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Housing Prices: Global Correction, Local Consequences

Housing Prices: Global Correction, Local Consequences Presentation by: Prakash Loungani This presentation draws on work-in-progress with my IMF colleagues Charles Collyns, Marcello Estevao and Deniz Igan. The views presented here are those of the authors and should not be attributed to the IMF.

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Housing Prices: Global Correction, Local Consequences

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  1. Housing Prices:Global Correction, Local Consequences Presentation by: Prakash Loungani This presentation draws on work-in-progress with my IMF colleagues Charles Collyns, Marcello Estevao and Deniz Igan. The views presented here are those of the authors and should not be attributed to the IMF. We thank Jair Rodriguez for excellent research assistance and Hites Ahir for helpful discussions. George Washington University Research Program in Forecasting November 18, 2008

  2. outline 1. a global boom and bust 2. how much further will house prices fall? • consequences of house price declines a. adjustment of residential investment in OECD countries b. adjustment of unemployment in U.S. states

  3. data sets • selected OECD countries, quarterly data,1970 to present (shorter time series in some cases) • ’51’ U.S. states, quarterly data,1975 to present

  4. 1. global boom and bust oecd countries: prices & quantities

  5. a global boom in OECD countries ...

  6. ... is now a global bust

  7. magnitude depends on index: U.S. example

  8. Residential investment has been plummeting in the U.S.

  9. globally, a residential investment boom ...

  10. ... is turning to bust

  11. 120 Change in Housing Prices and Residential Investment 00-06 100 ESP FRA 80 GBR DNK IRE 60 SWE CAN ITA NOR Housing prices USA 40 FIN 20 CHE 0 -20 0 20 40 60 80 100 DEU -20 -40 Residential Investment prices and quantities:up together ...

  12. 3 Change in Housing Prices and Residential Investment 07-08 2 CHE 1 0 ITA -35 -30 -25 -20 -15 -10 -5 0 5 10 -1 DEU FRA Housing prices -2 SWE GBR -3 DNK USA FIN -4 CAN ESP -5 IRE NOR -6 -7 Residential Investment prices and quantities: down together ...

  13. 2. how much further will house prices fall? evidence from past cycles evidence from short-run model evidence from long-term relationships a more careful look for U.S. (based on work by Deniz Igan)

  14. Evidence from past cycles • OECD (2005) • Claessens, Kose and Terrones (2008)

  15. evidence from short-run model

  16. price-income ratios are above historical values ...

  17. ... suggesting price gaps

  18. price/rent ratios are also above historical values ...

  19. ... suggesting price gaps

  20. U.S. price-to-rent ratio (PRR)

  21. housing affordability, then and now

  22. price-to-rent ratio: adjustment to benchmark

  23. 3. consequences residential investment: OECD countries unemployment: U.S. states (based on Estevao and Loungani)

  24. 3a. residential investment What explains the cross-country variation in the impact of house price busts on residential investment?

  25. cross-country variation in residential investment impacts of housing busts: role of interest payment to GDP ratio

  26. cross-country variation in residential investment impacts of housing busts: role of mortgage debt- to-GDP ratio

  27. cross-country variation in residential investment impacts of housing busts: role of mortgage market characteristics

  28. 3b. unemployment What explains the cross-state and cross-region variation in the impacts of house price busts unemployment?

  29. U.S. state unemployment rates at present

  30. Real Housing Prices and Unemployment Rates in the U.S. Regions New England 12 360 (Index) (In percent) Housing Bust Unemployment recession cycle 320 10 Unemployment rate (LHS) Smoothed unemployment (LHS) 280 Previous peak 8 Trough 1988Q2 Real house price index (RHS) 240 6 200 4 1979Q1 160 1995Q1 2 120 1981Q4 0 80 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Middle Atlantic 14 360 (Index) (In percent) Housing Bust Unemployment recession cycle 12 320 Unemployment rate (LHS) Smoothed unemployment (LHS) 10 280 Previous peak Trough Real house price index (RHS) 8 240 1988Q2 6 200 4 160 1979Q1 1995Q1 2 120 1981Q4 0 80 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 East North Central 14 360 (Index) (In percent) Housing Bust Unemployment recession cycle 12 320 Unemployment rate (LHS) Smoothed unemployment (LHS) 10 280 Previous peak Trough Real house price index (RHS) 8 240 6 200 4 160 1979Q2 2 120 1982Q4 0 80 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Note: Real housing prices defined as the OFHEO home price index in a census division divided by the CPI of the larger census region. Sources: Office of Federal Housing Enterprise Oversight (OFHEO); Bureau of Labor Statistics; and Haver Analytics.

  31. Real Housing Proces and Unemployment Rates in the U.S. Regions (cont.) West North Central 12 360 (Index) (In percent) Housing Bust Unemployment recession cycle 320 10 Unemployment rate (LHS) Smoothed unemployment (LHS) 280 Previous peak 8 Trough Real house price index (RHS) 240 6 200 4 160 1979Q2 1988Q2 2 1982Q3 120 1990Q4 0 80 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 1976Q1 1979Q1 1982Q1 1985Q1 1988Q1 1991Q1 1994Q1 1997Q1 2000Q1 2003Q1 2006Q1 South Atlantic 12 360 Unemployment: recession cycle (Index) (In percent) Unemployment rate (LHS) 320 10 Smoothed unemployment (LHS) Previous peak 280 Trough 8 Real house price index (RHS) 240 6 200 4 160 1979Q1 1989Q3 1993Q4 2 120 1990Q4 1995Q1 1981Q3 0 80 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 1976Q1 1979Q1 1982Q1 1985Q1 1988Q1 1991Q1 1994Q1 1997Q1 2000Q1 2003Q1 2006Q1 East South Central 360 14 (In percent) Unemployment: recession cycle (Index) Unemployment rate (LHS) 320 12 Smoothed unemployment (LHS) Previous peak 280 10 Trough Real house price index (RHS) 240 8 200 6 160 4 1979Q1 1999Q1 1988Q1 120 2 2000Q2 1981Q4 1990Q4 0 80 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Note: Real housing prices defined as the OFHEO home price index in a census division divided by the CPI of the larger census region. Sources: Office of Federal Housing Enterprise Oversight (OFHEO); Bureau of Labor Statistics; and Haver Analytics.

  32. Real Housing Prices and Unemployment Rates in the U.S. Regions (cont.) West South Central 12 360 (Index) (In percent) Housing Bust Unemployment recession cycle 320 10 Unemployment rate (LHS) Smoothed unemployment (LHS) 280 Previous peak 8 Trough Real house price index (RHS) 240 6 200 4 160 1979Q1 1983Q1 2 120 1981Q1 1990Q4 0 80 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 1976Q1 1979Q1 1982Q1 1985Q1 1988Q1 1991Q1 1994Q1 1997Q1 2000Q1 2003Q1 2006Q1 Mountain 12 360 (Index) (In percent) Unemployment: recession cycle Unemployment rate (LHS) 320 10 Smoothed unemployment (LHS) Previous peak 280 Trough 8 Real house price index (RHS) 240 6 200 4 160 1983Q1 1987Q1 2 120 1985Q4 1990Q4 0 80 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Pacific 12 360 Housing Bust (Index) (In percent) Unemployment recession cycle 320 Unemployment rate (LHS) 10 Smoothed unemployment (LHS) Previous peak 280 Trough 8 Real house price index (RHS) 240 6 200 1989Q4 4 160 1981Q2 2 120 1995Q1 1982Q3 0 80 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Note: Real housing prices defined as the OFHEO home price index in a census division divided by the CPI of the larger census region. Sources: Office of Federal Housing Enterprise Oversight (OFHEO); Bureau of Labor Statistics; and Haver Analytics.

  33. U.S. Regional Recessions 4 4 Unemployment rate (percent) 5 5 Average for regional recessions without a housing bust 6 6 7 7 8 8 9 9 Average for regional recessions with a housing bust 10 10 -12M Onset 12M 24M 36M 48M

  34. Regional Housing Busts and Unemployment Rates 30 50 Real House price index Census division : Beginning to trough ( cumulative percent change vis - à - vis New England: 1988q2 - 1995q1 45 beginning of housing bust) 20 Middle Atlantic: 1988q2 - 1995q1 East North Central: 1979q2 - 1982q4 40 West North Central: 1979q2 - 1982q3 10 West South Central: 1983q1 - 1990q4 35 Pacific: 1989q4 - 1995q1 0 30 -10 25 20 -20 15 -30 10 -40 5 -50 0 -16Q -12Q -8Q -4Q 0Q 4Q 8Q 12Q 16Q 20Q 24Q 28Q 32Q 36Q 40Q 44Q Beginning of cycle 16 Unemployment rate Housing busts: Census division: Beginning to trough (around housing busts) 14 New England: 1988q2 - 1995q1 Middle Atlantic: 1988q2 - 1995q1 East North Central: 1979q2 - 1982q4 12 West North Central: 1979q2 - 1982q3 West South Central: 1983q1 - 1990q4 Pacific: 1989q4 - 1995q1 10 8 6 4 2 0 -16Q -12Q -8Q -4Q 0Q 4Q 8Q 12Q 16Q 20Q 24Q 28Q 32Q 36Q 40Q 44Q Beginning of cycle Note: Events are centered at a peak in the real housing prices that was followed by a bust in one of the nine Census divisions. Real housing prices defined as the OFHEO home price index in a Census division divided by the CPI of the larger Census region. Sources: Office of Federal Housing Enterprise Oversight (OFHEO); Bureau of Labor Statistics; and Haver Analytics.

  35. Length of Regional Unemployment cycles. Unemployment cycles (excluding cycles occurring around housing busts) (In months) Census division Start 1/ Trough 2/ End 3/ Contraction 4/ Recovery 5/ Complete Cycle 6/ New England Jul-81 Jun-82 Jan-84 11 19 30 New England Apr-02 Apr-03 Mar-07 12 50 62 Middle Atlantic Sep-81 Jan-83 Dec-84 16 23 39 Middle Atlantic Nov-01 Dec-02 Jan-05 13 25 38 East North Central Feb-91 May-92 Apr-94 15 23 38 East North Central Oct-01 Jul-03 May-06 21 34 55 West North Central Oct-90 Feb-91 Mar-94 5 37 42 West North Central Oct-01 Jul-03 May-06 21 34 55 South Atlantic Feb-81 Dec-82 Jan-85 22 25 47 South Atlantic Nov-90 Mar-92 Dec-94 16 33 49 South Atlantic Aug-01 Jul-03 Sep-05 23 26 49 East South Central Jul-80 Jan-83 Jun-87 30 53 83 East South Central Feb-91 Jul-91 Jul-93 5 24 29 East South Central Sep-01 Aug-03 Sep-06 23 37 60 West South Central Mar-82 Jul-83 May-84 16 10 26 West South Central Jul-91 Jun-92 Jul-94 11 25 36 West South Central Nov-01 Jun-03 Apr-06 19 34 53 Mountain Dec-81 Jan-83 Dec-83 13 11 24 Mountain Jan-85 Jan-87 Jun-88 24 17 41 Mountain Sep-91 May-92 Sep-93 8 16 24 Mountain Aug-01 Mar-03 Dec-05 19 33 52 Pacific Sep-81 Jan-83 May-85 16 28 44 Pacific Oct-01 May-03 Feb-05 19 21 40 Average 16 28 44 Unemployment cycles ocurring around housing busts (In months) Census division Start 1/ Trough 2/ End 3/ Contraction 4/ Recovery 5/ Complete Cycle 6/ New England Apr-90 Nov-91 Mar-96 19 52 71 Middle Atlantic Jan-91 Jun-92 Aug-96 12 55 67 East North Central May-80 Nov-82 Aug-86 30 45 75 West North Central May-80 Nov-82 Sep-87 30 58 88 West South Central Dec-84 Jul-86 Mar-89 19 32 51 Pacific Mar-91 Nov-92 Dec-96 20 49 69 Average 22 49 70 1/ Point where actual unemployment rate is higher than smoothed unemployment rate. Unemployment rate was smoothed using the HP filter. 2/ Period with highest unemployment rate during the cycle. 3/ Actual unemployment rate falls below smoothed unemployment rate. 4/ Number of months from the beginning of the cycle to the trough. 5/ Number of months from the trough to the end of the cycle (recovery). 6/ Amplitude of total cycle (contraction + recovery).

  36. Estimating the Effect of Past Changes in Real Housing Prices on Recession and Recovery Length using U.S. Regional Data. Dependent variable: Recession length (number of months) Recovery length (number of months) (1) (2) (3) (4) (5) (6) ? rhp 0.52 0.19 0.33 -0.04 -1 (0.59) (0.58) (0.47) (0.42) ? rin -3.69 ** -2.57 * -3.57 ** -2.88 ** -1 (1.27) (1.27) (0.92) (0.92) bust * ? rhp -4.35 ** -2.93 * -3.30 ** -1.90 * -1 (1.12) (1.22) (0.88) (0.88) bust * ? rin -0.31 0.31 0.69 1.24 -1 (2.23) (2.07) (1.60) (1.49) Number of observations 28 28 28 28 28 28 2 Adjusted R 0.35 0.31 0.43 0.34 0.41 0.51 ? rhp = percent change in real housing prices in the 12 months leading to the recession. -1 ? rin = percent change in real regional income in the 12 months leading to the recession. -1 Real housing price and regional income respectively measured as the OFHEO home price index and personal income in the division divided by the CPI of the larger census region. There are 9 Census divisions and 4 census regions. Figures in parenthesis are standard errors. * means 5 percent level of significance and ** means 1 percent level of significance.

  37. Estimating the Effect of Past Changes in Real Housing Prices on Recession and Recovery Length using U.S. Regional Data. Dependent variable: Recession length (number of months) Recovery length (number of months) (1) (2) (3) (4) (5) (6) ? rhp -0.57 -0.28 0.49 -0.39 -1 (0.56) (0.51) (0.43) (0.38) ? rin -5.73 -4.79 -4.15 -3.24 ** ** ** ** -1 (1.33) (1.53) (1.00) (1.13) 2 ( ? rhp ) 0.28 0.12 0.23 0.10 * ** -1 (0.11) (0.11) (.08) (0.08) 2 ( ? rin ) 0.62 0.50 0.26 0.13 * -1 (0.30) (0.33) (0.23) (0.25) Number of observations 28 28 28 28 28 28 2 Adjusted R 0.18 0.40 0.39 0.21 0.43 0.45 ? rhp = percent change in real housing prices in the 12 months leading to the recession. -1 ? rin = percent change in real regional income in the 12 months leading to the recession. -1 Real housing price and regional income respectively measured as the OFHEO home price index and personal income in the division divided by the CPI of the larger census region. There are 9 Census divisions and 4 census regions. Figures in parenthesis are standard errors. * means 5 percent level of significance and ** means 1 percent level of significance.

  38. Housing bust magnifies impact of recessions on unemployment

  39. Shock to employment Response House Prices Response Employment Response unemployment Response labor force participation

  40. Shock to house prices Response House Prices Response Employment Response unemployment Response labor force participation

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