What is Bernanke Saying About Housing?
By Arnold Kling
the housing sector continues to suffer from serious imbalances–a marked excess supply for owner-occupied housing accompanied by a stronger rental markets.
If this is true, then there must be some institutional barriers to converting housing stock from owner-occupied housing to rental housing. In fact, Bernanke’s main policy recommendation is to make it easier for foreclosed homes that were formerly owner occupied to be converted to rentals.
That is a very different suggestion than what many reporters and bloggers are talking about when they say that Bernanke is calling for “more help” for the housing market. In recent years, “more help” has been equated with foreclosure prevention or subsidies to homebuyers, and that is not what I see Bernanke advocating.
To a first approximation, housing is fungible. By that, I mean that a given rental unit can be sold to an owner-occupant and a given owner-occupied unit can be rented out. To the extent that housing is fungible, it is nonsense to speak of the rental market and the owner-occupied market as obeying different conditions of supply and demand. Yes, there are some legal obstacles to converting some apartments to condos, and there are some legal obstacles to renting out some units with owner-occupants, but to my knowledge nobody has attempted to trot out a theory that those restrictions operate on the margin to create ultra-segmented housing markets.
Next, think of housing in terms of two decisions by households.
1) How much housing services do we obtain?
2) Do we obtain our housing services by owning or renting?
With a fungible housing market , all of the supply-demand action in the housing market is in (1). (2) is just an arbitrary allocation of the housing stock into rental units and owner-occupied units, based on institutional factors, such as tax clienteles (people with low incomes cannot take advantage of the mortgage interest deduction, and hence have an incentive to rent), regulations and subsidies of various kinds, and demographic characteristics (frequent movers are more likely to rent than well-rooted families).
Bernanke seems to me to be saying that housing is not fungible nowadays. In his view, if we see rents rising and prices falling that suggests a problem in converting owner-occupied units to rentals. I am skeptical of this.
The cost of housing has been going up for both owners and renters. For owner-occupants, this higher cost takes the form of low (or negative) rates of home price appreciation.* For landlords, low or negative appreciation is offsetting the increase in rents, so that economic profits may be low.
(*Note that the Bureau of Labor Statistics is correct to say that the housing component of the cost of living is rising. From an asset perspective, there is deflation, but from a cost of living perspective, there is not. This drives Scott Sumner nuts, because he thinks it makes measured inflation a joke. Taking this view to its logical conclusion, Sumner says to focus on nominal GDP, in which housing is represented by spending on new construction.)
In recent years, much of the U.S. housing stock has been unoccupied. Some units were bought during the bubble by speculators, who made bad bets.
Other units of the housing stock have been occupied by people who cannot afford the houses that they “bought” (with little or no money down). They could not have afforded to rent their residences, but they and their lenders implicitly counted on house price appreciation to make the transactions work out. Until these people either sell their houses or go through foreclosure, they are part of the imbalance in the housing market, because they are consuming more housing services than they can afford.
There will be a housing market equilibrium when:
(a). The excess stock of housing has been absorbed. It does not matter whether this absorption takes the form of renting or owner-occupancy.
(b). Households are no longer consuming excess housing services relative to their incomes.
My guess is that the biggest barrier to achieving equilibrium has been policies aimed at preventing foreclosure. Such policies clearly impede (b). They also impede (a), because the longer you delay foreclosure, the more the property gets trashed and the harder it is to sell.
To Bernanke’s credit, his speech does not champion foreclosure prevention. The policy suggestion that he pushes the most is to reduce institutional barriers to converting foreclosed houses into rental properties. If such barriers truly are important, then his suggestions would hasten (a). However, my view is that housing is fungible enough for (a) to take care of itself. As long as the market converts enough owner-occupied housing to rental housing, it does not matter whether certain specific homes that were in foreclosure are so converted.