Given how cyclical housing construction has been over the past 70 years I'm curious if the Fed had previously demonstrated such interest in production rates as they did in the 2005-2006 period.
Off-topic, thanks for the link to the Reason article you posted on Twitter about the proposed Senate housing bill. If a good housing policy bill is passed in the Trump administration I'll eat my hat, but if it happens I'll take it. I don't trust Warren---even though she's one of my senators---but if she continues to support the bill it will help. The political framing could be interesting:
-Southern Republicans get to continue owning the Libs because it will help their states more.
-Liberal policy wonks get some federal support for zoning reform.
-Trump won't care about or understand the bill and will just enjoy signing it with a golden pen.
Yeah. All of a sudden there are all sorts of things happening in Washington. I'm not sure how effective they will be. At least they are trying, and as far as I can tell I don't think there is anything really bad in them, but it's hard to know on these monster bills that run hundreds of pages.
It IS sad! The worst part of it is that a Malthusian context creates a primeval ethical condition. Where growth is possible, ethics can revolve around mutual benefit. We all take that for granted because that's the world we have lived in. It's hard to overstate how elevating capitalism has been for our ethical intuitions. But under a Malthusian context, ethical intuition presumes that someone else's loss will be everyone else's gain. You can see it everywhere from cruelty to immigrants to "getting Wall Street out of housing". It's toxic.
I do not like how this post is framed. As you say, “Raising the target rate had the most direct and immediate effect putting a stop to the thing that Phoenix needed more of.” But do you think that? Your timeline shows permits collapsing right after the Fed hikes began (and seems to imply causation), but, as I learned from you elsewhere, the (nominal) changes to the target rate do not drive this train. What really matters is the real shock caused by regulatory changes. Prices only flattened and sank once the 2006 Inter‑agency Guidance yanked credit. That guidance was a sudden real credit‑supply shock: it removed huge numbers of Phoenix buyers from the market. The marginal buyers shifting to renting caused the rental inflation you point out. We see what would have happened if mortgage rules had stayed constant then from the experience of the past several years: mortgage rates have soared (3 % to ~6%), yet prices stay high, because the (tight) mortgage rules remain unchanged. So regulatory throttle(s)—not the Fed—caused the housing bust.
Absolutely. You may be new to this substack. I write about that a lot. 100%. The price collapse was largely due to the mortgage crackdown. I'd say that changes at the federal agencies in 2008 had an even greater effect than the 2006 guidance in terms of the wealth shock it created.
I'd love it if you have any color to share on the 2006 changes.
One interesting statistic: the contribution of residential investment to US GDP was negative from Q4 2005 to Q2 2009 but it never subtracted more than -1.5% from any given quarter's growth.
One nitpick of this post: the argument about low interest rates causing a boom isn't about the absolute level of rates, but rates relative to some kind of natural rate. The level of rates themselves don't prove anything.
One thing that might be interesting: a post steel manning the credit/housing story and then another post refuting it.
I reviewed the factors associated with rising home prices in the way that some of the conventional literature does. But, they control away 80% of the data and I developed a way to include 80% of the data in the analysis, and to differentiate between credit and demand factors and supply factors. I found a higher coefficient for credit on home prices from 2002-2006 than the conventional papers did, but it was dwarfed by the scale of the supply issues.
On the rates issue, I agree. One way to assess it would be to measure the slope of the yield curve, and since long term rates didn't rise at all when the Fed raised the short term rate, and the curve was inverted by the time they were done, it is clear that they crossed neutral somewhere between 1% and 5%.
I follow the market monetarists, who might have used a 5% NGDP growth rate as a measure of neutral. This is sort of interesting. NGDP growth was a tad low, but hewed pretty closely to 5% in 2006 and 2007. But, spending was being funded by all that home equity being taken out of inflated homes in the sand states. The counterfactuals get really goofy here. A strict NGDP targeting regime might have slowed growth just slightly in 2003, and maybe that's where the Fed might have slowed migration down enough that the odd trends in 2006 would have been avoided. Maybe a 2% target rate in 2003 is still at 2% in 2007 with a slightly slower flow of migrants out of LA. If they had followed a similar path as the Fed we had until the end of 2007, an NGDP targeting Fed would probably have dropped rates to zero pretty quickly in early 2008.
Another signal is housing starts, per Ed Leamer, and of course that measure suggests that the Fed was already above neutral in 2004 or 2005. Unfortunately, Leamer was caught up in the vibes of the day and even in late 2007 couldn't bring himself to see the blaring alarm bells his own signal was flashing.
I agree with most of your article, but I am convinced that the 2008 crisis was very much a credit-driven crisis, especially in places like Phoenix, Las Vegas, the Inland Empire, and Stockton where regulation was light and land was cheap. Builders just kept building because credit was cheap and they knew there was always a greater fool who could buy the units with mortgages of 100% (or, more often, 120%.) Until they couldn't.
In case you haven't seen it, this is my analysis of the 2008 crisis. Long story short, it was caused by bad international bank regulation (ie the Basel capital standards).
Here is an excerpt: "I had a similar premonition of disaster when I visited the management of Sterling Financial, a Seattle-based thrift. Their construction loan portfolio had been growing like a weed and I wanted to get details. The CEO told me that most of the loans were for projects in the southwest, mainly Phoenix and Las Vegas. When I asked whether he thought that was prudent, he responded by assuring me not to worry, the “conduits” would always take him out of any completed project. When I asked him what, exactly, a conduit was, he clearly didn’t know."
Jeez. I would say late 2006 but I'm not sure. It was about the time that the subprime lenders started blowing up. I also visited WAMU which was even more worrisome because they were huge and Kerry Killinger was totally clueless.
That's what I figured. Every anecdote like that is from late 2006 or 2007. You wrote that "Builders just kept building because credit was cheap and they knew there was always a greater fool" and then you support it with an anecdote from a point when construction was down 50% and the fed funds rate was at its cycle high. This is why I'm here, writing about this stuff, because what you just did is literally every popular piece of literature on the topic, and when I noticed it, I thought it was so ridiculously wrong and tragic that I changed my career to learn and teach about it.
All the stuff in your post about Basel II seems reasonable. But I think you aren't engaging with the facts in terms of how it interacted with the housing boom and bust.
Just pointing out that while home completions peaked at 2.0 million annual rate in March 2006, completions in Jan 2007 were still 1.8 million. The rate of increase had slowed, but still plenty of new supply coming on stream, much of which was foreclosed on.
Given how cyclical housing construction has been over the past 70 years I'm curious if the Fed had previously demonstrated such interest in production rates as they did in the 2005-2006 period.
Off-topic, thanks for the link to the Reason article you posted on Twitter about the proposed Senate housing bill. If a good housing policy bill is passed in the Trump administration I'll eat my hat, but if it happens I'll take it. I don't trust Warren---even though she's one of my senators---but if she continues to support the bill it will help. The political framing could be interesting:
-Southern Republicans get to continue owning the Libs because it will help their states more.
-Liberal policy wonks get some federal support for zoning reform.
-Trump won't care about or understand the bill and will just enjoy signing it with a golden pen.
Yeah. All of a sudden there are all sorts of things happening in Washington. I'm not sure how effective they will be. At least they are trying, and as far as I can tell I don't think there is anything really bad in them, but it's hard to know on these monster bills that run hundreds of pages.
" Los Angeles is at a self-imposed Malthusian limit."
oh man oh man, it is so funny and so sad when you put it that way.
It IS sad! The worst part of it is that a Malthusian context creates a primeval ethical condition. Where growth is possible, ethics can revolve around mutual benefit. We all take that for granted because that's the world we have lived in. It's hard to overstate how elevating capitalism has been for our ethical intuitions. But under a Malthusian context, ethical intuition presumes that someone else's loss will be everyone else's gain. You can see it everywhere from cruelty to immigrants to "getting Wall Street out of housing". It's toxic.
I do not like how this post is framed. As you say, “Raising the target rate had the most direct and immediate effect putting a stop to the thing that Phoenix needed more of.” But do you think that? Your timeline shows permits collapsing right after the Fed hikes began (and seems to imply causation), but, as I learned from you elsewhere, the (nominal) changes to the target rate do not drive this train. What really matters is the real shock caused by regulatory changes. Prices only flattened and sank once the 2006 Inter‑agency Guidance yanked credit. That guidance was a sudden real credit‑supply shock: it removed huge numbers of Phoenix buyers from the market. The marginal buyers shifting to renting caused the rental inflation you point out. We see what would have happened if mortgage rules had stayed constant then from the experience of the past several years: mortgage rates have soared (3 % to ~6%), yet prices stay high, because the (tight) mortgage rules remain unchanged. So regulatory throttle(s)—not the Fed—caused the housing bust.
Absolutely. You may be new to this substack. I write about that a lot. 100%. The price collapse was largely due to the mortgage crackdown. I'd say that changes at the federal agencies in 2008 had an even greater effect than the 2006 guidance in terms of the wealth shock it created.
I'd love it if you have any color to share on the 2006 changes.
One interesting statistic: the contribution of residential investment to US GDP was negative from Q4 2005 to Q2 2009 but it never subtracted more than -1.5% from any given quarter's growth.
One nitpick of this post: the argument about low interest rates causing a boom isn't about the absolute level of rates, but rates relative to some kind of natural rate. The level of rates themselves don't prove anything.
One thing that might be interesting: a post steel manning the credit/housing story and then another post refuting it.
I'd say this paper is my strongman.
https://www.mercatus.org/research/research-papers/reassessing-role-supply-and-demand-housing-bubble-prices
I reviewed the factors associated with rising home prices in the way that some of the conventional literature does. But, they control away 80% of the data and I developed a way to include 80% of the data in the analysis, and to differentiate between credit and demand factors and supply factors. I found a higher coefficient for credit on home prices from 2002-2006 than the conventional papers did, but it was dwarfed by the scale of the supply issues.
On the rates issue, I agree. One way to assess it would be to measure the slope of the yield curve, and since long term rates didn't rise at all when the Fed raised the short term rate, and the curve was inverted by the time they were done, it is clear that they crossed neutral somewhere between 1% and 5%.
I follow the market monetarists, who might have used a 5% NGDP growth rate as a measure of neutral. This is sort of interesting. NGDP growth was a tad low, but hewed pretty closely to 5% in 2006 and 2007. But, spending was being funded by all that home equity being taken out of inflated homes in the sand states. The counterfactuals get really goofy here. A strict NGDP targeting regime might have slowed growth just slightly in 2003, and maybe that's where the Fed might have slowed migration down enough that the odd trends in 2006 would have been avoided. Maybe a 2% target rate in 2003 is still at 2% in 2007 with a slightly slower flow of migrants out of LA. If they had followed a similar path as the Fed we had until the end of 2007, an NGDP targeting Fed would probably have dropped rates to zero pretty quickly in early 2008.
Another signal is housing starts, per Ed Leamer, and of course that measure suggests that the Fed was already above neutral in 2004 or 2005. Unfortunately, Leamer was caught up in the vibes of the day and even in late 2007 couldn't bring himself to see the blaring alarm bells his own signal was flashing.
Thanks, I'll take a look at the paper.
I agree with most of your article, but I am convinced that the 2008 crisis was very much a credit-driven crisis, especially in places like Phoenix, Las Vegas, the Inland Empire, and Stockton where regulation was light and land was cheap. Builders just kept building because credit was cheap and they knew there was always a greater fool who could buy the units with mortgages of 100% (or, more often, 120%.) Until they couldn't.
In case you haven't seen it, this is my analysis of the 2008 crisis. Long story short, it was caused by bad international bank regulation (ie the Basel capital standards).
https://charles72f.substack.com/p/basel-faulty-the-financial-crisis
Here is an excerpt: "I had a similar premonition of disaster when I visited the management of Sterling Financial, a Seattle-based thrift. Their construction loan portfolio had been growing like a weed and I wanted to get details. The CEO told me that most of the loans were for projects in the southwest, mainly Phoenix and Las Vegas. When I asked whether he thought that was prudent, he responded by assuring me not to worry, the “conduits” would always take him out of any completed project. When I asked him what, exactly, a conduit was, he clearly didn’t know."
What was the date of the visit to Sterling?
Jeez. I would say late 2006 but I'm not sure. It was about the time that the subprime lenders started blowing up. I also visited WAMU which was even more worrisome because they were huge and Kerry Killinger was totally clueless.
That's what I figured. Every anecdote like that is from late 2006 or 2007. You wrote that "Builders just kept building because credit was cheap and they knew there was always a greater fool" and then you support it with an anecdote from a point when construction was down 50% and the fed funds rate was at its cycle high. This is why I'm here, writing about this stuff, because what you just did is literally every popular piece of literature on the topic, and when I noticed it, I thought it was so ridiculously wrong and tragic that I changed my career to learn and teach about it.
Wow. Sorry. No point in discussing further. Read my post.
All the stuff in your post about Basel II seems reasonable. But I think you aren't engaging with the facts in terms of how it interacted with the housing boom and bust.
Just pointing out that while home completions peaked at 2.0 million annual rate in March 2006, completions in Jan 2007 were still 1.8 million. The rate of increase had slowed, but still plenty of new supply coming on stream, much of which was foreclosed on.