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.

We thank Jair Rodriguez for excellent research assistance and Hites Ahir for helpful discussions.

George Washington University Research Program in Forecasting

November 18, 2008

outline

1. a global boom and bust

2. how much further will house prices fall?

3. consequences of house price declinesa. adjustment of residential investment in OECD countriesb. adjustment of unemployment in U.S. states

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

1. global boom and bust

oecd countries: prices & quantities

a global boom in OECD countries ...

Real Housing Prices(Changes 2001Q1-2007Q1)

-40

-20

0

20

40

60

80

100

ESP NZL FRA GBR DNK AUS CAN IRE NOR SWE FIN ITA USA KOR NLD CHE DEU JPN

... is now a global bustReal Housing Prices(Changes 2007Q4-2008Q2)

-8.0

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

CHE KOR ITA NLD JPN DEU FRA SWE DNK GBR USA FIN AUS ESP CAN NOR IRE NZL

magnitude depends on index: U.S. example

U.S. House Prices(Y/Y change)

OFHEO

Case-Shiller

-20

-15

-10

-5

0

5

10

15

20M

ar-0

1

Jun-

01

Sep

-01

Dec

-01

Mar

-02

Jun-

02

Sep

-02

Dec

-02

Mar

-03

Jun-

03

Sep

-03

Dec

-03

Mar

-04

Jun-

04

Sep

-04

Dec

-04

Mar

-05

Jun-

05

Sep

-05

Dec

-05

Mar

-06

Jun-

06

Sep

-06

Dec

-06

Mar

-07

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Residential investment has been plummeting in the U.S.

700

900

1100

1300

1500

1700

1900

2100

2300

2500Ja

n-00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

70

80

90

100

110

120

130

140

Housing starts (thousand of units)Residential Investment (index, rhs)

globally, a residential investment boom ...

Change in Residential Investment 2001-06

-20

-10

0

10

20

30

40

50

60

70

80

90S

wed

en

Den

mar

k

Irela

nd

Spa

in

Nor

way

Can

ada

Finl

and

Uni

ted

Kin

gdom

Uni

ted

Sta

tes

Fran

ce

Italy

Sw

itzer

land

Aus

tria

Ger

man

y

... is turning to bustChange in Residential Investment 2006-08

-40

-30

-20

-10

0

10

20S

wed

en

Aus

tria

Italy

Nor

way

Ger

man

y

Den

mar

k

Can

ada

Fran

ce

Finl

and

Uni

ted

Kin

gdom

Sw

itzer

land

Spa

in

Uni

ted

Sta

tes

Irela

nd

prices and quantities:up together ...Change in Housing Prices and Residential Investment 00-06

USA

GBR

CHE

SWE

ESP

NORITA

IRE

DEU

FRA

FIN

DNK

CAN

-40

-20

0

20

40

60

80

100

120

-20 0 20 40 60 80 100

Residential Investment

Hou

sing

pric

es

prices and quantities: down together ...

Change in Housing Prices and Residential Investment 07-08

USA

GBR

CHE

SWE

ESP

NOR

ITA

IRE

DEU

FRA

FINDNK

CAN

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

-35 -30 -25 -20 -15 -10 -5 0 5 10

Residential Investment

Hou

sing

pric

es

2. how much further will house prices fall?

evidence from past cyclesevidence from short-run model

evidence from long-term relationshipsa more careful look for U.S. (based on work by Deniz

Igan)

Evidence from past cycles

• OECD (2005)

• Claessens, Kose and Terrones (2008)

evidence from short-run model

-10

-5

0

5

10

15

20

25

30

35

Irela

nd

Uni

ted

Kin

gdom

Aus

tralia

Nor

way

Fran

ce

Sw

eden

Spa

in

Bel

gium

Japa

n

Den

mar

k

Net

herla

nds

Gre

ece

Italy

New

Zea

land

Uni

ted

Sta

tes

Por

tuga

l

Can

ada

Kor

ea

Finl

and

Ger

man

y

Aus

tria

-10

-5

0

5

10

15

20

25

30

35

Median

Max

Min

House Price Gaps (Percent)

price-income ratios are above historical values ...

Price / Income

0.0

0.5

1.0

1.5

2.0

2.5

KOR CHE DEU JPN ITA USA SWE FRA CAN FIN GBR NZL NOR ESP AUS DNK IRE NLD

1970-00 average

2008

... suggesting price gaps

Price Gap (Price to income average70-00)

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

NZL ESP GBR NLD AUS FRA DNK IRE CAN NOR SWE ITA FIN USA CHE JPN DEU KOR

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

Price / Rent

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

CHE DEU KOR JPN FRA USA ITA NZL SWE DNK AUS CAN FIN ESP GBR NOR NLD IRE

1970-00 average

2008

... suggesting price gapsPrice Gap (Price to rent 70-00)

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

ESP CAN AUS FRA GBR SWE DNK NOR NZL NLD IRE ITA FIN USA KOR CHE JPN DEU

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

-5

0

5

10

15

20

25

30

35

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

-5

0

5

10

15

20

25

30

35House price appreciation

PRR

User cost (inverse, based on moving average of inflation)

User cost (inverse, based on expectations of house price appreciation)

housing affordability, then and now

0

50

100

150

200

250

Ala

bam

a

A

lask

a

A

rizon

a

A

rkan

sas

Cal

iforn

ia

Col

orad

o

C

onne

ctic

ut

Del

awar

e

D

istri

ct o

f Col

umbi

aFl

orid

a

G

eorg

ia

H

awai

i

Id

aho

Ill

inoi

s

In

dian

a

Io

wa

K

ansa

s

K

entu

cky

Loui

sian

a

Mai

ne

Mar

ylan

d

M

assa

chus

etts

Mic

higa

n

M

inne

sota

Mis

siss

ippi

M

isso

uri

M

onta

na

N

ebra

ska

Nev

ada

New

New

Jer

sey

N

ew M

exic

o

New

Yor

k

N

orth

Car

olin

a

N

orth

Dak

ota

Ohi

o

Okl

ahom

a

O

rego

n

P

enns

ylva

nia

Rho

de Is

land

S

outh

Car

olin

a

S

outh

Dak

ota

Tenn

esse

e

Texa

s

Uta

h

Ver

mon

t

V

irgin

ia

W

ashi

ngto

n

Wes

t Virg

inia

Wis

cons

in

W

yom

ing

1990 2008

price-to-rent ratio: adjustment to benchmark

StatisticCurrent value

Deviation from trend (percent)

Time to adjustment

(years)

Drop necessary (percent)

Deviation from trend (percent)

Time to adjustment

(years)

Drop necessary (percent)

Average 23.17 9.80 2 7.98 24.42 4 9.83Median 21.42 5.80 2 0.00 22.84 4 4.24Maximum 71.41 48.79 6 79.20 100.51 14 79.20Minimum 9.90 0.00 0 0.00 0.00 0 0.00Standard deviation 8.83 11.18 2 12.95 13.36 1 12.80

Lower boundary Upper boundary

3. consequences

residential investment: OECD countriesunemployment: U.S. states (based on

Estevao and Loungani)

3a. residential investment

What explains the cross-country variation in the impact of house price

busts on residential investment?

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

Residential Investment Impact and Interest Payments

R2 = 0.4397

0

2

4

6

8

10

12

-25 -20 -15 -10 -5 0 5

Residential investment impact

Inte

rest

pay

men

ts

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

Residential Investment Impact and Mortgage Debt

R2 = 0.4244

0

20

40

60

80

100

120

140

-25 -20 -15 -10 -5 0 5


Mor

tgag

e-de

bt-to

-GD

P ra

tio

cross-country variation in residential investment impacts of housing busts:

role of mortgage market characteristicsResidential Investment Impact and Mortgage Market Index

R2 = 0.194

0.0

0.2

0.4

0.6

0.8

1.0

1.2

-25 -20 -15 -10 -5 0 5


Mor

tgag

e in

dex

3b. unemployment

What explains the cross-state and cross-region variation in the impacts of

house price busts unemployment?

U.S. state unemployment rates at present

U.S Unemployment by State, September 2008

0

1

2

3

4

5

6

7

8

9

10

RI

MI

MS

CA

NV

SC

OH TN KY

DC

NC IL AK FL GA

MO

OR IN CT

AZ

MN NJ

NY

WA PA

ME AL

MA

CO LA VT

TX ID WI

AR

DE

KS

MD

MT HI

WV VA IA NH

NM OK

ND

NE

UT

WY

SD

1995Q11981Q4

1979Q1

1988Q2

0

2

4

6

8

10

12

14

Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-0680

120

160

200

240

280

320

360Housing BustUnemployment recession cycleUnemployment rate (LHS)Smoothed unemployment (LHS)

Previous peakTrough

Real house price index (RHS)

(In percent) (Index)

New England

1979Q1

1981Q4

1995Q1

1988Q2

0

2

4

6

8

10

12


120

160

200

240

280

320

360Housing BustUnemployment recession cycleUnemployment rate (LHS)Smoothed unemployment (LHS)

Previous peakTrough



East North Central

1982Q4

1979Q2

0

2

4

6

8

10

12

14


120

160

200

240

280

320

360

Housing BustUnemployment recession cycleUnemployment rate (LHS)Smoothed unemployment (LHS)

Previous peakTrough



Middle Atlantic

Real Housing Prices and Unemployment Rates in the U.S. Regions

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.

1979Q1 1989Q3 1993Q4

1990Q41981Q3 1995Q1

0

2

4

6

8

10

12


120

160

200

240

280

320

3601976Q1 1979Q1 1982Q1 1985Q1 1988Q1 1991Q1 1994Q1 1997Q1 2000Q1 2003Q1 2006Q1

Unemployment: recession cycleUnemployment rate (LHS)Smoothed unemployment (LHS)Previous peakTroughReal house price index (RHS)

South Atlantic


1979Q11988Q1

1999Q1

2000Q21990Q41981Q40

2

4

6

8

10

12

14


120

160

200

240

280

320

3601976Q1 1979Q1 1982Q1 1985Q1 1988Q1 1991Q1 1994Q1 1997Q1 2000Q1 2003Q1 2006Q1


East South Central


1990Q41988Q21982Q3

1979Q2

0

2

4

6

8

10

12


120

160

200

240

280

320

360Housing BustUnemployment recession cycleUnemployment rate (LHS)Smoothed unemployment (LHS)Previous peakTroughReal house price index (RHS)


West North Central



Real Housing Proces and Unemployment Rates in the U.S. Regions (cont.)

1983Q1 1987Q1

1990Q41985Q40

2

4

6

8

10

12


120

160

200

240

280

320

3601976Q1 1979Q1 1982Q1 1985Q1 1988Q1 1991Q1 1994Q1 1997Q1 2000Q1 2003Q1 2006Q1


Mountain


1979Q1 1983Q1

1981Q11990Q4

0

2

4

6

8

10

12


120

160

200

240

280

320

360

Housing BustUnemployment recession cycleUnemployment rate (LHS)Smoothed unemployment (LHS)Previous peakTroughReal house price index (RHS)


West South Central

1982Q3

1981Q2

1995Q1

1989Q4

0

2

4

6

8

10

12


120

160

200

240

280

320

360Housing BustUnemployment recession cycleUnemployment rate (LHS)Smoothed unemployment (LHS)Previous peakTroughReal house price index (RHS)


Pacific



Real Housing Prices and Unemployment Rates in the U.S. Regions (cont.)

4

5

6

7

8

9

10-12M Onset 12M 24M 36M 48M

4

5

6

7

8

9

10

Unemployment rate (percent)

Average for regional recessions without a housing bust

Average for regional recessions with a housing bust

U.S. Regional Recessions

Regional Housing Busts and Unemployment Rates

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.

-50

-40

-30

-20

-10

0

10

20

30

-16Q -12Q -8Q -4Q 0Q Beginningof cycle

4Q 8Q 12Q 16Q 20Q 24Q 28Q 32Q 36Q 40Q 44Q0

5

10

15

20

25

30

35

40

45

50

New England: 1988q2 - 1995q1Middle Atlantic: 1988q2 - 1995q1East North Central: 1979q2 - 1982q4West North Central: 1979q2 - 1982q3West South Central: 1983q1 - 1990q4Pacific: 1989q4 - 1995q1

Census division : Beginning to troughReal House price index(cumulative percent change vis-à-vis beginning of housing bust)

0

2

4

6

8

10

12

14

16

-16Q -12Q -8Q -4Q 0Q Beginningof cycle

4Q 8Q 12Q 16Q 20Q 24Q 28Q 32Q 36Q 40Q 44Q

New England: 1988q2 - 1995q1Middle Atlantic: 1988q2 - 1995q1East North Central: 1979q2 - 1982q4West North Central: 1979q2 - 1982q3West South Central: 1983q1 - 1990q4Pacific: 1989q4 - 1995q1

Unemployment rate(around housing busts)

Housing busts:Census division: Beginning to trough

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 30New England Apr-02 Apr-03 Mar-07 12 50 62Middle Atlantic Sep-81 Jan-83 Dec-84 16 23 39Middle Atlantic Nov-01 Dec-02 Jan-05 13 25 38East North Central Feb-91 May-92 Apr-94 15 23 38East North Central Oct-01 Jul-03 May-06 21 34 55West North Central Oct-90 Feb-91 Mar-94 5 37 42West North Central Oct-01 Jul-03 May-06 21 34 55South Atlantic Feb-81 Dec-82 Jan-85 22 25 47South Atlantic Nov-90 Mar-92 Dec-94 16 33 49South Atlantic Aug-01 Jul-03 Sep-05 23 26 49East South Central Jul-80 Jan-83 Jun-87 30 53 83East South Central Feb-91 Jul-91 Jul-93 5 24 29East South Central Sep-01 Aug-03 Sep-06 23 37 60West South Central Mar-82 Jul-83 May-84 16 10 26West South Central Jul-91 Jun-92 Jul-94 11 25 36West South Central Nov-01 Jun-03 Apr-06 19 34 53Mountain Dec-81 Jan-83 Dec-83 13 11 24Mountain Jan-85 Jan-87 Jun-88 24 17 41Mountain Sep-91 May-92 Sep-93 8 16 24Mountain Aug-01 Mar-03 Dec-05 19 33 52Pacific Sep-81 Jan-83 May-85 16 28 44Pacific Oct-01 May-03 Feb-05 19 21 40Average 16 28 44

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 71Middle Atlantic Jan-91 Jun-92 Aug-96 12 55 67East North Central May-80 Nov-82 Aug-86 30 45 75West North Central May-80 Nov-82 Sep-87 30 58 88West South Central Dec-84 Jul-86 Mar-89 19 32 51Pacific Mar-91 Nov-92 Dec-96 20 49 69Average 22 49 70

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).

Length of Regional Unemployment cycles.

1/ Point where actual unemployment rate is higher than smoothed unemployment rate. Unemployment rate was smoothed using the HP filter.

Unemployment cycles (excluding cycles occurring around housing busts)

Unemployment cycles ocurring around housing busts(In months)

(In months)

Dependent variable:(1) (2) (3) (4) (5) (6)

?rhp -1 0.52 0.19 0.33 -0.04(0.59) (0.58) (0.47) (0.42)

?rin -1 -3.69 ** -2.57 * -3.57 ** -2.88 **(1.27) (1.27) (0.92) (0.92)

bust*?rhp -1 -4.35 ** -2.93 * -3.30 ** -1.90 *(1.12) (1.22) (0.88) (0.88)

bust*?rin -1 -0.31 0.31 0.69 1.24(2.23) (2.07) (1.60) (1.49)

Number of observations 28 28 28 28 28 28Adjusted R2

0.35 0.31 0.43 0.34 0.41 0.51?rhp -1 = percent change in real housing prices in the 12 months leading to the recession.?rin -1 = percent change in real regional income in the 12 months leading to the recession.

Estimating the Effect of Past Changes in Real Housing Prices on Recession and Recovery Length using U.S. Regional Data.

Recession length (number of months) Recovery length (number of months)

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.

Dependent variable:(1) (2) (3) (4) (5) (6)

?rhp -1 -0.57 -0.28 0.49 -0.39(0.56) (0.51) (0.43) (0.38)

?rin -1 -5.73 ** -4.79 ** -4.15 ** -3.24 **(1.33) (1.53) (1.00) (1.13)

(?rhp -1)2 0.28 * 0.12 0.23 ** 0.10(0.11) (0.11) (.08) (0.08)

(?rin -1 )2 0.62 * 0.50 0.26 0.13(0.30) (0.33) (0.23) (0.25)

Number of observations 28 28 28 28 28 28Adjusted R2 0.18 0.40 0.39 0.21 0.43 0.45?rhp -1 = percent change in real housing prices in the 12 months leading to the recession.?rin -1 = percent change in real regional income in the 12 months leading to the recession.

Estimating the Effect of Past Changes in Real Housing Prices on Recession and Recovery Length using U.S. Regional Data.

Recession length (number of months) Recovery length (number of months)

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.

Housing bust magnifies impact of recessions on unemployment

OECD Countries

-1

-1

0

1

1

2

2

3

3

4

t -4

t = 0

t + 4

t + 8

t + 1

2

Other recessions

Recessions with housing bust

U.S. Regions

4

5

6

7

8

9

10

t - 4

t = 0

t + 4

t + 8

t + 1

2

Recessions with housing bust

Other recessions

Unemployment Rate (Percent)

Shock to employment

0

.001

.002

.003

Res

pons

e

0 5 10 15 20quarters

95% CI orthogonalized irf

mymodel: chlemp -> chhp

0

.0005

.001

Res

pons

e



mymodel: chlemp -> chlemp

Response House Prices Response Employment

-.05

-.04

-.03

-.02

Res

pons

e



mymodel: chlemp -> lunem

Response unemployment

0

.002

Res

pons

e



mymodel: chlemp -> llfpop

Response labor force participation

Shock to house pricesResponse House Prices Response Employment

Response unemployment

0

.00005

.0001

Res

pons

e



mymodel: chhp -> chlemp

-.01

-.005

0

Res

pons

e



mymodel: chhp -> lunem

-.01

0

.01

.02

.03

Res

pons

e



mymodel: chhp -> chhp

0

.0002

.0004

.0006R

espo

nse



mymodel: chhp -> llfpop

Response labor force participation

housing prices: global correction, local consequences

Documents

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price gapsu

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