Housing Prices: Global Correction, Local Consequences

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Housing PricesGlobal Correction, Local
Consequences

• Presentation by
• Prakash Loungani
• This presentation draws on work-in-progress with
  my IMF colleagues Charles Collyns, Marcello
  Estevao and Deniz Igan. The views presented here
  are those of the authors and should not be
  attributed to the IMF.
• We thank Jair Rodriguez for excellent research
  assistance and Hites Ahir for helpful
  discussions.
• George Washington University
• Research Program in Forecasting
• November 18, 2008

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outline

• 1. a global boom and bust
• 2. how much further will house prices fall?
• consequences of house price declines
• a. adjustment of residential investment in OECD
  countries
• b. adjustment of unemployment in U.S. states

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data sets

• selected OECD countries, quarterly data,1970 to
  present (shorter time series in some cases)
• 51 U.S. states, quarterly data,1975 to present

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1. global boom and bust

• oecd countries prices quantities

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a global boom in OECD countries ...
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... is now a global bust
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magnitude depends on index U.S. example
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Residential investment has been plummeting in
the U.S.
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globally, a residential investment boom ...
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... is turning to bust
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prices and quantitiesup together ...
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prices and quantities down together ...
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2. how much further will house prices fall?

• evidence from past cycles
• evidence from short-run model
• evidence from long-term relationships
• a more careful look for U.S. (based on work by
  Deniz Igan)

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Evidence from past cycles

• OECD (2005)
• Claessens, Kose and Terrones (2008)

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evidence from short-run model
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price-income ratios are above historical values
...
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... suggesting price gaps
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price/rent ratios are also above historical
values ...
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... suggesting price gaps
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U.S. price-to-rent ratio (PRR)
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housing affordability, then and now
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price-to-rent ratio adjustment to benchmark
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3. consequences

• residential investment OECD countries
• unemployment U.S. states (based on Estevao and
  Loungani)

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3a. residential investment

• What explains the cross-country variation in the
  impact of house price busts on residential
  investment?

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cross-country variation in residential investment
impacts of housing busts role of interest
payment to GDP ratio
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cross-country variation in residential investment
impacts of housing busts role of mortgage debt-
to-GDP ratio
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cross-country variation in residential investment
impacts of housing busts role of mortgage
market characteristics
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3b. unemployment

• What explains the cross-state and cross-region
  variation in the impacts of house price busts
  unemployment?

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U.S. state unemployment rates at present
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Housing bust magnifies impact of recessions on
unemployment
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Shock to employment
Response House Prices
Response Employment
Response unemployment
Response labor force participation
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Shock to house prices
Response House Prices
Response Employment
Response unemployment
Response labor force participation