Consumption and House Prices in the Great Recession: Model Meets Evidence

Transcription

1 ÝÐ Consumption and House Prices in the Great Recession: Model Meets Evidence Greg Kaplan Chicago Kurt Mitman IIES - Stockholm Gianluca Violante Princeton Ò Å Ø Ò Ó Ø ÓÒÓÑ ØÖ ËÓ ØÝ

2 The QuestionyÝÐ Relative House Price 0.3 Boom Logs (1997:Q1 = 0) Bust Year

3 The QuestionyÝÐ Relative House Price 0.3 Boom Logs (1997:Q1 = 0) Bust Year What caused the boom and bust in house prices?

4 Two ViewsyÝÐ 1. Credit view Availability of credit to marginal borrowers determines demand for housing and house prices Financial deregulation in early 2000s (i.e., PLS) led to unsustainable lending to subprime low-income borrowers

5 Two ViewsyÝÐ 1. Credit view Availability of credit to marginal borrowers determines demand for housing and house prices Financial deregulation in early 2000s (i.e., PLS) led to unsustainable lending to subprime low-income borrowers 2. Expectations view Waves of optimism and pessimism affect desire to borrow, housing demand and house prices Middle class (i.e., prime borrowers) crucial to the story

6 Two ViewsyÝÐ 1. Credit view Availability of credit to marginal borrowers determines demand for housing and house prices Financial deregulation in early 2000s (i.e., PLS) led to unsustainable lending to subprime low-income borrowers 2. Expectations view Waves of optimism and pessimism affect desire to borrow, housing demand and house prices Middle class (i.e., prime borrowers) crucial to the story What do the microdata say?

7 Micro DatayÝÐ Credit view: credit growth (in boom) and defaults (in bust) concentrated among marginal borrowers Main-Sufi: influential body of work supporting this hypothesis

8 Micro DatayÝÐ Credit view: credit growth (in boom) and defaults (in bust) concentrated among marginal borrowers Main-Sufi: influential body of work supporting this hypothesis Recently, evidence in favor of credit supply view has been challenged by Albanesi et al., Adelino et al., Foote et al.!&& '& #& "& (( (% (% (% *& (& )& %& $# %& %& $' $&!& &!"!#!"!# $&&% $&&) $&&( $&&* +,-./0/**& **&/1/+,-./0/"$& +,-./2/"$& Share of originations Share of delinquencies

9 Micro DatayÝÐ Credit view: credit growth (in boom) and defaults (in bust) concentrated among marginal borrowers Main-Sufi: influential body of work supporting this hypothesis Recently, evidence in favor of credit supply view has been challenged by Albanesi et al., Adelino et al., Foote et al.!&& '& #& "& (( (% (% (% *& (& )& %& $# %& %& $' $&!& &!"!#!"!# $&&% $&&) $&&( $&&* +,-./0/**& **&/1/+,-./0/"$& +,-./2/"$& Share of originations Share of delinquencies Suggestive evidence: need measurement through structural models

10 Equilibrium Models of the Credit ViewyÝÐ Favilukis-Ludvigson-van Nieuwerburgh (2015); Justiniano-Primiceri-Tambalotti (2015); Greenwald (2016) Successful in generating large house price movements

11 Equilibrium Models of the Credit ViewyÝÐ Favilukis-Ludvigson-van Nieuwerburgh (2015); Justiniano-Primiceri-Tambalotti (2015); Greenwald (2016) Successful in generating large house price movements What does it take for looser credit to push up house prices? 1. Large effect of credit shocks on housing risk premium 2. Many households constrained in their housing choice

12 Equilibrium Models of the Credit ViewyÝÐ Favilukis-Ludvigson-van Nieuwerburgh (2015); Justiniano-Primiceri-Tambalotti (2015); Greenwald (2016) Successful in generating large house price movements What does it take for looser credit to push up house prices? 1. Large effect of credit shocks on housing risk premium 2. Many households constrained in their housing choice Model features that deliver these outcomes: 1. Short-term debt & no default: makes housing very risky 2. No rental market: many households that want to consume more housing, but can t

13 Our PaperyÝÐ Equilibrium model with rental market and long-term mortgages Aggregate shocks: income, credit, and beliefs Parameterize to cross-sectional and life-cycle facts Compare to time-series on: house prices, rent-price ratio, home ownership, leverage, and foreclosures Decompose the role of each shock Compare with new micro evidence Study transmission of house prices to consumption

14 Model: Household and Financial SectorsyÝÐ OLG with two phases in lifecycle: work and retirement CES utility over ND consumption (1 φ) and housing (φ) Idiosyncratic uninsurable earnings shocks Saving in risk-free bonds with exogenously fixed interest rate Housing can be bought at p h (sold s.t. transaction cost) or rented at ρ Long-term mortgages (to be repaid before death), with cash-out refi option, defaultable, competitively priced by financial intermediaries At origination: max LTV and max PTI constraints (λ m, λ π ) and origination cost (proportional to loan size) κ m HELOCs: one-period debt, non defaultable (λ b )

15 Closing the ModelyÝÐ Final good sector Linear technology in labor with productivity Z w = Z Construction sector Housing permits + labor aggregate housing investments I(p h ) Rental sector Frictionless conversion of rental units into OO units and viceversa Zero-profit condition yields equilibrium rental rate ρ Government Taxes workers (with mortgage interest deduction) and properties, sells land permits, and pays SS benefits to retirees

16 Lifecycle Profiles of Ownership and LeverageyÝÐ Leverage-Model Leverage-Data Home Ownership - Model Home Ownership - Data Age Age The model replicates: the steep rise in home ownership from age 25 to 50 the fact that home ownership remains flat during retirement and also the sharp decline in leverage over the life cycle

17 Aggregate ShocksyÝÐ Aggregate labor income: Z Credit conditions: (λ m, λ b, λ π ) and κ m

18 Aggregate ShocksyÝÐ Aggregate labor income: Z Credit conditions: (λ m, λ b, λ π ) and κ m Beliefs / News about future housing demand Three regimes for φ (share of housing services in u): µ φ L : low housing share and unlikely transition to φ H µ φ L : low housing share and likely transition to φ H µ φ H : high housing share

19 Aggregate ShocksyÝÐ Aggregate labor income: Z Credit conditions: (λ m, λ b, λ π ) and κ m Beliefs / News about future housing demand Three regimes for φ (share of housing services in u): µ φ L : low housing share and unlikely transition to φ H µ φ L : low housing share and likely transition to φ H µ φ H : high housing share Boom-Bust: shift from (a) to (b), and back to (a)

20 Aggregate ShocksyÝÐ Aggregate labor income: Z Credit conditions: (λ m, λ b, λ π ) and κ m Beliefs / News about future housing demand Three regimes for φ (share of housing services in u): µ φ L : low housing share and unlikely transition to φ H µ φ L : low housing share and likely transition to φ H µ φ H : high housing share Boom-Bust: shift from (a) to (b), and back to (a) Calibration of news shock: use data on expectations... but residual

21 Household Expectations in the ModelyÝÐ 0.07 ExpectedPriceGrowth Year

22 Household Expectations in the ModelyÝÐ 0.07 ExpectedPriceGrowth Year For boom years, survey evidence in Case-Shiller-Thompson shows US households expected house price to grow 5-10 pct per year

23 House PricesyÝÐ HousePrice Benchmark Belief Only Income Only Credit Only Year

24 House PricesyÝÐ HousePrice Benchmark Belief Only Income Only Credit Only Year Belief shock accounts for all boom-bust in house prices

25 House PricesyÝÐ HousePrice Benchmark Belief Only Income Only Credit Only Year Belief shock accounts for all boom-bust in house prices Households unconstrained with respect to housing consumption

26 Rent-Price RatioyÝÐ Rent-PriceRatio Bench Belief Inc Credit Data Year ( ) 1 δh τ ρ = ψ+p h h [ ] 1+r b E ph p h Belief about future appreciation shared by investment company

27 Home Ownership RateyÝÐ Bench Belief Inc Credit Data Year Cheap credit drives rise in home ownership Households constrained with respect to their tenure choice

28 Explaining the Effects of Credit ShocksyÝÐ Why looser/tighter credit does not affect housing demand? Defaultable long-term debt: housing risk premium is small Rental market: buyers are not constrained in housing choice

29 Explaining the Effects of Credit ShocksyÝÐ Why looser/tighter credit does not affect housing demand? Defaultable long-term debt: housing risk premium is small Rental market: buyers are not constrained in housing choice Why is rise in home ownership disconnected from house prices? Renters buy houses of similar size of those they rented It s the current home owners who upsize and push up demand

30 Explaining the Effects of Credit ShocksyÝÐ Why looser/tighter credit does not affect housing demand? Defaultable long-term debt: housing risk premium is small Rental market: buyers are not constrained in housing choice Why is rise in home ownership disconnected from house prices? Renters buy houses of similar size of those they rented It s the current home owners who upsize and push up demand If hh s already consume optimal amount of housing, why buy more? Housing is both a consumption good and an asset Many households buy larger houses to realize expected capital gains

31 Leverage (debt/house value) yýð Bench Belief Inc Credit Data Leverage Year Credit loosening is crucial to maintain constant leverage pre-boom

32 Endogenous Credit Boom Through BeliefsyÝÐ

33 Endogenous Credit Boom Through BeliefsyÝÐ Mortgage Rate shift in lender beliefs Loan-to-Value Ratio Lender s optimistic beliefs lower expected default rates lower mortgage rates, especially for subprime borrowers

34 Foreclosure Rate yýð Bench Belief Inc Credit Data Foreclosurerate Year Foreclosure spike due to interaction between optimistic belief and looser credit

35 An Economy where Credit Matters for House PricesyÝÐ

36 An Economy where Credit Matters for House PricesyÝÐ No rental mkt & no default: relaxation/tightening of LTV moves prices House Price Leverage Credit Data Year Year Counterfactual surge in leverage during the boom (flat in the data)

37 Comparison with New EvidenceyÝÐ Fact: credit growth occurred throughout distrib. of FICO scores

38 Comparison with New EvidenceyÝÐ Fact: credit growth occurred throughout distrib. of FICO scores Model: rank households by default probability at origination

39 Comparison with New EvidenceyÝÐ Fact: credit growth occurred throughout distrib. of FICO scores Model: rank households by default probability at origination Share of Debt Shares of Originated Mortgage Debt Default Risk (1=Above Median, 2=Below Median)

40 Comparison with New EvidenceyÝÐ Fact: credit growth occurred throughout distrib. of FICO scores Model: rank households by default probability at origination Share of Debt Shares of Originated Mortgage Debt Default Risk (1=Above Median, 2=Below Median) Share of foreclosures in the bottom quartile of default probability at origination falls from 100 pct in 2007 to 40 pct in 2011

41 ConsumptionyÝÐ 1.1 Consumption Year House prices explain 1/2 of boom and bust in C (rest is income)

42 ConsumptionyÝÐ Consumption Year Change in Log Consumption Renters Owners Housing Share of Total Wealth House prices explain 1/2 of boom and bust in C It s because of a wealth effect, i.e. through household balance sheet

43 Summary: What Did We Learn from the Model?yÝÐ Shift in expected house appreciation drives the boom-bust in p h Credit important for home ownership, leverage, and foreclosures Rental market + long-term mortgages are the key model features Model tells us that micro evidence and aggregate time series agree Changes in p h transmit to C through balance sheet effects

44 Summary: What Did We Learn from the Model?yÝÐ Shift in expected house appreciation drives the boom-bust in p h Credit important for home ownership, leverage, and foreclosures Rental market + long-term mortgages are the key model features Model tells us that micro evidence and aggregate time series agree Changes in p h transmit to C through balance sheet effects Thanks!