Difficult Facts About Housing
By Arnold Kling
Dramatic home price booms since the late 1990s have been in evidence in Australia, Canada, China, France, India, Ireland, Italy, Korea, Russia, Spain, the United Kingdom, and the United States, among other countries.
He has charts suggesting that the Netherlands and Norway experienced greater booms than the United States. In his book The Subprime Solution, he has a chart that shows London house prices rising faster than prices in Boston.
What makes this a difficult fact is that so many explanations of the house price boom are U.S/ specific. It is hard to argue that the Community Reinvestment Act or the repeal of Glass-Steagall are what account for the home price booms in Norway or Spain. In fact, Shiller’s view is that bubble/contagion is the only theory that can account for the multinational nature of the home price boom.
I want to argue that securitization helped stimulate the boom. However, securitization took off much less in other countries, as the paper by Richard K. Green and Susan M. Wachter points out. However, they do note that housing finance changed in a number of countries, moving from specialized institutions under tight government control to commercial banks. This reduced the extent of credit rationing in the housing finance systems.
Green and Wachter argue that up until the 1980’s, housing finance in many countries was segregated from the overall capital market. Then,
In the 1990’s, the integration of previously segmented mortgage markets into global capital markets allowed general interest rate declines to generate mortgage rate declines that both increased housing affordability and decreased the relative cost of housing.
The Green and Wachter paper offers hope to those of us who want to assign a role for financial market innovations in explaining the home price boom. Even the the boom took place in many countries, financial innovation took place in many countries as well. However, Shiller would argue that institutional changes are a response to housing boom psychology, rather than an exogenous factor.
They point out that from 1997 to 2005, the number of households with a mortgage increased by 20 percent, while the number of households increased by only 9 percent. Total mortgage debt increased by 250 percent, while nominal GDP increased by only 50 percent.
A second difficult fact, at least for me, comes from a more recent paper by Major Coleman, IV, Michael LaCour-Little, and Kerry D. Vandell.
The national average LTV for newly originated home loans over the observation period is provided by the Federal Housing Finance Board’s Monthly Interest Rate Survey (MIRS) data. It provides evidence of considerable stability over the entire period at around 80% for first liens, thus suggesting that the notion of higher LTV’s after 2003 due to increases in alternative mortgage densities was not consistent with the empirical evidence.
However, the authors do note that they are not looking at trends in second mortgages. If second mortgages and other forms of creative financing were increasing, then borrower down payments could have been falling. Also, additional risk factors were being layered on to mortgage lending. First, there was a rise in non-owner-occupied loans. Second, cash-our refinances are riskier than purchase loans, because with a purchase loan the buyer has an incentive to strive for a low price while with a cash-out refi the borrower wants to get the highest possible appraised value.