Transcript Implications of Mortgage Market Structure for Housing and Economic Activity

Implications of Mortgage Market
Structure for Housing and Economic
Activity
Laura Middlesworth
University of Wisconsin – Eau Claire
Q1-1960
Q3-1961
Q1-1963
Q3-1964
Q1-1966
Q3-1967
Q1-1969
Q3-1970
Q1-1972
Q3-1973
Q1-1975
Q3-1976
Q1-1978
Q3-1979
Q1-1981
Q3-1982
Q1-1984
Q3-1985
Q1-1987
Q3-1988
Q1-1990
Q3-1991
Q1-1993
Q3-1994
Q1-1996
Q3-1997
Q1-1999
Q3-2000
Q1-2002
Q3-2003
Q1-2005
Q3-2006
Q1-2008
Q3-2009
U.S. Residential Investment, % of GDP
8%
1
7%
0.9
6%
0.8
0.7
5%
0.6
4%
0.5
3%
0.4
0.3
2%
0.2
1%
0.1
0%
0
Sources: OECD, NBER
Q1-1960
Q4-1961
Q3-1963
Q2-1965
Q1-1967
Q4-1968
Q3-1970
Q2-1972
Q1-1974
Q4-1975
Q3-1977
Q2-1979
Q1-1981
Q4-1982
Q3-1984
Q2-1986
Q1-1988
Q4-1989
Q3-1991
Q2-1993
Q1-1995
Q4-1996
Q3-1998
Q2-2000
Q1-2002
Q4-2003
Q3-2005
Q2-2007
Q1-2009
Q4-2010
Index; equal to 1 in 2005
Work Started on Dwellings
1.4
1
1.2
0.9
0.8
1
0.7
0.8
0.6
0.5
0.6
0.4
0.4
0.3
0.2
0.2
0.1
0
0
Sources: OECD, NBER
Q1-1960
Q4-1961
Q3-1963
Q2-1965
Q1-1967
Q4-1968
Q3-1970
Q2-1972
Q1-1974
Q4-1975
Q3-1977
Q2-1979
Q1-1981
Q4-1982
Q3-1984
Q2-1986
Q1-1988
Q4-1989
Q3-1991
Q2-1993
Q1-1995
Q4-1996
Q3-1998
Q2-2000
Q1-2002
Q4-2003
Q3-2005
Q2-2007
Q1-2009
Q4-2010
No. of housing units
Permits for New Private Housing Units
2500000
1
0.9
2000000
0.8
0.7
1500000
0.6
0.5
1000000
0.4
0.3
500000
0.2
0.1
0
0
Sources: U.S. Census Bureau, NBER
•After 20 quarters, permits for new housing units accounts for…
15% of variation in GDP growth
26% of variation in residential investment
•After 20 quarters, 38% of the variation in residential investment is
attributed to the interest rate
•Impulse response functions suggest that a shock to
permits has a more pronounced impact on GDP growth
vs. a shock to residential investment
•A shock to permits has a lasting impact on residential
investment.
Housing and the Business Cycle
• Leamer (2007): In the post-war era, residential
investment was the greatest contributor to
weakness in GDP growth prior to 6 out of 10
recessions
– Volumes, not prices, matter
– Is residential investment so important because of
mortgage market structure in U.S.?
Residential Investment-to-GDP Ratio
16%
14%
12%
Peak value of ratio over
past decade
10%
8%
Value of ratio during
previous trough
6%
Ratio for most recent
quarter
4%
2%
0%
Source: OECD
Residential Investment
Growth rate compared to same quarter, previous year
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%
-40%
2008q4
Source: OECD
2009q4
2010q4
Mortgage Market Structure
Group 1
Group 2
Group 3
Belgium
Denmark
Australia
Canada
Finland
Ireland
France
Japan
Norway
Germany
Netherlands
Sweden
Spain
U.S.
U.K.
•Mortgage equity
extraction is not used
•Banks have conservative
lending practices
•Mortgage equity
extraction is allowed
•Banks have more
aggressive lending
practices
•Interest rates on
mortgages tend to be fixed
•Mortgage equity
extraction is allowed
•Banks have more
aggressive lending
practices
•Variable interest rates on
mortgages
Source: Tsatsaronis and Zhu (2004)
Variation in GDP Growth Attributed to
Private Sector Credit
8
7
6
%
5
4
3
2
1
0
1
4
8
Quarters
Group 1
Group 2
Group 3
12
Variation in Residential Investment
Attributed to Private Sector Credit
7
6
5
%
4
3
2
1
0
1
4
8
Quarters
Group 1
Group 2
Group 3
12
Variation in Residential Investment
Attributed to the Interest Rate
30
25
%
20
15
10
5
0
1
4
8
Quarters
Group 1
Group 2
Group 3
12
Variation in GDP Growth Attributed to
Residential Investment
12
10
%
8
6
4
2
0
1
4
8
Quarters
Group 1
Group 2
Group 3
12
Variation in GDP Growth Attributed to
the Interest Rate
12
10
%
8
6
4
2
0
1
4
8
Quarters
Group 1
Group 2
Group 3
12
Variation in GDP Growth Attributed to
Permits for New Housing Units
14
12
10
%
8
6
4
2
0
1
4
8
Quarters
Group 1
Group 2
Group 3
12
Summary of Preliminary Results
• More variation in residential investment is
attributed to interest rates for countries with
variable rate mortgages
– Possible reason for smaller amount of variation of
GDP growth attributed to residential investment?
• Mixed results for impact of private sector credit
on GDP growth, residential investment
• More variation in GDP growth is attributed to
permits for countries with more aggressive
lending
– Possible explanations?
Works Cited
• Cardarelli et al. “The Changing Housing Cycle
and the Implications for Monetary Policy,”
World Economic Outlook, No. 84, 2008.
• Leamer, Edward. “Housing is the Business
Cycle,” NBER Working Paper No. 13428, 2007.
• Tsatsaronis, Kostas and Haibin Zhu. “What
Drives Housing Price Dynamics: Cross-Country
Evidence,” BIS Quarterly Review, March 2004.