On Jan 1, 2009, at 9:35 PM, Patrick Bond wrote:
> Dean's point of view:
>
> Dean Baker wrote:
>> the relevant index from the MBA is the purchase index, and this has
>> gone nowhere. demand for loans falls in recessions.
>>
It does. Of course. But it's nearly impossible to get a mortgage today if you don't have a credit score over 700.
Here's what Dismal.com has to say about the MBA index: "Despite the increases in the purchase index in the previous weeks, there remains evidence that fewer applications are translating to originations. Relatively stronger readings from the pending home sales index, which leads existing-home sales by one to two months, suggests that a larger number of sales did not close because of intensified financial stress and tight credit conditions. Thus the improvement in the market index may be overstating the improvement in the housing market."
>> and the wealth effect of stock and housing is among the most widely
>> accepted propositions in economics.
I've read quite a bit on these, and the estimates of the wealth effect are all over the place. Former Fed gov Mishkin, speaking at Jackson Hole in 2007, reviewed the empirical evidence and found it remarkably inconclusive. He cited studies showing that between 0% and 62% of home equity cashouts was consumed. Quoting my own review of the empirical work from 2007:
> Most economists agree that changes in household wealth do lead to
> changes in spending, but estimates of the size of the so-called
> wealth effect vary widely. A 2003 paper by John Benjamin, Peter
> Chinloy, and G. Donald Judd estimates that a dollar change in the
> value of household financial assets results in a 2.3 cent change in
> consumption; the comparable figure for housing is 7.9 cents. Karl
> Case, John Quigley, and Robert Shiller (a team that overlaps
> substantially with the creators of the Case–Shiller–Weiss house
> price indexes) find a 3–4 cent on the dollar effect from housing
> wealth, and a negligible one for stocks. They also find that rising
> house prices stimulate consumption more than falling house prices
> depress it. A 2006 paper by Christopher Carroll, Misuzu Otsuka, and
> Jirka Slacalek finds a 2-cent effect from housing in the subsequent
> quarter, and a 9-cent effect over the long term; for stocks, the
> numbers are less than 1 cent and 4 cents respectively. Carroll et
> al. also find that consumption is sticky—it takes a long time to
> break down.
>
> ...
>
> So what do these numbers mean for the recent past and our likely
> future? There are two plausible dates for marking the housing
> market’s takeoff: 1995 and 2003. The late 1990s, however, are so
> mixed up with the dot.com mania that it’s hard to separate the stock
> effect from the housing effect. The years from 2003 through 2006,
> however, are a much purer housing era. Over that period, housing
> wealth rose by 35%; after-tax income, by 17%; and consumption, 21%.
> If we apply the estimate that 4% of the appreciation in housing is
> consumed, then about 43% of consumption growth from 2003 through
> 2006 can be accounted for by the housing wealth effect. If we use
> the 7% figure, the estimate rises to 75%. These figures seem quite
> high, given the rise in income. So if we make the conservative
> assumption that the housing wealth effect was responsible for the 4-
> point excess of consumption over income growth, we can guess that
> the housing boom added about a point a year to consumption growth,
> which translates into an 0.7 point, more or less, lift to GDP growth.
>
> And what about the future? A 10% decline in house values would, if
> the wealth effect scientists are right, translate into a drag of 0.4–
> 0.7% on consumption growth. With consumption around 70% of GDP, that
> would further translate into an 0.3–0.5% drag on growth.... If,
> however, Case, Quigley, and Shiller are right, the downward pressure
> on consumption from a housing downdraft would be less powerful than
> was the upward pressure on the upswing.
Since we've had a 20% decline in house prices, multiplying that by 4% gives us an 0.8% decline in consumption. Consumption growth went from 3.4% at the peak of the housing boom in late 2006 to -1% (year-to- year) in the third quarter of 2008 - a swing of over 4 points. The wealth effect explains only a small portion of that. Over the same period, mortgage equity withdrawal - home equity loans and the expenditure of house sale proceeds - went from around 10% of after-tax income to almost 0%. The portion that was consumed went from over 2% to close to 0%. That is, the effects of the flow of credit count for a whole lot more than the wealth effect.
Doug