VOL. 1, NO. 11 NOVEMBER 2006 EconomicLetter Insights from the BANK OF DALLAS

Making Sense of the U.S. Housing Slowdown by John V. Duca

A retrenchment in A robust housing market buoyed the U.S. economy during the

housing demand 2001 recession and fueled growth once recovery began. The record-setting

could affect economic building of single-family homes created construction jobs and spurred

growth directly demand for building materials, appliances and home furnishings. Business

through a pullback was brisk for mortgage lenders and real estate brokers alike.

in construction and Perhaps even more significant, rapidly rising housing prices had indirectly as flattening allowed consumers to tap into their mounting home equity, providing them

home prices restrain the financial wherewithal for a buying spree. By mid-2004, however, home

consumer spending. prices had risen to the point where many analysts worried that markets

were overheated, making homes less affordable, particularly for first-time

buyers already facing the drag of rising energy prices. Today, signs of a housing market Chart 1A slowdown are unmistakable. New and existing home sales have been declin- U.S. Home Sales Slow from High Levels ing since mid-2005, although they re- main high by historical standards

Thousands of units Thousands of units (Chart 1A). Building activity has be-

1,500 7,000 gun to cool a bit, while single-family housing permits have fallen 34 per- 1,300 6,000 Existing single-family home sales cent from their peak, settling back to 1,100 (excludes condos) 5,000 pre-2002 levels (Chart 1B). The build- 900 ing permits data suggest further de- 4,000 700 clines in single-family construction are New-home sales 3,000 500 likely, given the usual six to eight months it takes to complete a home. 300 2,000 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 Housing prices are rising more NOTE: Data are seasonally adjusted, annualized rates. slowly—perhaps even beginning to SOURCES: Census Bureau; National Association of Realtors. decline outright. In the second quarter, the Office of Federal Housing Enter- prise Oversight’s measure of home Chart 1B price appreciation registered its big- Falling Permits Point to Slowing Home Construction gest year-over-year slowdown since recordkeeping began in 1975. Even so, home-price gains remain solidly Thousands of permits Billions of dollars positive at 10.1 percent by this meas- 2,000 400 ure, which partly controls for changes 350 1,750 Real single-family in home quality by tracking only construction 300 1,500 prices from repeat sales (Chart 1C). 250 1,250 200 More recent data, however, sug- 1,000 150 gest further deceleration in prices. 750 Median existing home prices dipped Single-family 100 500 building permits 50 1.2 percent in the third quarter from

250 0 year-earlier levels—the first year-over- ’71 ’73 ’75 ’77 ’79 ’81 ’83 ’85 ’87 ’89 ’91 ’93 ’95 ’97 ’99 ’01 ’03 ’05 year decline since 1993 and the largest NOTES: Data are seasonally adjusted, annualized rates; contract values are chained, 2000. Shaded areas denote recessions. drop since the series began in 1969 SOURCES: Census Bureau; Bureau of Economic Analysis. (see Chart 1C). The decline contrasts with the 14.7 percent increase posted a year earlier. New-home price-appre- Chart 1C ciation rates have also turned down, Home-Price Appreciation Slowing Sharply posting a year-over-year decline of 2.4 percent in the third quarter, the largest drop since the early 1990s. Percent (year-over-year) For the U.S. economy, slower 20 Median existing Repeat home- building activity and softer prices raise single-family home 15 sales prices prices the specter of reversing—at least in part—the gains in housing starts posted 10 (Q2) between 2001 and 2005. A retrenchment 5 in housing demand could affect growth directly by depressing construction and 0 (Q3) indirectly as flattening home prices 1 –5 restrain consumer spending. ’69 ’72 ’75 ’78 ’81 ’84 ’87 ’90 ’93 ’96 ’99 ’02 ’05 Although homebuilding declines NOTE: Shaded areas denote recessions. are steep, the direct effect on the econ- SOURCES: ; National Association of Realtors. omy is likely to be less dramatic be- cause residential construction, includ-

EconomicLetter 2 OF DALLAS ing multifamily units, accounts for just wealth and the liquidity of an asset— and housing wealth imply a larger 6 percent of GDP. Even so, home- the ease and cost at which households effect of housing wealth on consump- building can significantly affect eco- can sell or borrow against its value. tion, the differences in liquidity enhance nomic growth. Residential construction First, home prices are less volatile the relative effect of stock wealth. Fore- added about 0.5 percentage point to than stock values, so consumers are most is the smaller transaction cost of GDP growth in 2004 and 2005 but sub- more likely to consider gains in hous- selling stocks compared with selling a tracted 1.1 percentage points in third ing wealth as more permanent. home. This helps account for the near- quarter 2006. Many forecasters project Second, there are large differences ly 100 percent turnover of New York further, but smaller, negative impacts in the distribution of these asset hold- Stock Exchange listings in a typical year, on GDP growth through most of 2007. ings. Stock ownership is very concen- while the annual turnover of homes in The indirect effects of a housing trated among high-income households, stable neighborhoods is usually 3 to 5 slowdown could be larger than the whose consumption is less sensitive percent. In addition, the low transac- direct effects if the deceleration in than moderate-income families’ to tions costs of stocks have made them home prices leads to slower growth in changes in wealth.3 Homeownership, readily available to borrow against, consumption, the largest component meanwhile, is spread more evenly. Al- whether from a brokerage account or, of GDP. The risk of a consumption though stock ownership has doubled more commonly, a retirement plan. slowdown is one reason policymakers since the early 1970s to roughly 50 per- Nevertheless, some facets of hous- are monitoring housing prices and cent of households today, homeowner- ing enhance its relative accessibility. home-equity withdrawals. ship rates are still higher, at 68 percent. When tapping financial wealth, con- While many households own stock, sumers face capital gains taxes and The Consumption Connection the amounts are small relative to early withdrawal penalties from retire- Housing’s link to consumption housing wealth for most homeowners. ment accounts. Housing wealth, by occurs largely through changes in Even before the collapse of technolo- contrast, receives more favorable tax wealth driven by home prices. In gen- gy stocks in 2000 and the recent run- treatment. Furthermore, several devel- eral, higher asset prices encourage up of housing prices, only 5 percent opments have enhanced housing’s liq- spending by increasing the lifetime re- of households had a higher share of uidity and thereby boosted the impact sources of income and wealth house- net wealth in stocks than in housing.4 on consumption of housing wealth rel- holds can consume. Of the types of Third, whereas the volatility and ative to that of stock wealth. household wealth subject to large distributional differences between stock These developments are likely re- price movements, the most important are stock investments and housing. The Federal Reserve’s flow of funds data provide a useful prism Chart 2 through which to view recent years’ Once Again, Real Estate Exceeds Stocks trends in wealth. At the turn of this as a Share of Net Worth century, the value of stocks eclipsed housing. From 2000 to 2005, U.S. households’ real estate assets grew by Percent $9.1 trillion, while a decline in equity 35 prices reduced their stock wealth by $2.5 trillion. Today the two categories 30 make up roughly the same percentage 25 of households’ net wealth (Chart 2). Real estate

Studies show that historically a $100 20 rise in housing wealth leads to about 1952–99 average real estate share of wealth a $6 rise in long-run consumption, 15 one and one-half times the $4 gain that would result from the same 10 increase in stock wealth.2 Directly held stocks + Why is housing’s wealth effect 5 bond and equity mutual funds stronger than the stock market’s? The 0 answer depends on how long-lasting ’52 ’56 ’60 ’64 ’68 ’72 ’76 ’80 ’84 ’88 ’92 ’96 ’00 ’04 asset-price changes are viewed, the SOURCES: Flow of Funds, Federal Reserve Board; author’s calculations. distribution of particular forms of

FEDERAL RESERVE BANK OF DALLAS 3 EconomicLetter lated to the low U.S. personal saving cial innovations have opened new ave- tracks the difference between increases rate of recent years. It turned negative nues for families to act more quickly in mortgage debt and households’ home in early 2006, when households’ on their consumption preferences.5 investments, covers a longer period. spending exceeded disposable Consistent with a growing liquidi- By this measure, MEW as a share income. Conventional estimates of the ty, or MEW effect, some new studies of labor and transfer income has be- wealth effect cannot fully account for have found wealth effects are now come more sensitive to swings in why Americans are consuming more greater than earlier research suggest- home-price appreciation, aided by and saving less. Increased liquidity of ed. One estimates that a $100 rise in the lower cost and greater ease of cash- home equity may provide an answer. housing wealth leads to a $9 increase out mortgage refinancings. In 2005, in spending. Another finds that in- MEW jumped to a record 5 percent of Fueling Consumption creases in housing wealth generate income, but it slowed sharply in the We can think of the overall impact three times the spending from stock- second quarter, when home-price of home prices on consumption as the price gains.6 Neither study, however, appreciation decelerated (Chart 3). combination of two parts—the tradi- directly examines whether housing As homeowners took money out tional wealth effect and the relatively wealth has a greater impact on con- of their homes, consumption rose as a new and growing phenomenon of sumption today because of the greater share of GDP (Chart 4). Conventional mortgage equity withdrawal (MEW). ease of accessing home equity. theories of wealth and consumption, In recent years, U.S. households have Together, higher home values and which tend to ignore credit and liquidi- been extracting housing wealth through financial innovations have enabled ty constraints, treat home-equity with- home-equity loans, cash-out mortgage homeowners to more easily tap hous- drawals merely as manifestations of a refinancings or by not fully rolling ing wealth. Mortgage equity with- modest wealth effect. They cannot ac- over capital gains from sales into down drawals have risen sharply recently count for the unusually high consump- payments on subsequent home pur- relative to income, whether measured tion levels of the first half of this dec- chases. Because home-equity loans and using the comprehensive approach of ade. This high consumption may not mortgages are collateralized, they usu- Greenspan and Kennedy,7 whose data be sustainable if homeowners’ wealth ally carry lower interest rates than un- extend back to 1990, or a cruder defini- declines or increases less rapidly. Even secured loans; thus, homeowners can tion based on the flow of funds ac- if home-price appreciation slows to borrow more cheaply. Also, by making counts. The two series tend to move the low single digits, MEW is likely to housing wealth more accessible, finan- together, but the latter approach, which fall sharply, perhaps by as much as 5 percentage points of income. The limited U.S. econometric evi- Chart 3 dence indicates that the strong pace of Mortgage Equity Withdrawals Increasingly Sensitive MEW may have boosted annual con- sumption growth by 1 to 3 percentage to Housing Inflation points in the first half of the present decade.8 This implies that a slowing of

Percent (two-quarter average) Percent (year-over-year) home-price appreciation into the low

7 20 single digits might shave 1 to 2 per- centage points off consumption growth 6 16 and 0.75 to 1.5 percentage points from 5 GDP growth for a few years. 4 While these estimates provide an 12 3 idea of housing’s potential economic impact, considerable uncertainty exists 2 8 Housing inflation about how much a slowdown in MEW 1 (repeat sales) might restrain consumption growth. Key 4 0 } issues include how much home-price Interest rate-induced appreciation might slow, how much –1 surge in cash-out and 0 other mortgage refinancing the deceleration would affect MEW and –2 Mortgage equity withdrawal/labor + transfer income how much a slowdown in MEW –3 –4 would restrain consumer spending. ’76 ’80 ’84 ’88 ’92 ’96 ’00 ’04 Housing Price Uncertainties. SOURCES: Office of Federal Housing Enterprise Oversight; Bureau of Economic Analysis; Flow of Funds, Federal Reserve Board; author’s calculations. Although the recent slowdown in home prices has been dramatic, it’s still un-

EconomicLetter 4 FEDERAL RESERVE BANK OF DALLAS The motive for cash-out refinancing Chart 4 can arise from a desire to shift wealth out of housing, but it also may reflect Consumption Share of GDP Jumps in Recent Years the desire to lower interest payments. As a result, mortgage equity withdraw- als have become more sensitive to Percent interest rate declines. The 2003 MEW 75 surge, for example, was linked less to

Consumers extract a run-up in home prices and more to housing wealth to 30-year fixed rates falling to the lowest fund spending levels in decades (see Chart 3). 70 Consumption Uncertainties. The connection between MEW and consumption is more a medium-term Tax reform boosts home-equity loans Consumption/GDP than a short-run phenomenon, and it 65 probably has evolved.13 One reason is that the factors affecting MEW also indi-

Average 1960–86 (62.6%) rectly impact consumption. They may cause households to alter how much 60 of MEW they devote to consumer ’81 ’84 ’87 ’90 ’93 ’96 ’99 ’02 ’05 spending, debt reduction, home NOTE: Data are seasonally adjusted, annualized rates. improvements or other investments. SOURCES: Bureau of Economic Analysis; author’s calculations. Given these uncertainties, predict- ing how much a slowing housing mar- clear how much housing-price appreci- role of speculation over the past few ket will affect consumption is difficult. ation will decelerate from the fast pace years, for example, may increase the This warrants monitoring of home of 2004–05. Analysts disagree about likelihood of price declines. Owner– prices, MEW and underlying consump- the extent to which U.S. home prices occupiers directly benefit from living tion trends. We also might learn from have been overvalued. A recent study in a home; they also incur moving the experience of other countries, by Moody’s Economy.com maintains costs that speculators don’t. As a especially the United Kingdom. that more than 100 of the nation’s 379 result, owner–occupiers are probably metropolitan areas, representing nearly more resistant to selling at a lower Lessons from Great Britain half the value of U.S. housing stock, price than outside investors, who Mortgage equity withdrawals have have a significant probability of seeing have a greater incentive to sell quickly been large in several other countries, price declines by the fall of 2007. On when prospects for gains diminish. primarily those with well-developed the other hand, a Brookings Institution Finally, mortgage rates remain mortgage markets, high homeowner- paper argues that there wasn’t a bub- low. The impact of monetary policy ship rates and solid property rights. ble in U.S. home prices in 2005.9 on housing demand appears to have These include the U.K., which saw a In part, the disparate conclusions loosened in recent years, with increas- large swing in MEW activity in the may reflect changes in supply and es in the rate not acting early 1990s, as well as Australia and demand.10 Traditional yardsticks may as quickly or forcefully on mortgage New Zealand, where MEW activity has overstate any degree of overvaluation costs (see box,“Interest Rates, Mort- been linked to consumer spending.14 if land supply conditions have become gages and the Housing Market”). Long-run studies of the U.K. show more restrictive over time, especially Mortgage Equity Withdrawal that MEW boosted consumption growth in coastal areas, and if financial inno- Uncertainties. The link between during the home-price upswing of the vations have permanently boosted MEW and home prices is uncertain late 1980s, but spending fell back when housing demand.11 And differences because it has changed much. The MEW declined along with home prices persist over which price measures to connection strengthened after home- in the early 1990s.15 The U.K.’s estimat- use, as well as whether home prices equity loans received favorable tax ed housing wealth coefficient is nota- should be judged, along with the user treatment in 1986. More recently, tap- bly larger than that in the U.S. prior to cost of housing, relative to house- ping home equity has been made eas- 2000. Nevertheless, recent Bank of holds’ incomes or costs of renting.12 ier by newer mortgage products, such England research stresses that the links Several other factors may influence as cash-out financing, and declining between home prices and consumer home prices. The apparent greater transaction costs. spending aren’t automatic. Rather, they

FEDERAL RESERVE BANK OF DALLAS 5 EconomicLetter arise from financial innovation and the optimizing behavior of households Interest Rates, Mortgages and the Housing Market that extract home equity for several possible uses, not just consumption.16 The U.K. research also notes that the connection between consumption Favorable trends in long-term inter- ly affected by the supply and demand for and housing wealth, which reflects the est rates were a key factor in the hous- debt in major economies, as well as by combination of traditional wealth and ing market’s strength up until the sum- the success of foreign central banks in MEW effects, became weaker as home mer of 2005. In the most recent inter- keeping longer-term inflation expecta- prices soared this decade. The recent est rate cycle, tions in check. In a world of more open upswing in U.K. interest rates was much increases didn’t push up market rates financial markets, foreign demand for smaller than the one in the 1980s, lead- for mortgages and other long-term U.S. bonds helps keep long-term inter- ing to less marked slowing of home- debt as much as in past cycles—a phe- est rates from rising as much as they did price appreciation. Nevertheless, a nomenon former Federal Reserve in the past. wealth effect helped slow consumption Board Chairman The changing interest rate patterns growth in 2005. described as a “bond market conun- have important implications for housing. One plausible explanation for the drum” in 2005. Although the Fed began raising the fed- less powerful home-price effects today Although it’s difficult to pinpoint the eral funds rate in June 2004, mortgage is that U.K. households were chastened reasons for this new behavior, econo- rates didn’t begin to increase noticeably by earlier experience and earmarked mists have offered two plausible, but until the summer of 2005 (see chart). As less MEW for consumption than in the not mutually exclusive, explanations— a result, the housing market didn’t cool 1980s. Although home prices and home- one largely domestic, one largely glob- in 2004. Instead, building activity and 1 equity extraction jumped sharply in the al. On the domestic side, a long period price gains continued for more than a late 1980s, both fell after short-term of relative price stability has led year before they began slowing in the fall interest rates rose. Because most U.K. investors to see the Federal Reserve as of 2005. Freddie Mac data show price mortgages carry adjustable rates, the more committed than in the past to appreciation running at a 10 percent rate 7.5 percentage point upswing in short- keeping inflation low over the long run. in the second quarter of 2004. The addi- term rates between May 1988 and As a result, markets no longer view fed- tional year of persistently low mortgage October 1989 made housing unafford- eral funds rate increases as signs that rates helped propel appreciation to its able not only for new buyers but also inflation will be rising, and such cyclical peak of 13.9 percent in the sec- for many existing homeowners, a half increases don’t push up longer-term ond quarter of 2005. million of whom lost their dwellings.17 bond rates as much. 1 Several factors may limit the rele- Globalization has meant that long- “Globalization’s Effect on Interest Rates and the Yield Curve,” by Tao Wu, Federal Reserve Bank of vance of recent British experience to term U.S. interest rates are increasing- Dallas Economic Letter, vol. 1, September 2006. the U.S. First, the two nations’ housing- price histories differ. Unlike the U.K. in the early 1990s, the U.S. hasn’t ex- Fed Tightening Notably Affects Mortgage Rates perienced a notable nationwide drop in home prices since perhaps the late Only Since Summer 2005 1960s.18 This difference suggests that Americans might adjust their spending Initial rates (percent) in reaction to home price movements 9 more than British households. 8 (last point 30-year fixed-rate mortgage Second, the September) 7 didn’t tighten as much as the Federal 6 Reserve did in the early years of this 5 10-year Treasury note 4 decade. The Fed pushed up its policy 3 1-year rate 4.25 percentage points, consider- adjustable-rate 2 mortgage ably more than the Bank of England’s 1 Federal funds rate 1.25 percentage points. As a result, in- 0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 terest rates on adjustable-rate mortgages

SOURCES: Census Bureau; Freddie Mac. rose more in the U.S. than in the U.K. Third, use of adjustable-rate mort- gages is roughly twice as high in the

EconomicLetter 6 FEDERAL RESERVE BANK OF DALLAS U.K., making British housing demand more sensitive to short-term interest rates. U.S. homebuyers, however, Chart 5 have increasingly used mortgages with Rising Use of Multiple, Interest-Only and negative amortization, multiple mort- Negative Amortization Mortgages in the U.S. gages on the same property and inter- est-only mortgages (Chart 5). Higher home prices have been cor- Percent related with mortgage innovations that 40 boost housing demand by increasing Share of mortgages bought by private mortgage pools having 19 35 loan availability. Similar mortgage lib- interest-only payment options eralization hasn’t occurred as much re- 30 cently in the U.K. as in the U.S. If a sus- tained easing of U.S. mortgage prac- 25 Share of mortgages bought tices has taken place, long-run U.S. hous- by private mortgage pools 20 having negative amortization ing demand probably has risen. On options the other hand, if new mortgage prac- 15 tices lead to greater-than-expected 10 Share of homebuyers loan-quality problems, there could be using more than a pullback in mortgage availability and, 5 one mortgage thereby, in U.S. housing demand. 0 Fourth, home-supply conditions ’85 ’87 ’89 ’91 ’93 ’95 ’97’99 ’01 ’03 ’05 are more flexible in the U.S., where SOURCES: American Housing Surveys (data on recent movers); The Market Pulse (LoanPerformance); author’s cost-of-living differences could induce calculations. migration from high-cost coastal met- ros to less expensive areas. This sug- gests high home prices may not be as Two factors make the relationship analysts and policymakers will need sustainable in the U.S. as in the U.K., between housing prices and consump- to monitor the impact of slower where tighter supplies of building lots tion difficult to predict. First, tradition- home-price appreciation on U.S. con- and fewer opportunities to migrate al yardsticks may overstate the extent sumption. It’s important to remember within the country limit downward to which home prices are overvalued that recent declines in housing activi- pressures on home prices. because of tighter land supplies than ty have been from high and unsus- Finally, a financial market boom in the past. At the same time, demand tainable levels to more normal ones, in London has helped support British for housing may have shifted upward marking the unwinding of some earlier home prices in recent years.20 due to easier mortgage availability, speculation. A beneficial side effect Because these factors have oppos- increased desire to live in coastal may be that income could catch up ing relative effects, it’s hard to tell areas and “star” cities, and increased with prices, making homes more whether housing demand has down- liquidity of housing wealth. In addi- affordable. shifted more strongly in the U.S. than tion, house-price dynamics may have From a longer-term view, the in the U.K. The housing market uncer- changed because of abnormally high slowing of homebuilding and con- tainties also make it more difficult to investor activity in recent years. sumption frees up resources for busi- gauge the effects on consumption. Second, forecasting the impact of ness investment crucial to the produc- slower mortgage equity withdrawal on tivity growth that fuels long-term A Need for Close Monitoring consumer spending is difficult, espe- gains in living standards. Finally, the The homebuilding retrenchment cially because the U.S. experience is impact of housing should be viewed probably will continue to restrain U.S. so short. The U.K. offers a longer per- alongside developments in other eco- economic growth in the near term, spective, but its relevance may be lim- nomic sectors to accurately assess while slower home-price appreciation ited because of British households’ inflationary pressures and aggregate or outright price declines will likely prior experience with a major housing demand over the short and medium mean less stimulus to consumer spend- bust. In addition, the recent rise of U.K. runs. ing. It remains to be seen, however, home prices appears to have been how much housing prices will affect accompanied by a smaller shift to risky Duca is a vice president and senior economist in consumer spending beyond the impact mortgage practices than in the U.S. the Research Department of the Federal Reserve of the traditional housing wealth effects. As these uncertainties play out, Bank of Dallas.

FEDERAL RESERVE BANK OF DALLAS 7 EconomicLetter EconomicLetter is published monthly by the Federal Reserve Bank of Dallas. The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Notes 11 “Making Sense of Elevated Housing Prices,” Federal Reserve System. The author thanks Danielle DiMartino for helpful by John V. Duca, Federal Reserve Bank of Dallas Articles may be reprinted on the condition that comments and Christine Rowlette and Stacy Southwest Economy, September/October 2005. the source is credited and a copy is provided to the Wohead for providing research assistance. See also “Why Have Housing Prices Gone Up?” Research Department of the Federal Reserve Bank of by Edward L. Glaeser, Joseph Gyourko and Dallas. 1 “Mutual Funds and the Evolving Long-Run Raven E. Saks, Harvard Institute of Economic Economic Letter is available free of charge by Effects of Stock Wealth on U.S. Consumption,” Research, Discussion Paper no. 2061, February writing the Public Affairs Department, Federal Reserve by John V. Duca, Journal of Economics and 2005. Other factors, such as density and immi- Bank of Dallas, P.O. Box 655906, Dallas, TX 75265- Business, vol. 58, May/June 2006, pp. 202–21. gration, may also affect regional pricing patterns. 5906; by fax at 214-922-5268; or by telephone at 214- 2 “A Primer on the Economics and Time Series 12 Because of some upward biases in the repeat 922-5254. This publication is available on the Dallas Econometrics of Wealth Effects,” by Morris A. sales index, Jonathan McCarthy and Richard W. Fed web site, www.dallasfed.org. Davis and Michael G. Palumbo, Finance and Peach use an index of constant-quality, new- Economics Discussion Series no. 2001-09, home prices (“Are Home Prices the Next Federal Reserve Board, January 2001, p. 33. ‘Bubble’?” Federal Reserve Bank of New York 3 “On the Concavity of the Consumption Economic Policy Review, vol. 10, December Function,” by Christopher D. Carroll and Miles S. 2004, pp. 1–17). Others prefer using prices from Kimball, Econometrica, vol. 64, July 1996, pp. repeat home sales, such as Joshua Gallin (“The 981–92. Long-Run Relationship Between House Prices 4 “Stocks in the Household Portfolio: A Look and Rents,” Finance and Economics Discussion Back at the 1990s,” by Joseph S. Tracy and Series Working Paper no. 2004-50, Federal Henry Schneider, Federal Reserve Bank of New Reserve Board, September 2004). Himmelberg et York Current Issues in Economics and Finance, al. (2005) use income over rents, while others vol. 7, April 2001. prefer the opposite, such as Leamer (2002) and 5 “House Prices, Consumption, and Monetary Morris A. Davis and Jonathan Heathcote (“The Policy: A Financial Accelerator Approach,” by Price and Quantity of Residential Land in the Kosuke Aoki, James Proudman and Gertjan W. United States,” Finance and Economics Vlieghe, Journal of Financial Intermediation, vol. Discussion Series Working Paper no. 2004-37, 13, October 2004, pp. 414–35. Federal Reserve Board, June 2004). 6 “How Large Is the Housing Wealth Effect? A 13 Duca (2006). New Approach,” by Christopher D. Carroll, 14 “Survey on Housing Equity Withdrawal and Richard W. Fisher Misuzu Otsuka and Jirka Slacalek, October 2006, Injection,” Reserve Bank Bulletin, Reserve Bank President and Chief Executive Officer http://econ.jhu.edu/people/ccarroll/papers/COS- of Australia, October 2005, pp. 1–12, and WealthEffects.pdf; and “Housing Wealth, “Household Savings and Wealth in New Helen E. Holcomb Financial Wealth, and Consumption: New Zealand,” by Alan Bollard, Bernard Hodgetts, Phil First Vice President and Chief Operating Officer Evidence from Microdata,” by Raphael Bostic, Briggs and Mark Smith, background paper, Harvey Rosenblum Stuart Gabriel and Gary Painter, manuscript, Reserve Bank of New Zealand, Sept. 27, 2006, Executive Vice President and Director of Research Lusk Center for Real Estate, December 2005. www.rbnz.govt.nz/speeches/2823190.pdf. 7 “Estimates of Home Mortgage Originations, 15 “Booms and Busts in the U.K. Housing W. Michael Cox Repayments, and Debt on One-to-Four-Family Market,” by John Muellbauer and Anthony Senior Vice President and Chief Economist Residences,” by Alan Greenspan and James Murphy, The Economic Journal, vol. 107, Robert D. Hankins Kennedy, Finance and Economics Discussion November 1997, pp. 1701–27, and “Mortgage Senior Vice President, Banking Supervision Series Working Paper no. 2004-41, Federal Equity Withdrawal and Consumption,” by Melissa Reserve Board, September 2005. Davey, Bank of England Quarterly Bulletin, Spring Executive Editor 8 Duca (2006) and “Mortgage Equity Withdrawal: 2001, pp. 1001–03. W. Michael Cox The Key Issue for 2006,” by Jan Hatzius and 16 “House Prices and Consumer Spending,” by Editor Monica Fuentes, US Economics Analyst, Gold- Andrew Benito, Jamie N. R. Thompson, Matt Richard Alm man Sachs, Issue 05/46, Nov. 18, 2005. Waldron and Rob Wood, Bank of England 9 “Bubble, Bubble, Where’s the Housing Quarterly Bulletin, Summer 2006, pp. 142–54. Associate Editor Bubble?” by Margaret Hwang Smith and Gary 17 “The Great British Housing Disaster and Econ- Kay Champagne Smith, in Brookings Papers on Economic Activity omic Policy,” by John Muellbauer, Economic Graphic Designer 1:2006, William C. Brainard and George L. Perry, Study no. 5, Institute for Public Policy Research, Ellah Piña eds., Brookings Institution Press, pp. 1–50. 1990. 10 Some argue that prices are greatly overvalued, 18 Freddie Mac Conventional Mortgage Home including Ed Leamer, “Bubble Trouble: Your Price Index, 1970 to present. Home Has a P/E Ratio Too,” UCLA Anderson 19 “Asymmetries in Housing and Financial Market Forecast, June 2002. Others argue that the user Institutions and EMU,” by Duncan Maclennan, cost of housing is lower because households can John Muellbauer and Mark Stephens, Oxford rationally expect strong home-price appreciation Review of Economic Policy, vol. 14, Autumn FEDERAL RESERVE BANK OF DALLAS over the long run; see “Assessing High House 1998, pp. 54–80. Prices: Bubbles, Fundamentals, and Mispercep- 20 “Housing and Monetary Policy: Lessons from 2200 N. PEARL ST. tions,” by Charles Himmelberg, Christopher the U.K. and Australia,” by Jan Hatzius, US Daily DALLAS, TX 75201 Mayer and Todd Sinai, Journal of Economic Financial Market Comment, Goldman Sachs, Perspectives, vol. 19, Winter 2005, pp. 67–92. Oct. 2, 2006.