“Betting the House” Oscar Jorda, Moritz Schularick, and Alan M. Taylor

1. “Betting the House”Oscar Jorda, Moritz Schularick, and Alan M. Taylor Discussion by Jim Wilcox Haas School of Business University of California, Berkeley Conference on Housing and Monetary Policy UCLA Ziman Center for Real Estate and FRB San Francisco

2. Outline Big Data Big Questions Time-Varying Results Time-Varying Banks and Mortgage Markets Concluding Observations Conference on Housing and Monetary Policy UCLA Ziman Center for Real Estate and FRB San Francisco

3. No Real Complaint About the Paper,Until … the Title • Like home owners, banks also bet • Banks’ losses can lead to credit crunches and crises • Rather than “Betting the House”, maybe… • Effects of External Monetary Shocks on Housing • Banking on Housing • Betting on Houses • Betting the Bank • Betting the Bank on Houses • Playing with House Money Conference on Housing and Monetary Policy UCLA Ziman Center for Real Estate and FRB San Francisco

4. Big Data:Across Countries and Decades • Huge sunk costs: time, effort, money, etc. • Data only for commercial banks • Nonbanks’ shares of credit also vary across countries and decades • Data for mortgage and nonmortgage loans • Mortgages for owner-occupied, multi-family, plus commercial buildings • Their shares also vary, a lot, across time and space Conference on Housing and Monetary Policy UCLA Ziman Center for Real Estate and FRB San Francisco

5. Big Patterns in the Data • Large, pervasive, recent rise in mortgages • Large declines in nominal mortgage rates permitted more borrowing and buying by the previously-cash-payment-constrained • Starting in mid-1980s in U.S. • Enough “Eu-rope” to hang Spain, Portugal, Ireland,… • Explains some of the big increases in ratios • Mortgages (relative to GDP) • House prices (relative to per-capita incomes) Conference on Housing and Monetary Policy UCLA Ziman Center for Real Estate and FRB San Francisco

6. Applying Big Data to Big Questions • Effects of monetary policy on long rates, mortgages and house prices (and crises) were large and pervasive, but mostly after WWII • Fortunately, all that pre-WWII data still useful • With commercial banks’ ignoring residential mortgages, I would expect weaker responses then of their mortgages and of house prices to rates • Results pass this placebo test, however inadvertently • Booms, busts, bubbles: mentioned, not tested Conference on Housing and Monetary Policy UCLA Ziman Center for Real Estate and FRB San Francisco

7. Notes for a New Instrumentfor Monetary Policy • IV for domestic, short-term, interest rates based on external rates • With adjustments for exchange rate regimes and for capital-flow regimes • Domestic rates had detectable, but very low, correlation with, and response to, the IV, zit • The much-stronger correlation of domestic rates with the domestic variables, given zit, is worrisome Conference on Housing and Monetary Policy UCLA Ziman Center for Real Estate and FRB San Francisco

8. Asides About Estimation • Flexibility of Jorda’s local-projection method • Specification restricts effects’ magnitudes and lag patterns to be the same across countries • First-differencing of all variables • Implies that the fixed-effects absorb constant, country-specific trends in any of the variables • Effectively raises weight on higher-frequencies • Absent co-integrating equations, untethers levels Conference on Housing and Monetary Policy UCLA Ziman Center for Real Estate and FRB San Francisco

9. After WW II, Mortgages Trend Up(percent of potential GDP, 1896-1999) Conference on Housing and Monetary Policy UCLA Ziman Center for Real Estate and FRB San Francisco

10. After WW II, Residential, Not Commercial, Mortgages Trend Upward(percent of potential GDP, 1896-1999) Conference on Housing and Monetary Policy UCLA Ziman Center for Real Estate and FRB San Francisco

11. Commercial Mortgages Were Large, But Falling, Share of All Mortgages(percent of all mortgages, 1896-1999) Conference on Housing and Monetary Policy UCLA Ziman Center for Real Estate and FRB San Francisco

12. Some Residential Mortgages Were in Commercial Banks(percent of potential GDP, 1896-1999) Conference on Housing and Monetary Policy UCLA Ziman Center for Real Estate and FRB San Francisco

13. Banks’ Share of Residential Mortgages:Low and Slowly-Rising(percent of all residential mortgages, 1896-1999) Conference on Housing and Monetary Policy UCLA Ziman Center for Real Estate and FRB San Francisco

14. Relative to Banks, Nonbanks Held Vastly More Residential Mortgages(percent of potential GDP, 1896-1999) Conference on Housing and Monetary Policy UCLA Ziman Center for Real Estate and FRB San Francisco

15. Concluding Observations • Current PTI seems better predictor of recent defaults than current LTV (e.g., underwater) • Commercial real estate had greater volatility of construction, prices, mortgage defaults, and roles in depositories’ losses and failures • Deflated role of inflation • Mortgages/GDP correlated with inflation • Positively but modestly, and likely reversed after 1970s • Irving Fisher contended deflation was crucial Conference on Housing and Monetary Policy UCLA Ziman Center for Real Estate and FRB San Francisco