-------- Original Message --------
Date: Thu, 01 Jan 2009 23:31:59 -0500 From: Dean Baker <dean.baker1 at verizon.net> To: pbond at mail.ngo.za References: <495D9374.2050201 at mail.ngo.za>
Look, both of these questions are really simple arithmetic.
The mortgage purchase index has been trending down along with the sales index. Yes, you should lag the sales index by two months, since that is roughly the lead time between application and closing. This doesn't change anything. The credit crunch story means that many creditworthy home buyers have to make 2 or 3 applications to get a mortgage. There should be an explosion in the ratio of applications to sales. I haven't looked at the data closely enough, but I doubt that there has even been an increase in this ratio.
On the wealth effect, yes, there are a range of estimates. I haven't surveyed the lit recently, but my guess is that the average would come in at over 5 percent for housing and at 3.5 percent for stock. We have lost roughly $6 trillion in real housing wealth in the last two years. Where i come from, 5 percent of $20 trillion (the value of the residential housing stock in 2006) is $400 billion. We have lost about $8 trillion in stock wealth. 3.5 percent of $8 trillion is $280 billion.
This gives a total predicted reduction in annual consumption of $680 billion or 4.5 percent of GDP. wow, the problem must be a credit crunch!
Doug Henwood wrote:
>> 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...