their home rather than renting it out. In effect, every homeowner is his or her own tenant, and the rent they forgo each month is called the “owners’ equivalent rent” (or OER) in the CPI. OER represents about 24 percent of the CPI (and about 11 percent of the PCE price index). The CPI captures this OER cost (sensibly, in our view) by measuring the cost of home rentals (details here). So whether the robust rise in home prices will influence the behavior of the CPI this year depends on whether rising home prices influence home rents.

So what is likely to happen to OER given the continued increase in home prices? Well, higher home prices, in time, ought to cause home rents to rise, putting upward pressure on the CPI. Homes are assets to landlords, after all, and landlords (like all investors) require an adequate return on their investments. Let’s call this the “asset market influence” of home prices on home rents. But the rents that landlords charge also compete with homeownership. If renters decide to become homeowners, the rental market loses customers, which should push home rents in the opposite direction of home prices for a time. Let’s call this the “substitution influence” on rent prices.

Consider the following charts, which show three-month home prices and home rents (measured by the CPI’s OER measure). It’s a little hard to see a clear correlation between these two measures.

Home Prices and Owners' Equivalent Rent

So we’ve separated these data into their trend and cycle components (using Hodrick-Prescott procedures, if you must know) shown in the following two charts. Now, if one takes the trend view, there is a clear positive relationship between home prices and home rents. This is consistent with the asset market influence described above. But also consider the detrended perspective. Here, home prices and home rents are pretty clearly negatively correlated. This, to us, looks like the substitution influence described above.

Trends in Home Prices and Owners' Equivalent Rent
Detrended Home Prices and Owners' Equivalent Rent

So let’s get back to the question at hand. What do rising home prices mean for OER and, ultimately, the behavior of the CPI? Well, it’s rather hard to say because the link between home prices and OER isn’t particularly strong.

Not definitive enough for you? OK, how about this: We think the recent rise in home prices will more likely lean against the rise in OER for the near term as the growing demand for home ownership provides some competition to the rental market. But, in time, these influences will give way to the asset market fundamentals, and rents are likely to accelerate as returns on real estate investments are reaffirmed.

Photo of Mike BryanBy Mike Bryan, vice president and senior economist, and

Photo of Nick ParkerNick Parker, economic research analyst, both in the Atlanta Fed’s research department

March 11, 2013 in Economics, Housing, Real Estate | Permalink


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So, how do the OER and house rental prices line up?

Posted by: stewart sprague | March 11, 2013 at 10:55 PM

When comparing house prices to OER, it's worthwhile to separate out the influence of interest rates. So instead of comparing house prices directly, it is useful to compare the P+I payment on that loan ammount at the going rate for 30 year mortgages.

Posted by: Jim A | March 12, 2013 at 07:54 AM

Can't you tell just by eyeballing the data that OER lags by about 18 months behind home prices? Shift the red line back, and see what that does to your correlation!

Posted by: Matchoo | March 12, 2013 at 12:51 PM

So, let me see if I get this right: the inflation rate is calculated in part from a mathematical construct representing a cost that no one actually pays, based on surveys asking people what they think their house is worth in rent. (And of course we know that homeowners are not biased in their view of the worth of their house!) I live in Cambridge, which has high rents and low vacancy rates. I'm giving me a pretty good deal on my rent--I should be charging me a lot more! As a practical matter I do regard the difference between my mortgage and what it would cost to rent around here as a kind of savings (thanks, super-low interest rates!). But then, you can also see how, since my mortgage is fixed, I am more concerned with inflation of costs that come directly out of my pocket, such as maintenance and food. Sadly, plumbers don't want to get paid in nontransferable theoretical constructs.

Posted by: MacCruiskeen | March 12, 2013 at 01:14 PM

The "correlation" chart is not persuasive.

A simpler hypothesis is that the CPI determination of OER is flawed. One might then be concerned that this bad OER measurement distorts the CPI and could lead to serious macro consequences due to the widespread use of a bad CPI.

And indeed, if one takes time to read how OER is actually determined, one is not heartened. The quote is below. The bottom line is that some owners are SURVEYED and asked their OPINION about what their house WOULD rent for, if they rented it! I am flabbergasted by this, because in my experience owner's responses are horribly biased and not at all reflective of actual rental market conditions. Many owners haven't even looked at renting for years, decades, etc. THERE HAS TO BE A BETTER WAY TO MEASURE 24% of the CPI! (The fact that this isn't being done, despite the weight and importance of this part of CPI, is a significant "tell" that no one actually cares about getting anything factually right in economics...)

From the link given in the article above:

" ' ... Owners’ equivalent rent of primary residence (OER) is based on the following question that the Consumer Expenditure Survey asks of consumers who own their primary residence:
“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

... From the responses to these questions, the CPI estimates the total shelter cost to all consumers living in each index area of the urban United States. ' "

Posted by: Wisdom Seeker | March 14, 2013 at 05:07 PM

What about Energy Prices (esp. NatGas) and OER. I recall that the relationship was the opposite of what one would expect, that as NatGas prices rose OER actually fell, although I can't recall why.

Posted by: Rab | February 05, 2015 at 10:33 AM

Got it. Estimated cost of Landlord provided utilities is SUBTRACTED from estimated rental costs to generate OER. So if Electricity (Energy) Costs rise that will put downward pressure on OER.

Posted by: Rab | February 05, 2015 at 10:39 AM

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October 19, 2012

Investor Participation in the Home-Buying Market

What is the investor share of the home-buying market, and in what direction is the trend moving? We have been asking ourselves this question for the past few months, because the answer can help to inform what type of housing recovery we are seeing. Is it being driven by owner occupants or investors?

If it is being driven by investors, does this signal an emerging aversion to homeownership? Or, instead, does this simply signal that owner occupants are unable access mortgage finance and that, for now, owner occupants will be unable to maintain the share of market they once held? If we see that the owner occupant share is increasing, this observation could offer some support that the housing recovery has legs. The conclusion that the investor share is increasing, then, may suggest that we will see home sales activity fall off once prices rise to the point that it no longer makes sense for investors to continue buying.

To help us pinpoint the share and trend in the investor participation in the home-buying market, we polled our real estate business contacts to get a better sense for our regional portrait of investor market share. When asked to describe the distribution of home buyers in their market, our business contacts from the Southeast (excluding Florida) noted that one-fifth of home sales, on average, were to investors. Once we added Florida into our tally of Southeast contacts, just over one-fourth of sales, on average, were to investors.


Since this was the first time we posed this question to our business contacts, we lacked information on the directional trend. To address this information gap, we asked our business contacts how sales to investors had changed between the second and third quarters of 2012. More than half reported no change or a slight decline in home sales to investors, unless you include the Florida observations. A closer look at Florida reveals that nearly two-thirds of our business contacts reported that sales to investors in Florida have increased over the past quarter. The investor dynamic in Florida all seems to add up, especially given the strong demand from international buyers and cash investors in South Florida. This dynamic was discussed in the latest issue of EconSouth.

We thought it would also be informative to ask our business contacts about their expectations for future investor home buying activity. For the Southeast less Florida, more than half of our business contacts indicated that they did not expect there to be much change in investor market share over the next year. For Florida, more than half of the business contacts continued to indicate that they expected share of sales to investors to increase.

While the intelligence gathered from our business contacts aligns nicely with external data sources, we still had a few concerns that made us question the directional trend of these data.

The first source of concern is two-fold. First, brokers serve as a key input to our business contact poll and others like it. In and of itself, this is not a big deal because brokers are valued business contacts that provide us with a frequent and timely pulse on changing conditions in local real estate markets. What is slightly problematic is that brokers often rely heavily on the Multiple Listing Service (MLS), which brings me to my second point. We have also been hearing through business contacts (and this is echoed in the media here) that the composition of the investor pool has shifted from primarily smaller mom/pop-type investors to larger institutional investors that, more often than not, purchase properties at auction or directly from banks. Often, these sales take place before the properties get listed on MLS.

So, how involved are brokers in transactions that take place before MLS? Is this particular slice of investment activity being picked up by our sources? If not, how much do we really know about the share and directional trend of investor participation in the home buyer market?

Media coverage (here, for example) of these institutional investors often describes scenes at local auction in which institutional investors outbid smaller investors and have gone so far as to expand their presence and show up at auctions where properties at the fringe (in less desirable locations) are being sold. This piece of information, alone, leads me to believe that these larger investors have displaced smaller investors. Therefore, it would not necessarily be correct to think of properties acquired by institutional investors as something in addition to the properties purchased by smaller mom/pop investors. Instead, many of the mom/pop investors have been priced out of the market and replaced by institutional investors.

Another related concern involves the timing and strategy of these institutional investors. Why would institutional investors flood local real estate markets at the same time that inventory is tightening and home prices are beginning to stabilize and modestly increase in many markets? Wouldn't this squeeze their yields and make it less desirable for them to continue to ramp up their efforts?

To help provide some insight into the institutional investor, I created a table of information to provide a profile on a few institutional investors often cited by the press. It is important to mention that this table was not intended to be all-encompassing and that the source of information is entirely secondary.


What this table implies is that institutional investors ramped up activity earlier this year and have indeed concentrated their investment activity within a handful of markets that were hit hard by the housing downturn. Acquisition strategies for these larger investors focus on mostly low-priced, distressed properties.

This makes sense. The markets hit hardest by the housing downturn are also the markets where distressed properties make up a significant portion of the available homes for sale. However, data from CoreLogic indicates that the share of distressed sales is steadily declining over time. As the distressed sales share continues to shrink and home prices continue to rise, it stands to reason that investment activity will shrink (or continue to shrink).

It was recently noted that Och-Ziff Capital Management Group LLC, a large institutional investor (not outlined in the table above), announced that it intends to exit this line of business. Perhaps it is just a matter of time before other large investors follow suit.

Dave AltigBy Jessica Dill, a senior analyst in the Atlanta Fed’s Center for Real Estate Analytics


October 19, 2012 in Housing, Real Estate | Permalink


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Another approach to this general topic is to track sales vs. mortgage purchase applications. Sales to investors generally do not require a single property mortgage. Sales were much stronger than applications in 2011 and the first half of 2012. More recently applications have picked up. This is consistent with investors being more active last year and early this year. Owner occupants now seem to have become more dominant.

Posted by: Douglas Lee | October 22, 2012 at 01:24 PM

Hi Jessica. You are correct. The markets hit hardest by the housing downturn are also the markets where distressed properties make up a significant portion of the available homes for sale.

Posted by: regulatory arbitrage | October 24, 2012 at 11:42 AM

Hi Jessica. I totally agree with you. the markets hit hardest by the housing downturn are also the markets where distressed properties make up a significant portion of the available homes for sale.

Posted by: adr arbitrage | November 06, 2012 at 02:52 PM

Jessica, this seems to be the case everywhere. Living in Panama there are a number of Americans who initially moved down here in the boom and had properties back home. Some of them have had to let those properties go, as even if they returned home, they would not be able to keep up the payments and the cost of living.

Posted by: Jeanne Smith | December 01, 2012 at 01:14 PM

Another one in agreement, downturn causes a lot of stress on the market all over the World. We just had our Auturm Statement here in the UK and there it was good for business bad for the individual.

Posted by: Dean K | December 06, 2012 at 03:27 AM

The housing market is different all over the World, but each Country has some dstressed areas more than others. Good article will return and read more. Thank you Jessica.

Posted by: Peter | December 07, 2012 at 08:57 AM

The markets hit hardest by the housing downturn are also the markets where distressed properties make up a significant portion of the available homes for sale.

Posted by: our website | January 25, 2013 at 09:02 AM

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September 17, 2012

Will the Housing Market Recovery Leave the Hardest-Hit Neighborhoods Behind?

The national news about residential real estate has been rosy. The latest figures from the U.S. Census Bureau and HUD find that sales of new single-family houses in July 2012 were up 3.6 percent over the June rate, and 25.3 percent above July 2011 numbers. The National Association of Realtors reported that existing-home sales grew 2.3 percent to a seasonally adjusted annual rate of 4.47 million in July from 4.37 million in June and are 10.4 percent above the July 2011 pace. The June S&P/Case-Shiller report on housing prices showed positive monthly gains across all markets in its 20-city composite for the second month in a row.

However, a large number of homes remain in the foreclosure pipeline and many of these properties are concentrated in certain neighborhoods, which is a particular challenge for recovery in these areas because research suggests that concentrated mortgage delinquency and foreclosure can depress housing prices (see discussions here, here, and here).

To examine this issue and the barriers to recovery in areas heavily affected by foreclosure, the Federal Reserve Bank of Atlanta's Community and Economic Development (CED) group conducted a poll to explore housing market conditions in the Southeast. We asked Neighborhood Stabilization Program administrators, HUD-approved housing counselors, and real estate brokers across the Sixth Federal Reserve District about price expectations and changes in supply and demand in the housing market. The poll was administered between August 7 and August 24. We received 224 responses to the poll and conducted an additional 23 interviews, all within the Sixth District, which includes all of Alabama, Florida, and Georgia, and parts of Louisiana, Mississippi, and Tennessee. The overall response rate to the poll was 30 percent (individual state response rates varied from 22 percent (Georgia) to 52 percent (Tennessee).

When we asked about their house price expectations over the next year (see the chart), we saw signs of bifurcation, with more than half (54 percent) expecting the overall jurisdiction to experience gains, but nearly half (48 percent) expecting the hardest-hit areas in those jurisdictions to continue to see price declines. (For our purposes, "hardest-hit areas" are defined as the top 10 neighborhoods in the area that had the most foreclosures. Also the differences across all parameters—price, inventory of homes for sale, and interest in home buying—between overall jurisdiction and the hard-hit areas are statistically significant.)

The differences between the overall jurisdiction and the hard-hit areas are less pronounced, though still present, when we asked respondents about changes in home buying interest and the number of homes for sale in the last six months (see the chart). Reflecting on the overall jurisdiction, 67 percent said that interest in home buying increased, and of those only 14 percent said it was a significant increase. Another 17 percent experienced decreased home-buying interest.

The "home-buying enthusiasm" found in overall jurisdictions is not as robust when respondents talked about hardest-hit neighborhoods. Although 46 percent mention that the interest in home buying in these areas has increased, it was offset by the 29 percent who noted a decrease in interest in home buying in these areas.

On the other hand, the inventory of homes for sale in the overall jurisdiction has increased in the last six months, according to 57 percent of the respondents (see the chart). (Of these respondents, 45 percent said the inventory increased modestly.) When referring to hardest-hit areas, almost half said that the number of homes for sale had increased in the last six months, 26 percent said it had remained the same, and 27 percent said the number had decreased. And while the trends in the overall jurisdiction and the hard-hit areas may not be wildly divergent in terms of the for-sale inventory, the causes may be different. In the overall jurisdiction, homeowners may be putting their homes on the market because they feel better about the potential returns, whereas it seems reasonable to suggest that in hard-hit areas the increase in inventory of homes for sale may reflect a continued foreclosure pipeline.

We then asked about the top barriers to house-price stabilization and recovery in the areas hardest hit by foreclosure. According to our respondents, the most significant barrier is the poor credit scores and financial history of people wanting to purchase homes in these areas (see the table). With tightened lending standards, fewer people are able to secure financing to buy homes. The next two barriers concern the continued flow of foreclosure starts in these areas. In these cases, the respondents suggest that foreclosures are initiated either because people owe more on their homes than they are worth or because of recent unemployment or underemployment of borrowers decreasing the ability to repay. Respondents also noted that low appraisals in hard-hit areas have undermined sales. Finally, the high concentration of vacant properties, likely perpetuated by the higher-ranked barriers identified in the poll, presents an image of disinvestment in the areas, making it difficult to attract new buyers.


It's important to recognize that even among hard-hit areas there are notable variations and expectations for the future. For example, responses to house price expectations in Florida's hard-hit areas were much more optimistic, with 36 percent expecting increases in the next year, compared to Georgia's hard-hit areas, where only 3 percent anticipated prices going up. Of course, there are metro areas where this "micro-recovery thesis," as Nick Timiraos of the Wall Street Journal puts it, is not at play. "Denver and Phoenix are experiencing price increases in almost every ZIP code," he notes. (A previous macroblog post provides another look at ZIP code–level house price analysis.)

Photo of Karen Leone de NieBy Karen Leone de Nie, research manager in the Atlanta Fed's Community and Economic Development (CED) department,



Photo of Myriam Quispe-AgnoliMyriam Quispe-Agnoli, an Atlanta Fed research economist and adviser to the CED research and policy team

September 17, 2012 in Housing | Permalink


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The newest form of discrimination - credit discrimination?

Posted by: Daniel R. Levitan | September 19, 2012 at 02:23 PM

Karen, I think it take some years for those you had to foreclose to get back on the property ladder. Also same for those who don't have higher enough credit score to purchase. Criteria for borrowing is more difficult today than it was 5-10 years ago.

Posted by: Kevin | December 09, 2012 at 06:54 AM

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August 29, 2012

Rising House Prices: The Good Fortune Spreads

On the heels of a rash of pretty good news related to residential real estate—including yesterday's pending home sales report—the June S&P/Case-Shiller report on housing prices checks in with positive monthly gains across all markets in its 20-city composite for the second month in a row. What's more, the index posted its first year-over-year gain since last summer.

The early reviews found little to dislike, from Calculated Risk...

This was better than the consensus forecast and the change to a year-over-year increase is significant.

...to Carpe Diem...

More evidence that the U.S. housing market has passed the bottom and is now in a period of sustainable recovery.

...to TimeBusiness...

[T]he housing market is steadily improving and is poised to contribute to economic growth this year. Modest economic growth and job gains are encouraging more Americans to buy homes.

The widespread nature of price firming evident in the Case-Shiller index is strikingly confirmed by looking at even more disaggregated data. The following chart shows June year-over-year price growth by zip code, before the crisis hit and since, based on data available from CoreLogic:

The sample represented by the chart covers about 21 percent of all of the zip codes in the nation, and is based (like Case-Shiller) on a repeat-sales methodology.

The striking aspect, of course, is that there haven't been price increases in the majority of the sample's zip codes since before 2007 (although there was improvement evident in 2010, followed by the re-emergence of broader weakness in 2011). Furthermore, the uniformity of the picture becomes even more apparent when you look market by market (across which the experience is not so uniform). Two of the big comeback stories—Miami and Phoenix—were uniform in the breadth of the suffering across their metro areas during the worst of the slump and are now just as uniform in recovery:

Folks in Atlanta, on the other hand—which remains the big negative outlier in the year-over-year Case-Shiller statistics—are just as uniform as Miami and Phoenix, but in the pain rather gain department:

Even so, the Atlanta market has had two consecutive months of Case-Shiller housing price appreciation and experienced the largest monthly percentage gains in the June report. It does appear that the rising residential real estate tide is raising most boats.

David AltigBy Dave Altig, executive vice president and research director;

Myriam Quispe-AgnoliMyriam Quispe-Agnoli, research economist and assistant policy adviser; and

Jessica DillJessica Dill, senior economic research analyst, and all with the Atlanta Fed

August 29, 2012 in Housing, Real Estate | Permalink


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the same analysts who panned the homebuyer tax credits as temporary market distortions are ignoring the temporary distortion in home prices caused by operation twist induced record low interest rates, which effectively reduces the amount a buyer pays for a home even as the list price rises..

the average interest rate on fixed rate 30 year mortgages in July was 3.55%, a full percentage point lower than Freddie Mac's had the 30 year mortgage rate at a year ago...a simple mortgage calculation shows that the monthly cost per $100,000 on a 30 year mortgage in july of 2012 was $451.84, compared to the $509.66 per $100K one would have paid monthly on a 30 year mortgage last July; that means to buy the same house a year ago would have cost a potential homeowner 12.8% more in payments monthly than it would cost under current interest rate regimes...so even should July's home price indexes show a 2.8% year over year gain in the principal price of the house, it would mean that potential home buyers are still commiting 10% less to homeownership than they were a year ago...the so-called housing recovery is merely a fiction of low interest rates, which will not stay this low forever...

Posted by: rjs | August 29, 2012 at 07:32 PM

Just like the unemployment figures, which don't reflect the numbers of those unemployed who have exited the job market, the housing data do not reflect those houses that have been taken off the market nor do they reflect those houses that have not been put on the market due to depressed prices. Once a steady trend of home sales begins, those who have been waiting on the sidelines will put their homes on the market driving prices down once again. The solution is not short term. The reality is, we are in the midst of (and have been for the past three years) the greatest redistribution of wealth in our Nation's history.

Posted by: Kirk Wiles | September 04, 2012 at 01:39 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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September 10, 2010

Policy may have created the housing bubble, but which policy is to blame?

There is little dispute that misguided policy choices led to the housing boom-bust cycle from which we are still recovering. The debate about which policies were most culpable, however, rages on. The latest chapter in this dispute is now available in the proceedings from this year's edition of the Kansas City Fed's Jackson Hole Economic Policy Symposium.

In defense of monetary policy, Charles Bean, Matthias Paustian, Adrian Penalver, and Tim Taylor—all of the Bank of England—write this:

"We argue that while relatively low policy rates compared to past experience contributed to the growth in credit and the rise in house prices in the run-up to the crisis, they played only a modest direct role."

Stanford University's John Taylor (still) isn't buying it:

"Their conclusion differs from mine for several reasons. First, they do not take account of much empirical work completed since the 2007 Jackson Hole conference. For example, Jarocinski and Smets (2008) of the European Central Bank estimated a VAR [vector autoregression] for the United States and found evidence that 'monetary policy has significant effects on housing investment and house prices and that easy monetary policy designed to stave off perceived risks of deflation in 2002-04 has contributed to the boom in the housing market in 2004 and 2005.' In a more recent study focusing directly on deviations from policy rules, Kahn (2010) of the Federal Reserve Bank of Kansas City finds that ‘When the Taylor rule deviations are excluded from the forecasting equation, the bubble in housing prices looks more like a bump.' "

I added the links to the papers cited by Taylor because they are thoughtful challenges by thoughtful people, and they deserve to be considered (though the Jaroconski and Smets article requires some tolerance of relatively sophisticated econometrics). That insightfulness, of course, does not mean they are completely persuasive; I still have my doubts.

Most of you are familiar with this picture of the "Taylor rule" referenced above—which prescribes a funds rate target based on the deviations of output from its potential and the deviation of inflation from a presumed target of 2 percent—compared with the actual path of the policy rate:


Bean et al. make note of a speech from the beginning of the year by Chairman Bernanke in which he in turn notes (among other things) that the period in which policy deviates from this particular Taylor rule is also a period in which the lending standards were dramatically relaxed. To give but one example, data collected by my colleague Kris Gerardi indicate that in Massachusetts the median loan to value ratios (LTVs) for all borrowers rose from 0.82 in 2000 to 0.9 in 2006. For subprime borrowers, LTVs rose during that period from 0.85 to 1.0. The statistical results cited in Taylor's response do not control for such developments, making it difficult to come to a strong causal conclusion.

Second, this observation (from the Bean et al. paper) introduces even more uncertainty regarding the robustness of the chain of events leading from low interest rates to the housing bubble:

"Chart 1 shows that both UK and euro-area policy rates were less noticeably out of line with their respective Taylor benchmarks. That too is striking. Indeed, in the United Kingdom, they were actually above the benchmark for much of the relevant period, even though the United Kingdom saw one of the larger run-ups in debt and house prices during this period. And, in the euro area, countries such as Spain experienced substantial house price booms, while countries such as Germany did not. That need not imply that monetary policy was innocent in the run-up to the crisis…But this is hardly compelling evidence for assigning the central role to monetary policy, suggesting that other factors were more important."

As the Bank of England authors suggest, monetary policy was not necessarily innocent. But at a minimum, it's worth keeping in mind that the monetary policy transmission mechanism is a good bit more complicated than any simple story would indicate.

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

September 10, 2010 in Housing, Monetary Policy | Permalink


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The Sugarscape work of the Santa Fe Institute, shows that markets generate purely endogenous bubbles and busts. Indeed, so does any market model that assumes that rational arbitrageurs may recognize the limits of fundamental arbitrage and instead bet with market movements -- thus accentuating them rather than dampening them. That kind of self-referential behavior makes markets work like herds, and herds stampede.

In other words, bubbles and busts are market phenomena, pure and simple. Policy may do a better or worse job of PREVENTING them, but the bubble itself is just markets acting the way markets act.

The continuing search for a governmental cause to the failure of private sector markets is deeply disappointing. It indicates that the searchers are still living in their Reaganaut fantasy of a market that can do no wrong and a government that can do no right. That ideology blinded the regulators to the bubble last time, and if it is not discarded, it will deceive them again the next time.

Posted by: Daniel G | September 12, 2010 at 07:22 PM

One of the strongest arguments against Fed monetary policy, or any federal government policy, as an important housing bubble culprit is the fact that the housing bubble was not a national, or even really regional, phenomena.

Florida, for example, had an intense housing bubble, but Georgia, next door to it, with a similarly growing economic base, did not.

California had an intense housing bubble, but Colorado and Illinois did not.

The policy that really stands out in most of the states that had severe housing bubbles that then collapsed was the presence of non-recourse residential mortgage laws, or laws that were perceived as being non-recourse.

The handful of exceptions, like Arizona and Nevada, probably represent cases of real estate wealth acquired by Californians where there was a non-recourse lending driven housing boom being rolled over to neighboring states where speculative investment and housing for retirees paid for with proceeds of California home sales make up a large share of the market.

Posted by: ohwilleke | September 13, 2010 at 04:38 PM

California had an intense housing bubble, but Colorado and Illinois did not.

I feel like I'm in that scene in Aliens where Ripley says "Did IQs suddenly drop while I was away??"

Bubbles appeared wherever suicide lending was allowed to happen.

Effective interest rates were dropped to 0-1% via 2 and 5 year teaser-rate ARMs and even negative-am products.

Back-end ratios were abandoned with the acceptance of either explicit liar loans or the connivance of mortgage brokers committing fraud to get their commission.

Down payment standards were abandoned with the innovation of the 103% loan.

The 2001-2003 tax cuts didn't hurt in instantly juicing everyone's buying power several hundred dollars a month.

All these inputs coalesced into a bubble run-up 2002-2004 that encouraged and funded REIC insiders to buy as many houses as they could to profit from the bubble trend.

Additionally, the bubble run-up was liberating HUNDREDS of billions of dollars a quarter of home equity credit via HELOC advances and drawdowns, money that was funding both real estate investment and household spending that supported the economic feel-good times that kept the bubble rolling.

I was outside the industry and not plugged in 2003-2005 so I didn't really understand these factors, but once the Casey Serin story (20-something loser able to take out $2.2M in liar loans 2005-2006) broke in late 2006 I understood that we were looking at a several trillion dollar bubble fraud that was perpetrated by the very simple mechanism of abject abandonment of historical lending underwriting standards.

This ain't rocket science! People will borrow as much money as you are willing to lend them!


And lend we did, 2002-2007.

Posted by: Troy | September 13, 2010 at 10:40 PM

The FED's always at fault. If the FED's technical staff had to pass a test of their knowledge they would all fail.

Why? Because it is a scientific fact that economic prognostications are mathematically infallible.

You don't know how, so you fail.

The housing bubble is especially easy to understand and forecast. All the demand drafts drawn on the money creating depository institutions clear through DDs – except those drawn on MSBs, interbank and the U.S. government.

Posted by: flow5 | September 15, 2010 at 03:40 PM

You might look at the recent article by Krugman and Wells. They argue that the foreign savings glut was more central than loose monetary policies of the Fed or the ECB, and more central than lax financial market regulation. That has long been my own view, so it was nice to see it supported from such a respectable source. The reasons they give for their conclusion are the same as those I gave in numerous posts over the last couple of years. For those who argue that it was primarily monetary policy, they need to explain differences within the euro area, as well as Greenspan's 'conundrum' about long term rates staying low after the Fed started to tighten.

Posted by: don | September 15, 2010 at 09:43 PM

Saw an argument from Fama that there were not any bubbles at all.

The savings glut referenced by Krugman has had nothing to do with it. It was low interest rates by the FED, and the backstop of Fannie and Freddie.

Loans could be written with reckless abandon. I recall an article in Barron's around 2003 about the danger of no interest loans. Maybe they should have written about no doc loans too!

Posted by: Jeff | September 18, 2010 at 10:10 PM

It turns out Keynes had it right concerning bubbles of all kinds: When too much money gets into the hands of too few people, their attempts to do anything with their excess cash will necessarily result in some kind of bubble. (If they were to merely put it into savings instruments they would be shooting themselves in the feet by causing interest rates paid to decline.) The fundamental causes of our present predicament really are a replay of the 1920's: a spurt in productivity created increased profits that the controllers of wages and salaries hogged for themselves, while the workers (perhaps expecting that they would surely get their share soon) participated in the general economic boom by using credit to increase present consumption. Keynes's analysis was pragmatic, not moral: Capitalism works best when there is a large, financially healthy middle class, who can consume a lot, save a little, and perhaps put a bit in equities. That's why we need very high marginal tax rates, to use the money collected to subsidize the middle class (transportation, education, housing--dare I say it, health care). While in gangsta capitalism a few people can become wealthy enough to be above personal ruin no matter what, even most wealthy people are better off with a Keynesian approach, as their wealth ultimately depends on a large pool of viable consumers.

Posted by: tall cotton | September 23, 2010 at 08:48 AM

First, permit me to admit that I am out of my league and should not have the temerity to comment. But, having observed the real estate market for decades, it is not possible to describe what the United States has just been through in the lead up to the Great Recession as a mere market bubble. Nothing like this has been seen before. Rather, the "savings glut" appears to be the best explanation for the unusual market phenomena. In the end, some person or entity must have the money to loan to borrowers to pay ever-increasing large amounts for the housing stock. In essence, it was inflation within a particular asset. Would it be fair to say that, de facto, the Chinese have, by virtue of their surplus in the form of immense U.S. bond holdings, become a second "central bank" for the U.S. economy, able to infuse money supply as suggested by Krugman and Wells? I agree that in some ways, to quote "Troy" it is not "rocket science." There were horrific lending practices. But from whence came the funds to endlessly lend to whomever asked for money? And perhaps it was also a combination of many of the factors identified by the comentors that caused this endless flow of loanable funds to drive prices to their absurd levels, well beyond the means of ordinary income to simply sustain the debt.

Posted by: mme | September 30, 2010 at 11:40 PM

The RE bubble formed because the FED under Greenspan decided that investment banks rather than the central bank should provide liquidity via expansion of an unregulated derivatives market as well as the erosion of banking capital and reserve requirements (as instituted under the Basel accords). The adoption of adjustable rate mortgages, the abrogation of Glass-Steagall, and the excesses of the Financial Modernization Act completed the gutting of any management and regulation of the financial system.

The FED is primarily concerned with the profitability of the banking industry, not the stability and well being of the general economy. As such, it will continue to support increased credit and higher debt/GDP levels until no sector of the economy can service its debt load regardless of the market manipulation exercised.

Posted by: MarkS | October 06, 2010 at 12:37 PM

In my opinion the reason was alluded to in your post, THE GROWTH OF CREDIT


Total debt / gdp has been rising for years and exceeded the peaks of the 1929 crash many years ago.
The rising debt/ gdp ratio manifested itself with a housing bubble.
If you are looking for why housing, employment and other economic indicators are not recovering look to the debt / gdp ratio. The economy is saturated with debt and consumers are concentrating on reducing their debt levels.

Posted by: Greg Merrill | October 12, 2010 at 05:07 PM

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