1
Recap of the housing crisis, and review of a few subprime myths and facts
Quick look at the current state of the housing markets
Review the macroeconomic backdrop to housing
Primer on recent Federal Reserve actions
The subprime population is too high risk, and should not get mortgages Historical default rates for subprime about 2% in US
Subprime mortgages are “exotic”: Option-ARMs, Neg-Ams, IO, etc.—we should stay away from such predatory products NO: In fact, VERY FEW of subprimes were this type of
mortgage Almost all were 2/28 or 3/27 ARMS
OK, but that’s why they defaulted—the ARM resets! NO: Little or no evidence of any reset effect (In fact, many reset to lower interest rates)
Securitization was a bad idea—Subprime MBS securities all lost huge amounts, and were a dumb idea NO: In fact, losses on AAA “vanilla” MBS < 10%
Source: Mortgage Bankers Association, Haver Analytics
Normal times: subprime rates are
higher, but manageable
Crisis times:Everyone is
in a mess
• No link between reset date and default
• Defaults increased in 2007/8—because house prices fell, unemployment rose
• Thus the rapid increase in prime defaults as well (not shown)
Source: Foote and Willen (2012)
Losses less than 10% on AAAWhy: Credit protection worked
Losses much worse on CDOs
Foote and Willen (2012)Private label RMBS
Better—permits are rising, inventories are lean
Source: Census Bureau, Haver Analytics
Prices are flattening or turning up modestly
Source: FHFA, Core Logic, Haver Analytics
Vacancies have improved nationwide (less so in VT, NH)
Still a lot of REO/property held off the market
Source: Census Bureau, Haver Analytics
Source: Bureau of Labor Statistics, Haver Analytics
Recession ends
Source: Bureau of Labor Statistics, Haver Analytics
Recession ends
Source: Bureau of Labor Statistics, Haver Analytics
Source: Bureau of Labor Statistics, Haver Analytics
Source: Bureau of Economic Analysis, Haver Analytics
Consumer spending has been fair to middling, given overall strength
And you know about housing!
Source: Bureau of Economic Analysis, Haver Analytics
Source: Census Bureau, Michigan Survey Research Center, Federal Reserve Board, Haver Analytics
Household wealth has improved a bit (housing values, stock market)
The “fiscal cliff” matters less to households?
But it matters to businesses
The global slowdown affects export-dependent businesses, consumers less so
Source: Bureau of Economic Analysis, Haver Analytics
“Fiscal Cliff” risksCategory Magnitude“Bush Tax Cuts” (income, estate, AMT)
$221B
Payroll Tax cut expiration $95BSequestration spending cuts $65BExpiration of unemp. benefits $26BOther changes (war drawdown, discretionary spending cuts, deprec. allowance)
$303B
TOTAL $710B=4.6% of GDP
Overall effect on GDP growth ~2.5 pctg. points
Source: Congressional Budget Office, author’s calculations
Source: Wall Street Journal, Haver Analytics
Congressionally-mandated goals(Dual Mandate)
Federal Funds rate
(overnight bank rate)
Primary policy instrument
QE“Forward
Guidance”
Alternative Policy Instruments
X
Long-term interest
rates, stock prices,
exchange rate
We buy long-term assets Removes them
from circulation in private markets
But private agents still want them
So they’re willing to accept them for a lower yield
Bottom line: we’re trying to reduce long-term rates
Fed’s SecuritiesPrivate Markets’
Securities
The recovery has been frustratingly slow Our tools to address weakness are
somewhat limited But we are doing what we can Recently, we have paid particular
attention to employment shortfalls Not because we don’t care about inflation But because the gap between the goal for
employment is so large