Download Discussion of “Credit Supply and the Housing Boom” by Alejandro Justiniano,

Discussion of “Credit Supply and the
Housing Boom” by Alejandro Justiniano,
Giorgio E. Primiceri, and Andrea
Tambalotti
Robert E. Hall
Hoover Institution and Department of Economics
Stanford University
NBER
with the help of Susan E. Woodward
8th Conference on Monetary Economics
Banco de Portugal
13 June 2015
·
1
The paper
argues that an expansion in mortgage funding accounted for the
runup in housing prices, not so much reductions in the
collateral constraint on borrowers
2
The paper
argues that an expansion in mortgage funding accounted for the
runup in housing prices, not so much reductions in the
collateral constraint on borrowers
This is not such a novel view—it is close to a consensus among
housing experts
2
The paper
argues that an expansion in mortgage funding accounted for the
runup in housing prices, not so much reductions in the
collateral constraint on borrowers
This is not such a novel view—it is close to a consensus among
housing experts
The long essay by Levitin and Wachter, cited in the paper, says
the following in its abstract:
[Our paper] demonstrates that the bubble was a
supply-side phenomenon attributable to an excess of
mispriced mortgage finance: mortgage-finance spreads
declined and volume increased, even as risk
increased—a confluence attributable only to an
oversupply of mortgage finance.
·
2
The role of the interest rate in
allocating risk
The paper also mentions the role of the declining world interest
rate
3
The role of the interest rate in
allocating risk
The paper also mentions the role of the declining world interest
rate
The interest rate governs the terms of trade between risk lovers
and risk avoiders
3
The role of the interest rate in
allocating risk
The paper also mentions the role of the declining world interest
rate
The interest rate governs the terms of trade between risk lovers
and risk avoiders
The risk lovers borrow from the risk avoiders and hold the
riskier investments
3
The role of the interest rate in
allocating risk
The paper also mentions the role of the declining world interest
rate
The interest rate governs the terms of trade between risk lovers
and risk avoiders
The risk lovers borrow from the risk avoiders and hold the
riskier investments
Many different institutions have emerged to tranche risk in this
way: banks, hedge funds, and securtizations with credit
enhancement to create low-risk instruments (AAA-rated
tranches) for some clienteles, and high-risk instruments (equity
tranches) for others
·
3
2003
2007
Treasury securities
Risk-avoiding
portfolio,
from Bernanke’s
Agency debt
AAA Corp
AAA RMBS (private
label), CMBS, and ABS
global-saving-glut
paper, 2011
Non-AAA Corp
Non-AAA RMBS (private label), CMBS, and ABS
Equity
Share AAA: 37.4%
Share AAA: 36.0%
Held by global saving glut countries
Treasury securities
Agency debt
AAA Corp
AAA RMBS (private label), CMBS, and ABS
Non-AAA Corp
Non-AAA RMBS (private label), CMBS, and ABS
Equity
2003
2007
Share AAA: 76.2%
Share AAA: 77.5%
Held by Europe
Treasury securities
Agency debt
AAA Corp
AAA RMBS (private label), CMBS, and ABS
Non-AAA Corp
Non-AAA RMBS (private label), CMBS, and ABS
2003
2007
4
Treasury securities
Agency debt
AAA Corp
AAA RMBS (private label), CMBS, and ABS
Non-AAA Corp
Non-AAA RMBS (private label), CMBS, and ABS
Equity
2003
2007
Risk-loving portfolio
Share AAA: 31.9%
Share AAA: 33.2%
Held by U.S. residents
Treasury securities
Agency debt
AAA Corp
AAA RMBS (private label), CMBS, and ABS
Non-AAA Corp
Non-AAA RMBS (private label), CMBS, and ABS
Equity
2003
2007
Share AAA: 35.8%
Share AAA: 32.0%
Note: RMBS: residential mortgage-backed securities; CMBS: commercial mortgage-backed securities; ABS: asset-backed securities other than RMBS and CMBS.
Source: Staff estimates based on Flow of Funds and Treasury International Capital system data.
23
5
30-year fixed-rate mortgage interest
rate and 10-year Treasury bond rate
20
Mortgages
18
16
14
12
10
8
10‐year Treasurys
6
4
2
0
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
2015
6
Mortgages v. Treasurys during the
expansion, crisis, and recovery
3.5
Spread of mortgages over 10‐year Treasurys
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2000
2002
2004
2006
2008
2010
2012
2014
7
How strong is the effect of the lower
interest rate?
The Gordon dividend-growth model applied to housing may
help on this:
f
p=
r−g
a lower interest rate r or a higher flow-value growth rate g
raises the price of housing p
8
How strong is the effect of the lower
interest rate?
The Gordon dividend-growth model applied to housing may
help on this:
f
p=
r−g
a lower interest rate r or a higher flow-value growth rate g
raises the price of housing p
g=r−
f
p
·
8
Ratio of flow value of owner-occupied
real estate to market value
0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0.00
1990
1994
1998
2002
2006
2010
9
Implied nominal expected growth rates
of flow value
0.06
0.05
0.04
0.03
0.02
0.01
0.00
‐0.01
‐0.02
‐0.03
‐0.04
1990
1994
1998
2002
2006
2010
10
Conclusions about the role of the
interest rate
Over the period from 1993 through 2006, the implied expected
growth rate was close to constant, meaning that all of the rise
in housing stock prices relative to flow prices came from the
falling interest rate
11
Conclusions about the role of the
interest rate
Over the period from 1993 through 2006, the implied expected
growth rate was close to constant, meaning that all of the rise
in housing stock prices relative to flow prices came from the
falling interest rate
But the collapse of prices starting in 2007 was not at all the
result of rising interest rates, but rather of a large decline in the
expected growth of the flow value of housing
·
11
Supply of housing
The model assumes a fixed supply of houses—an increase in
demand raises house prices, and does not stimulate new
construction and the shift of land into housing and out of other
uses
12
Supply of housing
The model assumes a fixed supply of houses—an increase in
demand raises house prices, and does not stimulate new
construction and the shift of land into housing and out of other
uses
In reality, many markets have elastic supply of new houses and
house price did not rise very much during the bubble
12
Supply of housing
The model assumes a fixed supply of houses—an increase in
demand raises house prices, and does not stimulate new
construction and the shift of land into housing and out of other
uses
In reality, many markets have elastic supply of new houses and
house price did not rise very much during the bubble
A paper by Albert Saiz has demonstrated this point, and
provides strong evidence of the heterogeneity of housing
markets along this dimension
·
12
Albert Saiz, QJE
THE GEOGRAPHIC DETERMINANTS OF HOUSING SUPPLY
1285
(a)
13
12.5
12
11.5
11
0
.5
1
Inverse of supply elasticity
Log median house value
1.5
2
Fitted values
13
Modeling the opening of the mortgage
market
The paper’s model takes the opening to be a simple upward
shift in an exogenous constraint on all mortgage finance
14
Modeling the opening of the mortgage
market
The paper’s model takes the opening to be a simple upward
shift in an exogenous constraint on all mortgage finance
This assumption contradicts the evidence that the traditional
30-year fixed mortgage is tightly linked to other debt markets
14
Modeling the opening of the mortgage
market
The paper’s model takes the opening to be a simple upward
shift in an exogenous constraint on all mortgage finance
This assumption contradicts the evidence that the traditional
30-year fixed mortgage is tightly linked to other debt markets
More subtle modeling would recognize the specific importance
of new types of mortgages, which extended mortgage financing
to borrowers previously excluded
·
14
Expansion of non-traditional mortgages
Value of mortgages outstanding
Billions of dollars
Total
Subprime
Variable rate, other prime, and alt-A
Prime fixed-rate and FHA/VA
12000
10000
8000
6000
4000
2000
2000
2001
Source: Federal Reserve Board staff estimates.
2002
RMBS, CMBS, and ABS outstanding, by rating
2003
2004
2005
2006
2007
0
15
The fax machine removed a key
mortgage bottleneck
16
The fax machine removed a key
mortgage bottleneck
The fax was the first practical way to distribute the terms of
mortgages in the wholesale market to independent brokers, who
proved to be adept at helping previously excluded classes of
borrowers obtain loans
·
16
Concluding remarks
The paper is on the right track in emphasizing the supply of
finance to housing
17
Concluding remarks
The paper is on the right track in emphasizing the supply of
finance to housing
Rough calculations suggest that all of the price increase
resulted from declining interest rates; innovation in mortgage
forms and extension of eligibility to less credit-worthy borrowers
is secondary
17
Concluding remarks
The paper is on the right track in emphasizing the supply of
finance to housing
Rough calculations suggest that all of the price increase
resulted from declining interest rates; innovation in mortgage
forms and extension of eligibility to less credit-worthy borrowers
is secondary
So the paper’s characterization of the rise in supply might
better be the connection to the world interest rate, rather than
a shift of a fixed constraint.
·
17