- Mortgage Choice Determinants: The Role of Risk and Bank Regulation, Mardi H. Dungey, Firmin Doko Tchatoka, Graeme Wells & Maria Yanotti, Economic Record, Vol. 91, Issue 295, pp. 417–437, 2015 (Paid Access).
- Subprime Governance: Agency Costs in Vertically Integrated Banks and the 2008 Mortgage Crisis, Claudine Madras Gartenberg & Lamar Pierce, Forthcoming in Strategic Management Journal.
- The Role of Contagion in the American Housing Boom, Anthony A. DeFusco, Wenjie Ding, Fernando V. Ferreira & Joseph Gyourko.
- The Federal Reserve: The Weakest Lender of Last Resort Among its Peers, Hal S. Scott.
Tag Archives: Federal Reserve
Homebuyer’s Guide to Rate Hike
Fed Chair Yellen
U.S. News & World Report quoted me in A Consumer’s Guide to the Fed Interest Rate Hike. It opens,
The era of cheap money isn’t exactly over, but on Wednesday, after seven years of having near zero interest rates, the Federal Reserve voted to raise the central bank’s benchmark interest rate from a range of 0 percent to 0.25 percent to a range of 0.25 percent to 0.5 percent. Economists have largely seen this as a positive development – it means the American economy is considered strong enough to handle higher interest rates – but, of course, the all-important question on everyone’s minds is likely: What does this mean for me?
It depends, of course, on where you’re putting your money these days.
Homebuying. While it’s expected that the minor interest rate hike will result in it being more costly to borrow money to buy a home, that isn’t necessarily the case. Numerous factors influence mortgage rates, from where in the country your home is located to the state of the global economy to whether inflation is believed to be around the corner. Still, there’s a pretty fair chance that the interest rate hike will lead to higher borrowing costs.
But it’s worth remembering that even if the rates go up, it’s still cheap to buy a house compared to the recent past. According to Freddie Mac’s website, the average 30-year fixed-rate mortgage currently stands at 3.94 percent. If you bought a house, say, 15 years ago, the annual average rate in 2000 was 8.05 percent.
David Reiss, a law professor at Brooklyn Law School who specializes in real estate, says he wouldn’t rush out to buy a home based on the Fed’s announcement.
“I would caution strongly against letting the Fed’s actions on the interest rate influence the home-buying decision all that much, no matter what market you live in,” Reiss says. “First of all, the mortgage market has taken the Fed’s likely actions into account already, so interest rates … incorporate some of the rise in rate already.”
Bottom line, he says: “Generally, people should be buying a home when it makes sense for their lifestyle. Expect to stay put for a while? Maybe you should buy a home. Expecting kids? Maybe you should buy a home. Retiring to a warmer clime? Maybe you should buy a home.”
Again, the interest rate climbed 0.25 percent, and while the Fed has indicated that rates may continue to rise, Federal Reserve Chair Janet Yellen has stressed that any future hikes will be gradual.
“Small changes in interest rates do not generally make that much of a dollars-and-cents difference in the decision to buy,” Reiss says.
Feds Financing Multifamily
The Congressional Budget Office has released The Federal Role in the Financing of Multifamily Rental Properties. The report opens,
Multifamily properties—those with five or more units— provide shelter for approximately one-third of the more than 100 million renters in the United States and account for about 14 percent of all housing units. Mortgages carrying an actual or implied federal guarantee have been an important source of financing for acquiring, developing, and rehabilitating multifamily properties, particularly after the collapse in house prices and credit availability that accompanied the 2008–2009 recession. According to the Federal Reserve, the share of outstanding multifamily mortgages carrying such a guarantee increased by 10 percentage points, from 33 percent at the beginning of 2005 to 43 percent at the end of the third quarter of 2014. (A slightly larger increase of about 16 percentage points occurred in the federal government’s market share of the much larger single-family market.) Such guarantees are made by a variety of entities, and some policymakers are looking for ways to make the federal government’s involvement more effective. Other policymakers have expressed concern about that expanded federal role and are looking at ways to reduce it. (1)
This debate is, of course, key to housing policy more generally: to what extent should the government be involved in the provision of credit in that sector?
This report does a nice job of summarizing the state of the multifamily housing sector, particularly since the financial crisis. It provides an overview of federal mortgage guarantees for multifamily projects and reviews the choices that Congress faces when it decides to determine Fannie and Freddie’s fate. That is, should we have a federal agency guarantee multifamily mortgages; take a hybrid public/private approach; authorize a federal guarantor of last resort; or take a largely private approach?
We should start by asking if there is a market failure in the housing finance sector and then ask how the government should intercede to correct that market failure. My own sense is that we intercede too much and we should move toward a federal guarantor of last resort with additional support for the low- and moderate-income subsector of the market.
Wednesday’s Academic Roundup
- Introduction to Special Issue: Government Involvement in Residential Mortgage Markets, W. Scott Frame, Real Estate Economics, Vol. 43, Issue 4, pp. 807–819, 2015 (Paid Access).
- How Does the Federal Reserve’s Large‐Scale Asset Purchases (LSAPs) Influence Mortgage‐Backed Securities (MBS) Yields and U.S. Mortgage Rates?, Diana Hancock & S. Wayne Passmore, Real Estate Economics, Vol. 43, Issue 4, pp. 855–890, 2015 (Paid Access).
- Property Rebels: Reclaiming Abandoned Bank-Owned Homes for Community Uses, Valerie Schneider, American University Law Review, Vol. 65, Issue 2, Forthcoming.
- Is an Apartment a Nuisance?, Michael Lewyn, 43 Real Est. L.J. 509 (2015).
- Helping the Middle-Class: How Interest Rates Affect the Distribution of Housing Wealth, Isaac Hacamo.
- Urbanization and Property Rights, Yongyang Cai, Harris Selod & Jevgenijs Steinbuks, World Bank Policy Research Working Paper No. 7486.
- Crowdfunding the City: The End of ‘Cataclysmic Money’?, David S. Bieri.
- The Role of Property Rights in the Debate on Large-Scale Land Acquisitions, Olivier De Schutter.
- Using Urban Agriculture to Grow Southern New England, Laurie J. Beyranevand, Sara C. Bronin, Marie Mercurio & Sorell E. Negro, Connecticut Planning, SNEAPA 2015.
Thursday’s Advocacy & Think Tank Round-Up
- The Center on Budget and Policy Priorities has released a report Realizing the Housing Voucher Program’s Potential to Enable Families to Move to Better Neighborhoods in which it recommends key changes which would lead to long term upward mobility for families using housing vouchers – chief among their goals is encouraging recipients relocation to lower poverty neighborhoods.
- Corelogic’s September 2015 National Foreclosure Report in which it finds the number of foreclosures down 1.3% since August, and foreclosure inventory is down 23.4% since September 2014.
- The Mercatus Center at George Mason University’s How Land Use Regulation Undermines Affordable Housing concludes that most regulation lead to higher costs (over free market prices) which disproportionately accrues to lower income citizens.
- Seeking Alpha blogger proposes that rather than a QE4 the Fed should arrange Student Loan Property Bond to restore growth. This is how it would work: “The Fed would convert that loan into a Property Bond that pays off the $29,000 loan and advances an additional $29,000 to the student for the home deposit in return for taking a 10% stake in the acquired property. There would be no dividend attached to the Property Bond – the Fed’s return would come from the home price appreciation… The main owner of the property could later choose when the Fed realizes [sic] its return – it could be at the sale of the first home or rolled over onto subsequent purchases until, ultimately, the death of the main owner.”
Tuesday’s Regulatory & Legislative Round-Up
- A Joint Release of a Final Swap Margin rule by the Farm Credit Administration (FCA), the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency (FHFA), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC), “establishes minimum margin requirements for swaps and security-based swaps that are not cleared through a clearinghouse. The margin requirements help ensure the safety and soundness of swap trading in light of the risk to the financial system associated with non-cleared swaps activity.”
- The U.S. Senate has enacted the Bipartisan Budget Act to lift the debt ceiling until March 2017. Affordable housing advocates are hopeful that the budget agreement will lead to an increase in funding for programs such as HOME Investment Partnership program, for more information see Enterprise Community Partners Blog Post on #saveHome efforts.
What’s Pushing Down The Homeownership Rate?
S&P has posted a report, What’s Pushing Down The U.S. Homeownership Rate? It opens,
Seven years after the Great Recession began, a number of key economic factors today have reverted from their short-term extremes. Home prices are rebounding, unemployment is declining, and optimism is rising among economists if not among financial markets that the U.S. economy may finally be strong enough to withstand a rate hike from the Federal Reserve. All these trends point to reversals from the recession’s dismal conditions. Even so, one telling trend for the nation’s economy hasn’t yet reverted to its historic norm: the homeownership rate. The rising proportion of renters to owner occupants that followed the housing market turmoil has yet to wane. Compound this with tougher mortgage qualifying requirements over recent years, and it’s not surprising that the homeownership rate, which measures the percentage of housing units that the owner occupies, dropped to a 50 year low of 63.4% in first quarter 2015. However, the further decreases in unemployment and increases in hourly wages that our economists forecast for the next two years may set the stage for an eventual comeback, if only a modest one. (1)
S&P concludes that many have chosen not to become homeowners because of diminished “mortgage availability and income growth.” (8) Like many others, S&P assumes inthat the homeownership rate is unnaturally depressed, having fallen so far below its pre-bubble high of 69.2%. While the current rate is low, S&P does not provide any theory of a “natural” rate of homeownership (cf. natural rate of unemployment). Clearly, the natural rate in today’s economy s higher than something in the 40-50 percent range that existed before the federal government became so involved in housing finance. And clearly, it is lower than 100% — not everyone should be or wants to be a homeowner. But merely asserting that it is lower than its high is an insufficient basis for identifying the appropriate level today.
I think that the focus should remain on income growth and income inequality. If we address those issues, the homeownership rate should find its own equilibrium. If we push people into homeownership without ensuring that they have stable incomes, we are setting them up for a fall.
