CPI out yesterday, and housing costs are driving the CPI.
Some headlines connected the CPI to tariffs.
I can assure you, housing has 10 times, maybe 20 times, the influence on the CPI than tariffs.
But you read about tariffs and inflation...because that what orthodox macroeconomists talk about.
So...can housing-cost inflation (shortages) be fought with tighter money?
Would more QE by the Fed, which would tend to add money back into capital markets and lower interest rates, bring marginal improvements in housing supplies?
(I think marginal, but for the real deal we have to outlaw property zoning).
CPI inflation excluding rent has been at or below 2% for 3 years now. Rent inflation should not be included in the Fed's mandate under current conditions.
I'll say it again...a huge economy like the US can innovate around or adapt to tariffs, and the longer the tariffs stay on, the better the adaptations. And in fact the nation would become more resilient and self-reliant in an unpredictable world.
I am old enough to remember the oil cut-offs of the 1970s. This is not a hypothetical.
In contrast, the longer housing construction is criminalized, the worse the situation gets. This is also not a hypothetical.
I suppose what we really need to do is return to pre-WWII lending standards for housing construction. The streetcar suburbs were financed with short-term (5-8 years) mortgages, 50% down payments, and interest rates of 8-10%.
It also helps to have 60 hour work weeks, limited plumbing, no electricity, cheap labor, and looser building and development regulations.
"Criminalizing some portion of imports will likely lead to marginally lower living standards. But the longer the imports are kept out, the more the domestic economy will adapt, innovate, leapfrog the hurdles. The same way orthodox macroeconomists say domestic economies surmount economic sanctions."
----
"But criminalizing new housing construction will axiomatically lead to large reductions in living standards, and the longer the new housing is criminalized, the deeper the reductions in living standards become, especially for those who rent."
So...we can talk about tariffs, or we can talk about housing.
America's macroeconomists choose....tariffs! Tariffs! Tariffs! Inflation! Inflation and tariffs!
I wasn't thinking about the different ways in which the UK and the USA measure the ability of households to repay loans, and then I realised I was thinking about the issue the wrong way.
"When a measure becomes a target, it ceases to be a good measure" -Goodhart's Law.
Goodhart also stated that “Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.”
Have you thought about using AI to see whether the restriction since 2008 have resulted in fewer foreclosures below the credit threshold you've focused on? Of course, there will likely be difference, but if the difference isn't that significant it could be the smoking gun which proves that the post-2008 restrictions are overly draconian and not worth the impact they've had on both the supply and demand side.
And yes, I know that Becker outcome tests are generally used to prove discrimination, but in this instance, if the outcomes haven't changed that much for the target group in which you're interested, you've proven that the restrictions are unfairly discriminatory against lower income households.
Plus, you might get better institutional penetration with your goal, if the Becker outcome test proves little statistical difference between then and now. A provable accusation of discrimination of any sort tends to draw more eyeballs, and is tantamount to a loaded gun.
Foreclosures are definitely down. There is some correlation between the new standards and credit risk.
Ironically, it was foreclosures in the financial crisis that didn’t map particularly well to credit risk measures. The reports on that at the time interpreted that to mean that the credit risk scores needed to be improved. Of course, I would argue that it was because foreclosures were largely a product of an exogenous shock that was only secondarily correlated with credit risk, in that it was applied in proportion to perceived credit risk. Your likelihood of having a foreclosure or short sale in 2011 had more to do with how much that shock affected your neighbors than it had to do with your ex ante credit risk.
Well, you're the one who wants to go back to 20th century lending standards. I was simply pointing out to you that 20th century lending standards capped HTI at 28% and DTI at 36%. It's not just that DTIs are high on new mortgages, it's that they are much higher than they used to be. Of course they have to be, because home prices are so much higher. But that doesn't make high DTI loans less risky. You say high DTIs were only a feature of wealthy homeowners. I don't know how you can look at FHA data and come to that conclusion. Your focus seems to be on the relationship between the credit box and the ability of people to purchase a home. You need to restrict all of your analysis, in that case, to purchase originations only. Refinance originations swamped purchase originations in the 2003-2007 period, so they'll cloud any points you're trying to make with that data. And, if you are using the GSE loan performance data, you're missing most of the purchase originations in that period because they exclude from that data all the loans that wouldn't qualify today.
Things changed dramatically between 1990 and 2000. You can go back and read the OFHEO and HUD annual reports during the latter part of that decade to see what was happening to the credit box at the GSEs and FHA during that period, and why the GSEs and FHA were doing that (at least what they said publicly). The current credit box is pretty close to Y2K, with one exception. Loans where FICO<700 are almost exclusively FHA because of pricing, and loans where FICO<620 are much harder to get (LTV has to be lower to qualify at FHA), because there is no subprime alternative to FHA.
I wrote this post before you left your other comments.
I didn’t say high DTI is only high income. I said the increase in the 2000s was among high income borrowers.
I agree that higher DTI is associated with higher risk. My point is that tighter lending hasn’t reduced average DTIs, so that continuing to tighten standards in an attempt to reduce high DTIs is a fool’s errand.
If lending hasn’t tightened, why was total lending to sub-740 scores down by something like 2/3 in the 2010s while the cash outflows required to buy low tier homes in most cities were at unprecedented lows?
OT but in the ballpark:
CPI out yesterday, and housing costs are driving the CPI.
Some headlines connected the CPI to tariffs.
I can assure you, housing has 10 times, maybe 20 times, the influence on the CPI than tariffs.
But you read about tariffs and inflation...because that what orthodox macroeconomists talk about.
So...can housing-cost inflation (shortages) be fought with tighter money?
Would more QE by the Fed, which would tend to add money back into capital markets and lower interest rates, bring marginal improvements in housing supplies?
(I think marginal, but for the real deal we have to outlaw property zoning).
Exactly.
CPI inflation excluding rent has been at or below 2% for 3 years now. Rent inflation should not be included in the Fed's mandate under current conditions.
I'll say it again...a huge economy like the US can innovate around or adapt to tariffs, and the longer the tariffs stay on, the better the adaptations. And in fact the nation would become more resilient and self-reliant in an unpredictable world.
I am old enough to remember the oil cut-offs of the 1970s. This is not a hypothetical.
In contrast, the longer housing construction is criminalized, the worse the situation gets. This is also not a hypothetical.
I suppose what we really need to do is return to pre-WWII lending standards for housing construction. The streetcar suburbs were financed with short-term (5-8 years) mortgages, 50% down payments, and interest rates of 8-10%.
It also helps to have 60 hour work weeks, limited plumbing, no electricity, cheap labor, and looser building and development regulations.
I reverently quote myself:
"Criminalizing some portion of imports will likely lead to marginally lower living standards. But the longer the imports are kept out, the more the domestic economy will adapt, innovate, leapfrog the hurdles. The same way orthodox macroeconomists say domestic economies surmount economic sanctions."
----
"But criminalizing new housing construction will axiomatically lead to large reductions in living standards, and the longer the new housing is criminalized, the deeper the reductions in living standards become, especially for those who rent."
So...we can talk about tariffs, or we can talk about housing.
America's macroeconomists choose....tariffs! Tariffs! Tariffs! Inflation! Inflation and tariffs!
I wasn't thinking about the different ways in which the UK and the USA measure the ability of households to repay loans, and then I realised I was thinking about the issue the wrong way.
"When a measure becomes a target, it ceases to be a good measure" -Goodhart's Law.
Goodhart also stated that “Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.”
Have you thought about using AI to see whether the restriction since 2008 have resulted in fewer foreclosures below the credit threshold you've focused on? Of course, there will likely be difference, but if the difference isn't that significant it could be the smoking gun which proves that the post-2008 restrictions are overly draconian and not worth the impact they've had on both the supply and demand side.
And yes, I know that Becker outcome tests are generally used to prove discrimination, but in this instance, if the outcomes haven't changed that much for the target group in which you're interested, you've proven that the restrictions are unfairly discriminatory against lower income households.
Plus, you might get better institutional penetration with your goal, if the Becker outcome test proves little statistical difference between then and now. A provable accusation of discrimination of any sort tends to draw more eyeballs, and is tantamount to a loaded gun.
Foreclosures are definitely down. There is some correlation between the new standards and credit risk.
Ironically, it was foreclosures in the financial crisis that didn’t map particularly well to credit risk measures. The reports on that at the time interpreted that to mean that the credit risk scores needed to be improved. Of course, I would argue that it was because foreclosures were largely a product of an exogenous shock that was only secondarily correlated with credit risk, in that it was applied in proportion to perceived credit risk. Your likelihood of having a foreclosure or short sale in 2011 had more to do with how much that shock affected your neighbors than it had to do with your ex ante credit risk.
Well, you're the one who wants to go back to 20th century lending standards. I was simply pointing out to you that 20th century lending standards capped HTI at 28% and DTI at 36%. It's not just that DTIs are high on new mortgages, it's that they are much higher than they used to be. Of course they have to be, because home prices are so much higher. But that doesn't make high DTI loans less risky. You say high DTIs were only a feature of wealthy homeowners. I don't know how you can look at FHA data and come to that conclusion. Your focus seems to be on the relationship between the credit box and the ability of people to purchase a home. You need to restrict all of your analysis, in that case, to purchase originations only. Refinance originations swamped purchase originations in the 2003-2007 period, so they'll cloud any points you're trying to make with that data. And, if you are using the GSE loan performance data, you're missing most of the purchase originations in that period because they exclude from that data all the loans that wouldn't qualify today.
Things changed dramatically between 1990 and 2000. You can go back and read the OFHEO and HUD annual reports during the latter part of that decade to see what was happening to the credit box at the GSEs and FHA during that period, and why the GSEs and FHA were doing that (at least what they said publicly). The current credit box is pretty close to Y2K, with one exception. Loans where FICO<700 are almost exclusively FHA because of pricing, and loans where FICO<620 are much harder to get (LTV has to be lower to qualify at FHA), because there is no subprime alternative to FHA.
I wrote this post before you left your other comments.
I didn’t say high DTI is only high income. I said the increase in the 2000s was among high income borrowers.
I agree that higher DTI is associated with higher risk. My point is that tighter lending hasn’t reduced average DTIs, so that continuing to tighten standards in an attempt to reduce high DTIs is a fool’s errand.
If lending hasn’t tightened, why was total lending to sub-740 scores down by something like 2/3 in the 2010s while the cash outflows required to buy low tier homes in most cities were at unprecedented lows?