Why does it have to be either or? Can't it be a combination of supply shortages caused by land regulation and simultaneously loose monetary policy? I am not understanding why it is a dichotomy.
A combination of the fact that supply fits the facts well and monetary explanations don't.
My problems with monetary explanations apply on several levels. In terms of rates, I don't think the Fed has as much control of even short term rates as they are presumed to have. Long term rates aren't particularly sensitive to short term rates. The real long term rates that might relate to home values are even less sensitive to Fed policy and short term rates. And I'm not sure even real long term rates have much influence on home prices. Certainly no naive review of the data of the last 20 or 30 years would find a dependable relationship. (In the "Shut Out" appendix, I used a standard real long term rate relationship for price/rent ratios, but I have come to think that mostly plays out by changing rents rather than prices.)
If we ignore rates and use inflation or nominal growth as proxies for monetary posture, again, it is very hard to find any discernable relationship with home values. In my tracker data that I update monthly, I pull out the portion of home prices that can be attributed to supply constraints, which is purely defined by intra-metro price differentials, and that accounts for much of the variation that has been attributed to loose money.
I discuss monetary policy a bit in "Building from the Ground Up".
This is interesting, thanks for the response. I'm curious to read more of your thoughts on monetary policy and the Fed not having much control over rates. In general I am confused whether central banks or market forces are ultimately responsible for "setting" rates. This could resolve some cognitive dissonance I have on the topic.
My starting point is Scott Sumner and the market monetarists. (themoneyillusion.com) Some primary examples that created havoc: the increase in the target rate from 2004 to 2006 basically had no effect on mortgage rates. And, in September 2008, the Fed decided to keep their target at 2% immediately after the Lehman failure, deciding that for some reason hitting the target the committee had set was more important than not burning down the financial world. The target remained at 2%, but overnight rates collapsed and never actually hit 2% after the meeting, even though the Fed bought up $100s of billions in treasuries trying to push it up. It was never going to hit 2% because buying treasuries to try to hit it was deflationary.
Why does it have to be either or? Can't it be a combination of supply shortages caused by land regulation and simultaneously loose monetary policy? I am not understanding why it is a dichotomy.
A combination of the fact that supply fits the facts well and monetary explanations don't.
My problems with monetary explanations apply on several levels. In terms of rates, I don't think the Fed has as much control of even short term rates as they are presumed to have. Long term rates aren't particularly sensitive to short term rates. The real long term rates that might relate to home values are even less sensitive to Fed policy and short term rates. And I'm not sure even real long term rates have much influence on home prices. Certainly no naive review of the data of the last 20 or 30 years would find a dependable relationship. (In the "Shut Out" appendix, I used a standard real long term rate relationship for price/rent ratios, but I have come to think that mostly plays out by changing rents rather than prices.)
If we ignore rates and use inflation or nominal growth as proxies for monetary posture, again, it is very hard to find any discernable relationship with home values. In my tracker data that I update monthly, I pull out the portion of home prices that can be attributed to supply constraints, which is purely defined by intra-metro price differentials, and that accounts for much of the variation that has been attributed to loose money.
I discuss monetary policy a bit in "Building from the Ground Up".
This is interesting, thanks for the response. I'm curious to read more of your thoughts on monetary policy and the Fed not having much control over rates. In general I am confused whether central banks or market forces are ultimately responsible for "setting" rates. This could resolve some cognitive dissonance I have on the topic.
My starting point is Scott Sumner and the market monetarists. (themoneyillusion.com) Some primary examples that created havoc: the increase in the target rate from 2004 to 2006 basically had no effect on mortgage rates. And, in September 2008, the Fed decided to keep their target at 2% immediately after the Lehman failure, deciding that for some reason hitting the target the committee had set was more important than not burning down the financial world. The target remained at 2%, but overnight rates collapsed and never actually hit 2% after the meeting, even though the Fed bought up $100s of billions in treasuries trying to push it up. It was never going to hit 2% because buying treasuries to try to hit it was deflationary.
Interesting stuff. I have heard of Scott Sumner but never read him. I'm going to check out his site.
Loving your blog too--already helping me piece things together!