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Outline for our time today

Housing and the macroeconomy Jeff Fuhrer, EVP and senior policy advisor Federal Reserve Bank of Boston N ovember 28, 2012. Outline for our time today. Recap of the housing crisis, and review of a few subprime myths and facts Quick look at the current state of the housing markets

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Outline for our time today

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  1. Housing and the macroeconomyJeff Fuhrer, EVP and senior policy advisorFederal Reserve Bank of BostonNovember 28, 2012

  2. Outline for our time today • Recap of the housing crisis, and review of a few subprime myths and facts • Quick look at the current state of the housing markets • Review the macroeconomic backdrop to housing • Primer on recent Federal Reserve actions

  3. Subprime “facts” and mythsWhy an LMI mortgage program might make sense • The subprime population is too high risk, and should not get mortgages • Historical default rates for subprime about 2% in US • Subprime mortgages are “exotic”: Option-ARMs, Neg-Ams, IO, etc.—we should stay away from such predatory products • NO: In fact, VERY FEW of subprimes were this type of mortgage • Almost all were 2/28 or 3/27 ARMS • OK, but that’s why they defaulted—the ARM resets! • NO: Little or no evidence of any reset effect • (In fact, many reset to lower interest rates) • Securitization was a bad idea—Subprime MBS securities all lost huge amounts, and were a dumb idea • NO: In fact, losses on AAA “vanilla” MBS < 10%

  4. Default rates Normal times: subprime rates are higher, but manageable Crisis times: Everyone is in a mess Source: Mortgage Bankers Association, Haver Analytics

  5. Resets—not the problem • No link between reset date and default • Defaults increased in 2007/8—because house prices fell, unemployment rose • Thus the rapid increase in prime defaults as well (not shown) Source: Foote and Willen (2012)

  6. Did securitization work?A look at MBS performance Losses much worse on CDOs Losses less than 10% on AAA Why: Credit protection worked Private label RMBS Foote and Willen (2012)

  7. How is housing doing now? • Better—permits are rising, inventories are lean Source: Census Bureau, Haver Analytics

  8. How is housing doing now? • Prices are flattening or turning up modestly Source: FHFA, Core Logic, Haver Analytics

  9. How is housing doing now? • Vacancies have improved nationwide (less so in VT, NH) • Still a lot of REO/property held off the market Source: Census Bureau, Haver Analytics

  10. The macroeconomic backdrop

  11. We have to start with labor markets Source: Bureau of Labor Statistics, Haver Analytics

  12. Why is unemployment so stubbornly high?It’s not job loss these days Recession ends Source: Bureau of Labor Statistics, Haver Analytics

  13. It’s the failure to create new jobs Recession ends Source: Bureau of Labor Statistics, Haver Analytics

  14. This also explains the remarkable length of unemployment spells Source: Bureau of Labor Statistics, Haver Analytics

  15. Supports and DragsContribution of components to growth versus historical average Source: Bureau of Economic Analysis, Haver Analytics

  16. Supports and DragsContribution of components to growth versus historical average • Consumer spending has been fair to middling, given overall strength • And you know about housing! Source: Bureau of Economic Analysis, Haver Analytics

  17. The pattern of support is switching about now Source: Census Bureau, Michigan Survey Research Center, Federal Reserve Board, Haver Analytics

  18. Why this shift? • Household wealth has improved a bit (housing values, stock market) • The “fiscal cliff” matters less to households? • But it matters to businesses • The global slowdown affects export-dependent businesses, consumers less so

  19. Inflation remains well-contained Source: Bureau of Economic Analysis, Haver Analytics

  20. Key Risks Source: Wall Street Journal, Haver Analytics

  21. Federal Reserve Actions:Extensions of conventional policy Congressionally-mandated goals (Dual Mandate) Price stability (low and stable inflation) Maximum sustainable employment Primary policy instrument Alternative Policy Instruments Federal Funds rate (overnight bank rate) QE “Forward Guidance” Long-term interest rates, stock prices, exchange rate X

  22. How does QE work? • We buy long-term assets • Removes them from circulation in private markets • But private agents still want them • So they’re willing to accept them for a lower yield • Bottom line: we’re trying to reduce long-term rates Private Markets’ Securities Fed’s Securities

  23. In summary • The recovery has been frustratingly slow • Our tools to address weakness are somewhat limited • But we are doing what we can • Recently, we have paid particular attention to employment shortfalls • Not because we don’t care about inflation • But because the gap between the goal for employment is so large

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