What Happened To Housing

I have not spent enough time on the supply side issue in housing. Thankfully, Cardiff Garcia posts on some of the constraints that are holding back a housing boom. He lists a number of concerns but one in particular strike me a significant. I would describe as uncertainty about the GSE’s  role a damper, that keeps natural feedback loops from exploding. Cardiff expresses it like this:

– Uncertainty about the future of securitisation (and by extension the ability to package and sell the mortgages they do originate), related to:

  • General worries about the gradual withdrawal of the GSEs and the inability of private-label securitisation to fill the gap
  • The eventual definition of Qualified Residential Mortgages by regulators
  • An unwillingness to securitise loans beneath historically high FICO scores and other standards
  • The more specific worry that risk-sharing bonds won’t materialise or be popular if they do
  • Higher guarantee fees by the GSEs

Cardiff’s phrasing – which I take as informative – casts this as an issue of temporary uncertainty. As the mortgage industry restarts under a new paradigm banks are not exactly sure how its all going to shake out. To the extent that this is uncertainty then we should expect it gradually ease as folks become more familiar with the way things work post crisis. Perhaps more importantly, if the GSEs don’t clear things up then we should not be surprised to see a revival in private label securitization.

Once, we start getting into these really granular frictions, it becomes very difficult to see how and when events will unfold. We can still say that there is upward pressure in the housing market and the fundamental dynamics mediate in favor of a positive feedback loop. However, it’s entirely plausible that issues like this will string things out for some time. In particular, I can see this making things rough for condo developers. That, in turn implies Florida will be a problem state for some time.

One last point. Cardiff writes:

We first covered this note here, and since then Amir Sufi published some very useful research in a note titled “Will Housing Save the US Economy” — to which the paper’s answer was that no, it will not.

Sufi’s main point is that the housing wealth effect only ever applied to homeowners with relatively low credit scores. But these are precisely the kinds of people who remain shut out of mortgage markets now, including those for refinancing at the current low rates.

I am not sure why folks insist on calling this a wealth effect when at this point its almost clearly a liquidity-collateral effect. Indeed, its likely that wealth effects per se don’t exist. Collateral effects exist. And, of course they primarily affect folks who are liquidity constrained – the poor and investors in either highly speculative or highly capital intensive projects.


Karl SmithKarl Smith, Contributor
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