Housing Research

While everyone is worried about home prices and mortgages, there is some interesting research in housing and the economy showing up in various places.  A few recent items are worth mentioning.  One common comment about housing is that the housing bust has left many people with under water mortgages who can’t move to take a new job, creating all kinds of employment disclocations.  Research at the Boston Fed finds that while people may be locked into their homes, the impact on employment is miniscule or less — at most one-tenth of a percentage point on the unemployment rate per year over 2007-2009.   One big factor in lock-ins, where home owners can’t sell or refinance because the mortgage is underwater and the outstanding balance is more than the value of the house is falling prices.  Work at the San Francisco Fed shows that falling prices push mortgages under water and raise the liklihood of a default if the homeowner runs into any financial difficulties.   Falling prices driven by defaults which are in turn driven by under-water mortgages create a downward sprial for homeowners and the value of their homes.

Lately almost no one talks about the supply of homes, yet restrictions can cause volatility in prices. A paper by Andrew Paciorek at the Federal Reserve shows that restrictions of new supply due to regulations increases costs and leads to volatile prices.  The same effects can be caused by local geography — steep hills and hard to build-on areas — also restricts investment in housing and limits increases in supply when prices rise.   The last paper by Manuel Adelino and Felipe Severino looks at the supply of credit and home prices.  The focus is on the availability of credit, not on mortgage interest rates and shows that the availability if crucial. One bit of evidence is that loan to value ratios shift around the conforming mortgage upper limit set by Fannie Mae.