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“Betting the House”
Oscar Jorda, Moritz Schularick, and Alan M. Taylor
Discussion by Jim Wilcox
Haas School of Business
University of California, Berkeley
September 5, 2014
Jim Wilcox
Conference on Housing and Monetary Policy
UCLA Ziman Center for Real Estate and FRB San Francisco
1
Outline
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Big Data
Big Questions
Time-Varying Results
Time-Varying Banks and Mortgage Markets
Concluding Observations
September 5, 2014
Jim Wilcox
Conference on Housing and Monetary Policy UCLA Ziman Center
for Real Estate and FRB San Francisco
2
No Real Complaint About the Paper,
Until … the Title
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Like home owners, banks also bet
• Banks’ losses can lead to credit crunches and crises
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Rather than “Betting the House”, maybe…
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Effects of External Monetary Shocks on Housing
Banking on Housing
Betting on Houses
Betting the Bank
Betting the Bank on Houses
Playing with House Money
September 5, 2014
Jim Wilcox
Conference on Housing and Monetary Policy
UCLA Ziman Center for Real Estate and FRB San Francisco
3
Big Data:
Across Countries and Decades
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Huge sunk costs: time, effort, money, etc.
Data only for commercial banks
• Nonbanks’ shares of credit also vary across
countries and decades
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Data for mortgage and nonmortgage loans
• Mortgages for owner-occupied, multi-family, plus
commercial buildings
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Their shares also vary, a lot, across time and space
September 5, 2014
Jim Wilcox
Conference on Housing and Monetary Policy
UCLA Ziman Center for Real Estate and FRB San Francisco
4
Big Patterns in the Data
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Large, pervasive, recent rise in mortgages
Large declines in nominal mortgage rates
permitted more borrowing and buying by the
previously-cash-payment-constrained
• Starting in mid-1980s in U.S.
• Enough “Eu-rope” to hang Spain, Portugal, Ireland,…
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Explains some of the big increases in ratios
• Mortgages (relative to GDP)
• House prices (relative to per-capita incomes)
September 5, 2014
Jim Wilcox
Conference on Housing and Monetary Policy
UCLA Ziman Center for Real Estate and FRB San Francisco
5
Applying Big Data to Big Questions
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Effects of monetary policy on long rates,
mortgages and house prices (and crises) were
large and pervasive, but mostly after WWII
Fortunately, all that pre-WWII data still useful
• With commercial banks’ ignoring residential
mortgages, I would expect weaker responses then
of their mortgages and of house prices to rates
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Results pass this placebo test, however inadvertently
Booms, busts, bubbles: mentioned, not tested
September 5, 2014
Jim Wilcox
Conference on Housing and Monetary Policy
UCLA Ziman Center for Real Estate and FRB San Francisco
6
Notes for a New Instrument
for Monetary Policy
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IV for domestic, short-term, interest rates
based on external rates
• With adjustments for exchange rate regimes and
for capital-flow regimes
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Domestic rates had detectable, but very low,
correlation with, and response to, the IV, zit
The much-stronger correlation of domestic
rates with the domestic variables, given zit, is
worrisome
September 5, 2014
Jim Wilcox
Conference on Housing and Monetary Policy
UCLA Ziman Center for Real Estate and FRB San Francisco
7
Asides About Estimation
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Flexibility of Jorda’s local-projection method
Specification restricts effects’ magnitudes and
lag patterns to be the same across countries
First-differencing of all variables
• Implies that the fixed-effects absorb constant,
country-specific trends in any of the variables
• Effectively raises weight on higher-frequencies
• Absent co-integrating equations, untethers levels
September 5, 2014
Jim Wilcox
Conference on Housing and Monetary Policy
UCLA Ziman Center for Real Estate and FRB San Francisco
8
After WW II, Mortgages Trend Up
20
30
40
50
60
70
(percent of potential GDP, 1896-1999)
1900
1920
1940
1960
1980
2000
year
September 5, 2014
Jim Wilcox
Conference on Housing and Monetary Policy
UCLA Ziman Center for Real Estate and FRB San Francisco
9
After WW II, Residential, Not Commercial,
Mortgages Trend Upward
0
20
40
60
80
(percent of potential GDP, 1896-1999)
1900
1920
1940
1960
1980
2000
year
allmortpot
resmortpot
September 5, 2014
Jim Wilcox
cremortpot
Conference on Housing and Monetary Policy
UCLA Ziman Center for Real Estate and FRB San Francisco
10
Commercial Mortgages Were Large,
But Falling, Share of All Mortgages
30
20
10
creshare
40
50
(percent of all mortgages, 1896-1999)
1900
1920
1940
1960
1980
2000
year
September 5, 2014
Jim Wilcox
Conference on Housing and Monetary Policy
UCLA Ziman Center for Real Estate and FRB San Francisco
11
Some Residential Mortgages Were
in Commercial Banks
0
2
4
6
8
10
(percent of potential GDP, 1896-1999)
1900
1920
1940
1960
1980
2000
year
September 5, 2014
Jim Wilcox
Conference on Housing and Monetary Policy UCLA Ziman Center
for Real Estate and FRB San Francisco
12
Banks’ Share of Residential Mortgages:
Low and Slowly-Rising
5
10
rescb
15
20
(percent of all residential mortgages, 1896-1999)
1900
1920
1940
1960
1980
2000
year
September 5, 2014
Jim Wilcox
Conference on Housing and Monetary Policy
UCLA Ziman Center for Real Estate and FRB San Francisco
13
Relative to Banks, Nonbanks Held
Vastly More Residential Mortgages
0
20
40
60
(percent of potential GDP, 1896-1999)
1900
1920
1940
1960
1980
2000
year
resmortcbpot
resmortpot
September 5, 2014
Jim Wilcox
resmortnonpot
Conference on Housing and Monetary Policy
UCLA Ziman Center for Real Estate and FRB San Francisco
14
Concluding Observations
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Current PTI seems better predictor of recent
defaults than current LTV (e.g., underwater)
Commercial real estate had greater volatility of
construction, prices, mortgage defaults, and
roles in depositories’ losses and failures
Deflated role of inflation
• Mortgages/GDP correlated with inflation
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Positively but modestly, and likely reversed after 1970s
• Irving Fisher contended deflation was crucial
September 5, 2014
Jim Wilcox
Conference on Housing and Monetary Policy
UCLA Ziman Center for Real Estate and FRB San Francisco
15