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fomc | 2,005 | The average lot size also has been declining rather rapidly, indicating that the price of land is going up rapidly. | 22 |
fomc | 2,005 | I'm not asking for the change, I'm looking for the level. Governor Gramlich. | 17 |
fomc | 2,005 | Well, one more question on the data. Josh, you need the share of land to do the price-rent ratio, don't you? You adjust for improvements, but surely that's only on the structure, not on the land. | 46 |
fomc | 2,005 | Right. | 2 |
fomc | 2,005 | So the share of land in the value is increasing. Is that extracted from your price-rent ratio in some way? | 24 |
fomc | 2,005 | Yes. What you do is get the depreciation rate, and that's relative to the structure. It actually doesn't make too much of a difference exactly how you do it. But, again, I got land share numbers from Morris Davis, and one can basically tamp it down year by year. | 57 |
fomc | 2,005 | Okay. Then it's also a ratio. And the CPI tenant rent measure is for a constant unit over time. So what you try to do is to normalize on that? | 34 |
fomc | 2,005 | Yes. My price series and my rent series are both indexes to start with, so they are unit-less. Again, leaning on my colleague, Morris, we get a base-year estimate of rents for a constant-quality unit. We get the base-year dollar price and then multiply by that. | 58 |
fomc | 2,005 | Okay. John, I have one question for you. How do we interpret the optimal policy? We, the policymakers, know all the shocks. So when we move the funds rate on the red line, is that to be interpreted as acting in advance of the house-price change, simultaneously with the house-price change, or what? | 66 |
fomc | 2,005 | In the optimal policy simulations, from the beginning of the simulations, which is the third quarter of this year, you know the entire future path of house prices and any other shocks that I add. So you are acting in anticipation of those future price changes. | 51 |
fomc | 2,005 | So if we see house prices going up, we're in effect cutting the funds rate while the house prices are going up? | 24 |
fomc | 2,005 | That's correct. That's why I was trying to compare it with the Taylor rule--which doesn't have that aspect of responding to developments as they unfold--to see how well that would do. | 37 |
fomc | 2,005 | I wanted to make one other point with regard to Josh's work, and that is that using the tenant rent component of the CPI and comparing it with the OFHEO index is, in my opinion, a real apples-to-oranges type of comparison. As I pointed out in my comments, the OFHEO index measures what is happening around the 75th perce... | 117 |
fomc | 2,005 | Actually, it's based on single-family homes which are rented but have the characteristic that they could be sold. | 21 |
fomc | 2,005 | Not in the tenant rent component he is using. | 10 |
fomc | 2,005 | The rent component I presume we're using is the owners' equivalent rent, are we not? | 18 |
fomc | 2,005 | Actually, it's not. But it doesn't make any difference. [Laughter] I could easily have done it with the owners' equivalent rent, but I would have had to cut off all my pictures in 1983 because that's when that series begins. I went with the tenant rent strictly for the length of the time series. But if you look at the ... | 106 |
fomc | 2,005 | If you keep getting a significant rise in home ownership--meaning a shifting of existing families from rent only--you are going to bias that ratio. | 29 |
fomc | 2,005 | Absolutely. As an aside, but regarding that particular point, I've been working one day a week at the Bureau of Labor Statistics, and I have access to the confidential underlying micro data that they use to build up the CPI. So, some of my work is trying to get at just these types of criticisms. But from the underlying... | 153 |
fomc | 2,005 | That raises an important point because, as we know, wages of nonsupervisory workers, which are essentially payroll data, are going up 3 percent, whereas implicitly that of supervisory workers is going up double or three times that. That's changing; it has accelerated in the most recent period. | 59 |
fomc | 2,005 | Let me note just one last thing. The pictures are going to look the same as those Dick showed, whether we look at house prices relative to income or to rent. So, even if the rent series might have this problem or that problem--and it does have problems--house prices have grown quite dramatically using the adjusted data... | 74 |
fomc | 2,005 | Governor Ferguson. | 3 |
fomc | 2,005 | I guess my question is addressed to Glenn and John. Obviously, the United States is unique, but we're not the only country where a central bank has been trying to deal with this issue. We've seen recently that monetary authorities in the United Kingdom, Australia, and perhaps the Netherlands are all talking about the p... | 109 |
fomc | 2,005 | That's an interesting question. I think one of the points to be considered is that those countries are all smaller than the United States, and typically their residential property markets are centered in one or two cities--London or Sydney, for example. So perhaps that's a factor that just looms larger in the policy ca... | 166 |
fomc | 2,005 | But have the results, generally speaking, been positive or neutral? I know this policy is in its early days, but is there any judgment one could make even at this early stage on whether or not more jawboning--or, in the case of Australia, actually moving rates--has been helpful? | 61 |
fomc | 2,005 | I think both Australia and the United Kingdom, to the extent they have conducted this type of policy, have felt it was fairly successful. They have been able to temper home price appreciation and restore some balance in the economy without any significant macroeconomic fallout. They have had lower home price appreciati... | 75 |
fomc | 2,005 | President Poole. | 4 |
fomc | 2,005 | I'd like to comment also on the policy discussion. It seems to me that to do this analysis correctly, the central bank really has to think about intervening more or less all the time because, if you have a one-off policy response and you promise that you're never ever going to do it again, it perhaps would not be all t... | 254 |
fomc | 2,005 | I guess I'd make a distinction there, in that I think the proponents are talking not about setting asset prices in general but about trying perhaps to reduce the bubble component. Clearly, if asset prices are set equal to the fundamentals, that's going to lead to the proper functioning of-- | 55 |
fomc | 2,005 | But the point is that there could be a little bubble component or a big bubble component. Obviously, policymakers wouldn't apply the instrument when prices are regarded as reflecting the fundamentals, but the instrument would be continuously available. The whole point of such an instrument would be to keep the price ri... | 108 |
fomc | 2,005 | I'm sympathetic to that view. It seems as if there might be a threshold. That is, policymakers might be more interested in certain asset markets or might be more interested in prices in asset markets in general at certain times. But I think you're alluding to the moral hazard or political complications that could arise... | 79 |
fomc | 2,005 | Essentially, it's the same problem that arises with wage and price controls. Having that as a policy instrument that is sometimes used and sometimes not used completely changes the pricing mechanism in a market economy. I think that problem applies in spades to stock prices, equity prices, and bond prices. With house p... | 79 |
fomc | 2,005 | People also have made the argument that if policymakers are going to clean up the mess after the fact, there may be other problems. If you let equity prices rise on the upside but then essentially make some sort of insurance agreement on the downside, that again is a distortion--though perhaps an asymmetric one--that m... | 66 |
fomc | 2,005 | There's ample room, I think, for understanding the housing market within what you phrased as the standard policy. But I think going after asset prices directly is something very different. That's the point that I'm trying to make. | 44 |
fomc | 2,005 | President Yellen. | 4 |
fomc | 2,005 | Thank you, Mr. Chairman. I just wanted to make a couple of comments and also ask a quick question. My first comment relates to the run-up in price-rent ratios that we've seen. It seems to me that there might be a couple of factors that could explain at least some portion of the run-up, though probably not all of it, th... | 908 |
fomc | 2,005 | It sounds like a CDO [collateralized debt obligation]. That's what it is, isn't it? | 21 |
fomc | 2,005 | Yes. So I wondered if that was something that you're aware of and something that is included in the numbers. | 22 |
fomc | 2,005 | Yes. The data that you see on my first exhibit in principle include second liens, closed-end second liens. And in particular in the graph that you cite I use the newly available 2004 data from HMDA which for the first time has collected data on whether or not the HMDA loan is a junior or a first lien. So the picture th... | 84 |
fomc | 2,005 | Could I just ask a quick question? Do we have data on price to-rent ratios of apartment dwellings? We do have data on prices of apartments, and we have rent. I think Dick raised a very interesting question about the numerator and the denominator. The way to square that is to get the same data for the same type of unit.... | 81 |
fomc | 2,005 | We do have those data. There's an index that gives price per square foot and rent per square foot for apartments nationally and in various cities. And it shows a marked increase in the price-rent ratio. | 41 |
fomc | 2,005 | Does it look like the ones that you were showing? | 11 |
fomc | 2,005 | It doesn't go back as far--it only goes back to 1986--but since 1996, yes. | 24 |
fomc | 2,005 | Okay. | 2 |
fomc | 2,005 | It's quite a steep increase. | 6 |
fomc | 2,005 | Is the level the same, can you tell? | 10 |
fomc | 2,005 | These apartment price data and rent data are by square footage. I guess I could make a calculation, but I don't have those data here. | 28 |
fomc | 2,005 | It's worthwhile looking at that. Sorry about the interruption. Governor Olson. | 14 |
fomc | 2,005 | I have a couple of questions. First of all, concerning the scenario of a 20 percent decline in housing prices: Is that weighted to any extent? Is it weighted so that it would reduce the froth or the increased valuation that had occurred up to a certain point? Or would that simply take the total amount of value and redu... | 74 |
fomc | 2,005 | All I'm doing is the latter--reducing the overall housing wealth by 20 percent relative to the base. | 22 |
fomc | 2,005 | With Josh's 20 percent, I assume that there is an implicit weighting, is there not? Would the 20 percent increase in value reflect to some extent the greater run-up in value in areas like California where there are large numbers of properties that have increased significantly more in value than others? | 59 |
fomc | 2,005 | It's basically a value-weighted measure. | 8 |
fomc | 2,005 | Yours is. But is it the aggregate divided by the number of housing units? I would think that there would have to be an implicit weighting in your calculation. If, in fact, the decline in value--the Nasdaq effect, in other words--were to represent a return to normal from the increases that had occurred, would that have ... | 76 |
fomc | 2,005 | In terms of the FRB/US model, the only way that house prices and housing wealth enter is through the aggregate. | 25 |
fomc | 2,005 | I see. | 3 |
fomc | 2,005 | So, one of the shortcomings, even of a model with several hundred equations, is that it doesn't have the distribution effects. | 25 |
fomc | 2,005 | There are two parts to that. One is the overall impact on the model. The second is that, to the extent there is risk embedded in the underlying mortgages, it would tend to be where the run-up has been higher. I'm going to talk a little bit about that tomorrow. My second point is on land value. In the assessed valuation... | 313 |
fomc | 2,005 | Not in the United States. I don't know what country or planet--[laughter] | 18 |
fomc | 2,005 | The planet was Earth. [Laughter] The country was the United States. And the person making the observation was talking about sales of the nonconforming product into what they see as a growing and undisciplined secondary market. | 47 |
fomc | 2,005 | I'm sorry, I shouldn't have said that. Do you mean the flow or the stock? | 18 |
fomc | 2,005 | Well, that's a good question. I think the statement was as to the flow. | 17 |
fomc | 2,005 | Then I beg your pardon. Of course, the stock differences are enormous. As for the flow difference, on net, GSE guaranteed mortgages in both pools and to a small extent on the balance sheet hardly grew at all in 2004, while it was an explosive year for growth for the RMBS sector. | 63 |
fomc | 2,005 | That's true. That's a good point. Thank you. | 11 |
fomc | 2,005 | President Fisher. | 3 |
fomc | 2,005 | Following up on Governor Ferguson's question, I would imagine that one of the differences here is that we have tremendous variations from market to market. And to the Chairman's question about the proportion of housing prices attributable to the land value, I would assume that it has to do with local regulation and res... | 263 |
fomc | 2,005 | I'll leave the monetary policy aspect to my colleagues. But let me make a couple of points about land use restriction. Certainly, land use restrictions, environmental restrictions, and those types of things have played a role in the rapid rise in house prices. That certainly is a factor. I mentioned in my briefing that... | 363 |
fomc | 2,005 | Just one follow-up comment. There's a lot of evidence to suggest that a good part of the reason for the rapid rise in home prices in California, Washington, D.C., and along the East Coast, for example, is because of relatively inelastic supply--not that demand there is necessarily stronger. That's pretty clear in the d... | 105 |
fomc | 2,005 | I would imagine that it would be driven also by the kind of margins that the suppliers can capture. Just for verisimilitude, I talked to Hovnanian, who builds about 20,000 homes a year at roughly $300,000 apiece. His margins are being squeezed in California, but in these less restrictive areas he can capture a greater ... | 106 |
fomc | 2,005 | The argument for the rapid rise in land prices in 1837 was that land was fixed in quantity. [Laughter] So, new ideas are very rare. Vice Chair. | 36 |
fomc | 2,005 | I remember that bubble! [Laughter] I have two questions. My first is for John Williams or perhaps for Dave Stockton. What is the right way to think about dealing with uncertainty in considering the policy question? Put aside Glenn's question about whether you know anything ever about the relationship between prices and... | 143 |
fomc | 2,005 | I think that the Greenbook forecast, as I understand it--and maybe Dave should talk about this--is predicated on a particular assumption about the future path of housing prices and takes into account the kind of models that Josh was discussing. The staff looks at all the empirical evidence, just as they do for every eq... | 241 |
fomc | 2,005 | And you wait and see and then adjust course based on developments as they unfold. | 16 |
fomc | 2,005 | That would be the standard policy. | 7 |
fomc | 2,005 | Just on that point, isn't that the difference between the optimal policy and the Taylor rule? With the Taylor rule, you wait and see. In the optimal policy, you somehow know this so you can move earlier. | 43 |
fomc | 2,005 | Right. The Taylor rule would just be one example, of course, of a policy that takes into account the information you have up to that point. It's not optimal in some sense. It's just a simple equation. It does represent this wait-and-see approach. I was using the optimal policy to illustrate what you would do if you kne... | 75 |
fomc | 2,005 | John can correct me if I'm wrong, but I think there is an important element to your question about what is the source of uncertainty. If the source of uncertainty is going to be the evolution of house prices, that basically is uncertainty of a linear type that's affecting aggregate demand. So you take your best shot an... | 113 |
fomc | 2,005 | My second question is about policy, but not monetary policy. Glenn, in your note, you allude to other instruments if monetary policy doesn't seem to be the appropriate tool to address a concern about lower value prices. What do we know about the history of the use of the supervisory tool in past periods of concern abou... | 99 |
fomc | 2,005 | It's called the real bills doctrine. | 7 |
fomc | 2,005 | Since the bills doctrine. [Laughter] | 9 |
fomc | 2,005 | Since you're going to the British Embassy, I might note that in the United Kingdom they used to allow loan-to-value at origination of 120 percent. You could buy your property under water essentially by 20 percent. One of the recent restrictions they've imposed is a limit of 110 percent. So this time around they feel mu... | 97 |
fomc | 2,005 | I meant in our history. In our history, have we used that tool to good or ill effect? Have we used it wisely and with foresight? | 31 |
fomc | 2,005 | You're biasing the answer. [Laughter] | 10 |
fomc | 2,005 | The answer is obviously "yes." [Laughter] | 11 |
fomc | 2,005 | My understanding is that we've used it fairly often in the postwar period, in the '60s, '70s, and '80s--in early 1980, for example. My understanding is that it hasn't worked very well. There have been times when we've tried to jawbone the banking system's allocation of credit. | 67 |
fomc | 2,005 | Is the history one of using it too late, or of using it and its having no effect because there are other ways to get money? | 28 |
fomc | 2,005 | May I say something here? I don't have any quantitative studies on this, but based on talking to the folks who lived through it, I'd make a couple of observations. If we look at the 1980s--the most recent housing bubble that was nationwide. We saw the bubble bursting nationally as opposed to the pockets we've had with ... | 681 |
fomc | 2,005 | Shall we break for coffee? | 7 |
fomc | 2,005 | President Moskow. | 4 |
fomc | 2,005 | Thank you, Mr. Chairman. I wanted to make a few comments and then ask a question. First, I'd say that with all of the concerns about froth in housing markets, I found these presentations to be very informative, and I want to congratulate the people who spent a lot of time preparing them. I thought they were all very go... | 544 |
fomc | 2,005 | Well, I trust you did receive or are aware of the background document we circulated on the foreign experience. | 21 |
fomc | 2,005 | Yes. | 2 |
fomc | 2,005 | We didn't do price-rent ratios, and given what Josh has described in terms of the care he has to put in before he feels he has something close to the right number, I think we might feel a little hesitant to do so. I take it back; there are price-rent ratios--[laughter] in the back portion of that paper. What data we ha... | 250 |
fomc | 2,005 | But you can't really associate it with the degree of financial innovation that we've had in the United States because of this great variability? Is that what you're saying, Karen? | 33 |
fomc | 2,005 | I guess I wouldn't necessarily associate it with, say, the development of the secondary market or the ease of equity extraction, and those sorts of things, but I'm not saying they're irrelevant. For example, in this chart, Switzerland--which is a country that I think of as having made little progress in that regard--do... | 160 |
fomc | 2,005 | Thank you. | 3 |
fomc | 2,005 | President Minehan. | 4 |
fomc | 2,005 | Thank you, Mr. Chairman. I also want to thank the authors of the papers--the international paper as well as all of the papers that were talked about today--because I found them very helpful and reassuring, along the lines that Michael Moskow was discussing. I also thought that Janet's comments on the financial innovati... | 596 |
fomc | 2,005 | If you look at the housing affordability picture--basically relating house prices and interest rates and income--it has been moving around in a fairly stable and favorable area for the last, say, 8 to 10 years. | 45 |
fomc | 2,005 | Right. | 2 |
fomc | 2,005 | As you know, mortgage rates have been moving up and down but on balance they have flattened out a bit over the past few years, if you compare, say, 2003 to now. So what has been happening over that time period is that affordability is edging down to the lower end of the range in which it has fluctuated for a while. The... | 179 |
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