The San Francisco Federal Reserve doesn’t think we’re seeing another housing bubble.
In a post on Monday, Fed researchers
Reuven Glick, Kevin J. Lansing, and Daniel Molitor argue that while home prices have nearly recovered to their pre-recession peak seen in 2006, the last nine years of home prices gains have been accompanied by more reasonable and sustainable behaviours from homeowners and lenders.
Ergo, no bubble.
Here’s the Fed’s team:
We find that the increase in U.S. house prices since 2011 differs in significant ways from the mid-2000s housing boom. The prior episode can be described as a credit-fuelled bubble in which housing valuation — as measured by the house price-to-rent ratio — and household leverage — as measured by the mortgage debt-to-income ratio — rose together in a self-reinforcing feedback loop. In contrast, the more recent episode exhibits a less-pronounced increase in housing valuation together with an outright decline in household leverage — a pattern that is not suggestive of a credit-fuelled bubble.
And the Fed’s argument, really, hinges on this chart, showing the steady decline in household leverage and an only modest rebound in home price valuations as measured by the price-to-rent ratio, which the Fed team considers analogous to a stock’s price-to-dividend ratio.
And again, this is all about a market that is simply acting less insane.
Here’s more detail from the Fed on the mortgage market’s problems pre-crisis:
As house prices rose during the mid-2000s, the lending industry marketed a range of exotic mortgage products to attract borrowers. These included loans requiring no down payment or documentation of income, monthly payments for interest only or less, and adjustable-rate mortgages with low introductory “teaser” rates that reset higher over time. While these were sold as a way to keep monthly payments affordable for new homebuyers, the exotic lending products paradoxically harmed affordability by fuelling the price run-up. Empirical studies show that house prices rose faster in places where subprime and exotic mortgages were more prevalent.
In their influential book, “House of Debt,” Atif Mian and Amir Sufi outlined how inflated home prices were eventually marked down in a similar self-reinforcing fashion to how the Fed describes the pre-crisis home price run up.
Recall again that the price of houses rose faster in areas where more exotic and lower quality mortgages were prevalent. But it was these same areas that saw the swiftest downturn in home prices, which led to more foreclosures, which led to a further decline in home prices and so on.
And in its analysis, the San Francisco Fed is broadly following the same line of thinking as Mian and Sufi.
The steady decline in household leverage — indicated by the decline in the mortgage-debt-to-income ratio — is what the Fed cites as reflecting both a healthy appreciation in current home prices and a steady flushing of the toxins that inflated the pre-crisis housing bubble.
Or as the Fed writes, “These observations help allay concerns about another credit-fuelled bubble.”
So there you go.
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