By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen
Anyone surprised by the housing recovery is simply blind to the context that the Federal Reserve has administered a bazooka full of aid and comfort over the past few years. They bought up enough mortgage bonds to force interest rates to near-record lows, boosting the fortunes of asset holders. And in so doing they made housing an attractive investment product, bringing lots of Wall Street cash into the REO-to-rental play, at least for a short while. That predictably increased demand and put housing prices on their current trajectory.
The promising winds could shift come autumn, however. Too much dumb money entered the investor purchase market, and the Fed is likely to decide to Septaper in a couple weeks. This has already impacted credit markets; 10-year Treasuries hit 3% briefly yesterday, and the 5% mortgage is likely not too far behind. Oddly enough, jumbo loans are actually now cheaper than conforming loans for the first time in anyone’s memory, partially because of banks wanting to hook rich homebuyers and partially because of the forced suicide of the GSEs (Matt Yglesias gets some of this wrong; the powers that be don’t want Fannie and Freddie to exist anymore, and they see increasing the g-fees as a means to that end).
But we have to wonder just how bad this outcome is. Who has benefited and who has suffered from the policy decisions in housing and monetary policy over the past few years? According to a remarkable little report from mortgage-backed securities analysts at Bank of America Merrill Lynch, “the cost burdens are disproportionately impacting low-income groups and renters.” (You could probably have guessed that one yourself.)
One important insight here is that “easy monetary policy,” as evidenced by QE, is correlated with the rise in income inequality over the past 35 years. The two periods over this time where inequality really shot up came right after recessions in 1991-93 and 2007-11. These two periods were characterized by aggressive monetary policy, including quantitative easing. Since the primary credit channel in the successive rounds of QE targeted assets for either the rich or near-rich, this stands to reason.
But the primary focus of the paper is housing, and the centrality of it in Bernanke’s QE policy. He basically created the conditions for a rise in home prices, thinking that would have great positive effects for the economy. BofA/Merrill cites a Harvard State of the Nation Housing report to question that received wisdom. After all, rising home prices, more than anything, raises the cost of housing. And the key question, then, is “Cui bono”:
The report starts with comments on the benefits associated with housing’s revival, such as home equity accumulation, but it quickly turns to a starker reality, which is that “the number of households with severe housing cost burdens has set a new record.” This language would be more consistent with the view of housing expressed in gold terms – housing is not a good news story. Moreover, the report shows that the hardest hit in the population are renters and those at the low end of the income distribution. As Exhibit 4 highlights, the share of renters in the population, now at 35%, has been rising in recent years, as the homeownership rate has steadily declined from the bubble peak in 2004. So not only are renters disproportionately sharing in increased housing costs, the percent of households in this category is increasing in the wake of the financial crisis.
The Harvard report defines two categories of households with respect to housing costs as a share of income: moderately burdened and severely burdened. Moderately burdened households pay 30%-50% of pre-tax income for housing; severely burdened households pay more than 50%. Exhibit 5 and Exhibit 6 show the evolution – and growth – of the “burdened,” which combines moderately and severely burdened, from 2001 to 2007 to 2011, with breakouts between owners and renters. The data show that rising home prices laid the burden primarily on owners between 2001 and 2007, but as home prices declined and credit tightened, the burden shifted to renters. Most importantly, in aggregate, between 2001 and 2011, there was a 35% increase in the number of burdened households, for a net addition of 11 million households to the burdened category. The percent of burdened households grew from 29.4% to 36.8%.
The analysts note that, even with mortgage rates plummeting from 7% to 4% from 2001 to 2011, 42 million households experienced moderate or severe housing costs. (And the whole thing doesn’t take into account negative equity.) And renters took the brunt of this stress in the later period; by 2011, an incredible 50% of all renters were burdened by high housing costs.
“It is difficult to imagine this was the policy objective behind lowering mortgage rates,” the analysts write with a wink. But that’s what happened. A persistent foreclosure wave, tighter credit and increased rental demand led to higher rental prices and more stress on those at the lower end of the income scale. Meanwhile, those who could get credit were rewarded with cheap interest rates, while those who couldn’t ended up paying through the nose for rent. Returns on rental PROPERTY in 2011 were quite high, in the double-digits; rentiers benefited mightily from this squeeze. My understanding of the market is that this has moderated somewhat and rental price gains have slowed. But with wages stagnant, the rent still takes up an inordinate amount of the monthly budget.
This massively impacts quality of life. According to the Harvard study, individuals in the bottom quartile of the income distribution with affordable places to live spend 19% of their monthly expenditures on housing; those with severe burdens spend up to 60%. This has an incredible domino effect on all other ordinary purchases, including food, health care, education and transportation. Leading to a pretty radical set of conclusions, considering they come from bank analysts:
If monetary policy is in fact responsible for increasing housing cost burdens through policies that have inflated home values, then it is also responsible for limiting the available dollars that lower income families have to spend on education. If unequal access to education is indeed a key driver of growing income inequality, then it appears as if the vicious cycle of rising home prices, higher housing costs, less money to spend on education and greater income inequality is poised to continue. In particular, in its latest FOMC statement (July 31, 2013), the Fed thought it necessary to add a statement that it was concerned with the recent rise in mortgage rates, suggesting again that rising home prices is a policy goal.
In addition, if individuals have so little money leftover after shelling out for housing, inflation remains low from a supply/demand standpoint. “Perversely, the more the Fed boosts home prices through QE, and thereby increases housing cost burdens for lower income cohorts, it may well be further pressuring inflation lower,” the analysts write.
Ultimately, these analysts are giving advice to institutional investors, and warning of the risk of an early exit for QE, though the way they get around to it is quite amazing. They conclude that Obama is concerned with inequality, and thus wants to install Summers at the Fed to curtail QE. This is silly for a couple reasons; by the time any replacement for Bernanke gets there, QE’s probably going to be over anyway. And as to Obama, I think this gets things backwards, especially if you look at his recent comments on housing policy. The President said in his Zillow chat that institutional investors scooping up distressed properties was “good business sense”; his sympathies obviously lie there, rather than with those stressed by the consequences of these actions. Similarly, there’s been all this talk about the future of housing finance, and far less about the future of those who have to live in that housing.
It’s hard to escape the proposition that monetary policies which inflate asset prices and increase real-world costs, particularly at the low end of the spectrum, represent a feature, not a bug.