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fomc | 2,005 | If rates flatten out or if they rise? | 9 |
fomc | 2,005 | If rates flatten out; that's because we would not be getting a kick any more from lower rates. House prices can go up and housing remains affordable if rates are lower. But if they flatten out and stay flat, one might think that it's going to be hard for house-price gains to keep humming along the way they've been goin... | 75 |
fomc | 2,005 | Okay. I guess I was coming at it the other way. | 13 |
fomc | 2,005 | I'm sorry, then. | 5 |
fomc | 2,005 | No, no. Let me just think about that for a while. Go on. | 17 |
fomc | 2,005 | Let me make one other point on the reasons why there may have been an increase in the equilibrium price-rent ratio, because I certainly agree with you and President Yellen that there are some good reasons. Those reasons could well include financial innovation, changes in capital gains taxation, and supply constraints. ... | 115 |
fomc | 2,005 | Right. | 2 |
fomc | 2,005 | While they were probably valid explanations for the stock market rise in the '90s, they didn't necessarily, in the end, go all the way to explaining how far those valuations had moved, even if they had somewhat of a solid economic impetus to begin with. | 52 |
fomc | 2,005 | I was thinking primarily about the affordability issue. I know the affordability ratio involves at least three things moving simultaneously--the value of houses, disposable income, and interest rates. I was more or less looking just at the interest rate component. | 47 |
fomc | 2,005 | Okay. | 2 |
fomc | 2,005 | I was wondering if interest rates were moving up instead of not moving up how that affects affordability. | 19 |
fomc | 2,005 | It's going to make housing significantly-- | 7 |
fomc | 2,005 | Well, yes, but where is the breaking point? If the 10-year rate goes up 1 percentage point, say, are we going to get worried about whether people can afford their houses? Or is there some range over which the rate can rise and we shouldn't be concerned? | 57 |
fomc | 2,005 | I certainly wouldn't want to say the breaking point is here or there. But again, going back to some of the conversations I've had with homebuilders, for what it's worth, they indicate that they're not going to be too worried unless we see an increase--and one that occurs fast--on the order of 100 basis points. | 66 |
fomc | 2,005 | So 1 percentage point, or 100 basis points, in a short amount of time-- | 19 |
fomc | 2,005 | Yes, but that's based just on talking to some builders, as opposed to any firm statistical analysis. So I would be very cautious. I would certainly hesitate to draw a firm conclusion about a particular increase being a tipping point or a breaking point. | 49 |
fomc | 2,005 | If I could just add a point: In the spring of '87, we had a very rapid increase in rates--200 basis points--as we did again in 1994, and the housing market proved to be surprisingly resilient in the face of those fairly steep increases. | 55 |
fomc | 2,005 | Governor Kohn. | 4 |
fomc | 2,005 | Thank you, Mr. Chairman. I have three questions. The first one is on the price-to-rent ratio. We've been treating it as if most of the adjustment has come on prices. And I wanted to ask Josh particularly whether, as you've been looking at the micro data and thinking about this, the dynamics of some of these innovations... | 608 |
fomc | 2,005 | Did you want to start on rents? That will give the others some time to think. I've looked at the rent side of the picture. As to this idea that perhaps prices are getting too high relative to rents, I'd argue that they're going to come back in line. Now, maybe rents are going to be doing some of the correcting, as it w... | 164 |
fomc | 2,005 | You don't see anything in the current situation that would differentiate it from past history in that regard. I guess that was my question. | 26 |
fomc | 2,005 | I do not, certainly not with respect to the rents. I would like to say also that I agree with the comments that financial innovations could very well be a justifiable reason for house prices to be higher than usual relative to other prices. I do think some things are different. But I don't see anything to suggest that ... | 81 |
fomc | 2,005 | With regard to equity prices and bond prices, the reason I included that comparison was to make a couple of points. For one, the comment is often made that we can't second-guess financial markets or financial market participants. It seems as if that may be true for equity market participants but less true for bond mark... | 294 |
fomc | 2,005 | In fact, the third scenario that I considered involved trying to emphasize that point--namely that, at least by some measures that people have come up with, there is a big difference in where bond rates are relative to standard estimates of fundamentals. It's actually a much bigger problem for the economy than just the... | 374 |
fomc | 2,005 | Okay. President Poole. | 6 |
fomc | 2,005 | Just for the hell of it, I'd like to offer the hypothesis that property values are too low rather than too high. [Laughter] If you believe that Treasury indexed bonds are a good measure of the real rate of interest--and we were getting into this discussion--the real rate of interest has been cut in half in the past fiv... | 294 |
fomc | 2,005 | That's roughly the right number. | 6 |
fomc | 2,005 | Okay. It's a significant part of total new construction. And I know in the community where I live--I thought this was real estate hype when we bought our house--we were told that we had bought the land and got the house for free. But that's just about the case, because the houses in my area--a subdivision built in the ... | 353 |
fomc | 2,005 | Mr. Chairman, I'd like to propose that he buy my house in Washington, [laughter] given that confidence. | 24 |
fomc | 2,005 | If I'm right, you won't need me to buy it. | 12 |
fomc | 2,005 | Governor Bies. | 4 |
fomc | 2,005 | I have an observation and a question about what has been happening to the mix of mortgage products in the last 12 to 18 months. In 2003, we saw refinancings peak; and then in 2004, total originations went from $3.8 trillion down to $2.8 trillion. So they dropped and are continuing to be soft this year. But what happene... | 279 |
fomc | 2,005 | Okay, let me try to answer that question. I can't really comment on the hype mentality or the mortgage broker who uses a high pressure sales tactic. But in 2004, for example, I believe that, of the ARMs that were originated, less than 10 percent were traditional ARMs with a one-year reset period. The remaining 90 perce... | 307 |
fomc | 2,005 | Well, that was going to be my next question. The other part of this is that we have these older 3-, 5-, and 7-year ARMs, and 2005 is the initial wave of the 3-year ARMs having their first bump-up in rates or being refinanced out of existence. | 65 |
fomc | 2,005 | Right. | 2 |
fomc | 2,005 | And the numbers I've seen suggest that in the next three years 60 percent of these ARMs are going to have the rate bumped up or be refinanced. So, as we look at the cumulative impact of this--I'm going back to the affordability issue--what do we really see happening going forward in these mortgages? | 64 |
fomc | 2,005 | Well, as you say, the rates are going to reset, and households will make decisions about whether to refinance to a different point on the yield curve. Or people can decide to move. I don't think there's going to be a catastrophe on the average reset date that-- | 54 |
fomc | 2,005 | No matter how fast rates move up. | 8 |
fomc | 2,005 | Obviously, if rates went up sharply, that could be a problem. | 14 |
fomc | 2,005 | You have to think in terms of the environment that we are forecasting to occur. It's a pretty tame interest rate environment; so it's not one that will necessarily generate significant concerns about the costs of those reset mortgages. Now, obviously, we could be wrong in both directions. One could imagine a situation ... | 157 |
fomc | 2,005 | The second question I have relates to the nature of the price decline risk. If some of these ARMs can't be refinanced and foreclosures actually start to occur--where financial institutions take over the property--are there any studies out there that indicate how much foreclosure volume could hit the market before it ha... | 68 |
fomc | 2,005 | Not any recent studies that I'm aware of. We proposed doing a study jointly with a private data vendor company on precisely this topic but it didn't really go anywhere. The question is whether foreclosure clusters can have a pernicious kind of spillover effect. I would say that lenders and loan servicers aren't unaware... | 136 |
fomc | 2,005 | We'll just have to see how they really are going to engineer those processes. Thank you. | 18 |
fomc | 2,005 | President Lacker. | 4 |
fomc | 2,005 | Yes. I have just a couple of comments and a question. Clearly, there are some perspectives from which housing prices seem to have drifted out of the usual relationship with indicators of fundamentals, and Joshua documented some of them. But it seems to me as if there are a lot of plausible stories one can tell about fu... | 651 |
fomc | 2,005 | Well, I think there's something to it. There is the view that people, particularly higher-income people, place a high value on their time. If you don't want to be caught in Washington, D.C., traffic, say, you might decide to sell your house in the suburbs and move into the city and in the process drive up land prices i... | 179 |
fomc | 2,005 | That certainly seems possible. When I look at Josh's exhibit 3 on page 5, I see the Miami price-rent ratio at 64 percent above its trend. Now, it's possible that everybody just woke up and decided, boy, there are people in Miami who are just really terrific to be around--it's an exciting city and fascinating people liv... | 789 |
fomc | 2,005 | President Stern. | 3 |
fomc | 2,005 | Yes. I have a question for Karen about a couple of the charts. One of the things that struck me in looking at the charts for the United Kingdom--whether you look at price to-rent ratios or real house prices--is that they obviously have gone through several very sharp swings. If you look at the U.S. historical charts, t... | 116 |
fomc | 2,005 | Well, for one thing, the U.K.'s 1990 cycle was amplified by regulatory changes that preceded it, which led to mortgage lending that was excessive and not well supervised. It was a kind of blind-leading-the-blind situation: The regulator changed the rules and the financial institutions moved into the market and practice... | 768 |
fomc | 2,005 | May I raise a question, which puzzles me, on chart 13? That has the new home price index and the OFHEO index. I don't think there's a big problem understanding the prices of new homes ex land. Since homes are largely customized, one would expect that, as indeed the data show, the growth in productivity--and presumably ... | 359 |
fomc | 2,005 | Well, I think in part it may go back to one of the issues discussed earlier about the rate at which replacement is taking place. Now, I haven't done this in the most scientific way, but if you just take periodic estimates of the stock of housing, whether from the Census or from the American Housing Survey, and try to l... | 125 |
fomc | 2,005 | Let me just say this. We have this series on vacancy rates and ratios, and that series actually has an implicit housing stock figure. If you take the figure for completions and match it up against that, for a good portion of the last 10 years you get negative replacement. | 57 |
fomc | 2,005 | Right. | 2 |
fomc | 2,005 | So it's not evident what those replacement numbers are. We're really at sea on what the actual total housing stock is, which is the problem we have with measuring population as well. So I'm not sure you can make the statement that you just made. | 49 |
fomc | 2,005 | Well, I think for a shorter time horizon you can say that. | 14 |
fomc | 2,005 | Do you mean like the period we're in now? | 10 |
fomc | 2,005 | Yes, over the past four or five years, I think it does hold true. | 17 |
fomc | 2,005 | You mean as far as the completion rate being so high relative to household formation--if you believe the household formation data. | 24 |
fomc | 2,005 | Right. Well, and also to the estimates of the stock. | 13 |
fomc | 2,005 | Okay. So you're suggesting that this is--but this pattern has gone on since 1980. | 20 |
fomc | 2,005 | Page 14, Mr. Chairman. | 8 |
fomc | 2,005 | Page 14? | 4 |
fomc | 2,005 | It has been going on for a long time, but I think the separation has been most pronounced more recently. | 22 |
fomc | 2,005 | That's certainly true. But is it credible that we can have a consistently more rapid rise in prices of existing homes unless the value of the land is rising faster for those homes? Then there's the issue we discussed earlier about moving out into the suburbs, which undercuts the land price value of the new homes. Do we... | 71 |
fomc | 2,005 | That is my opinion on the matter. If you put a new home into place on a plot of land and follow that over time, the value of the structure might rise, reflecting an improvement to the house, or it might deteriorate. But as for the land, once the house is built, it falls into existing house land. That's what it is from ... | 182 |
fomc | 2,005 | That can't be far wrong. | 6 |
fomc | 2,005 | If you look at the pattern of the green line, the constant-quality and the cost line move roughly together. Obviously, the constant-quality price index has increased more rapidly recently, because that index does capture partially, I think, increases in land prices. But I think that the gaps between the three lines are... | 85 |
fomc | 2,005 | You're implying, however, an answer to the question I asked you before which you refused to answer [laughter], which is the ratio of the land value to total value. | 35 |
fomc | 2,005 | There's a difference between refusal and inability. [Laughter] | 12 |
fomc | 2,005 | The ratio is--unless you were inferring it between the two prices, which begs the question-- | 20 |
fomc | 2,005 | Well, that's exactly what Morris Davis-- | 8 |
fomc | 2,005 | Yes, I understand that. But it raises the question of whether the price data are accurate. | 19 |
fomc | 2,005 | Absolutely. As I said, this is what I think is going on. In my view, that's what is capturing land prices. | 26 |
fomc | 2,005 | Did you ever say what adjustments you make in the repeat-transactions OFHEO numbers? | 18 |
fomc | 2,005 | In my prepared text, no, I didn't. But I can go over them briefly. Would you like me to-- | 24 |
fomc | 2,005 | Can you do it quickly? | 6 |
fomc | 2,005 | Yes. I made an adjustment for improvement rate and depreciation rate. And there are actually two types of transaction biases I made adjustments for. One is the fact that homes that have greater appreciation tend to transact more and, therefore, they show up more in the repeat transaction database. So I made an adjustme... | 133 |
fomc | 2,005 | Governor Gramlich, did you want to make a comment? | 12 |
fomc | 2,005 | I have three quick points. On Sue's point earlier about foreclosures, I think foreclosure rates nationally are too low to do anything with analytically. But in my world of low-income housing, in certain urban neighborhoods they get up to 40 percent or so. One can't help but think that what happens--it's like the old re... | 182 |
fomc | 2,005 | That probably wouldn't happen. | 5 |
fomc | 2,005 | Well, that's right. I understand that the link between interest rates and prices is weak. But really, there ought to be a full general equilibrium, if you will, calculation there. Affordability rates may tend to be a lot more stable than we would think just from interest rates alone, if it turns out that they do have a... | 251 |
fomc | 2,005 | Is that a statement or a question? | 8 |
fomc | 2,005 | Yes. [Laughter] Do I have to say? If somebody wants to comment, they can. | 21 |
fomc | 2,005 | Let's choose to leave it as it stands and we'll end this discussion with President Fisher. Do you want to make a comment? | 25 |
fomc | 2,005 | No, sir. Mine was on a similar line, neither a question nor a statement. [Laughter] | 22 |
fomc | 2,005 | Dino, how long are your remarks? | 9 |
fomc | 2,005 | About 10 minutes. | 5 |
fomc | 2,005 | Why don't we leave them until first thing tomorrow morning? Is that okay? Let's adjourn. June 30--Morning Session | 25 |
fomc | 2,005 | Mr. Kos will start this morning. | 8 |
fomc | 2,005 | 6 Thank you, Mr. Chairman. Most major asset markets were little changed in the intermeeting period. The exceptions were: the price of oil, which rose; the euro, which fell; and corporate credit markets, which faced some turbulence after the downgrade of GM debt. The top panel graphs the 3-month cash deposit rate in bla... | 2,069 |
fomc | 2,005 | I'm fascinated by the correlations in the daily movement of rates among the five major countries shown at the top of page 4. I'm even looking to see whether or not it is apparent in the data that Australia is 12 hours behind the United States, and I can't tell whether we're following Australia or they're following us. ... | 163 |
fomc | 2,005 | I think that's one of the reasons some of the traders are looking for other explanations, such as technical explanations related to the seasonal pattern. | 27 |
fomc | 2,005 | That would be a huge seasonal adjustment. It doesn't make any sense. I cannot believe, with all the hedge funds losing money, that the ability to pick up a seasonal and exploit it has not been ground away time and time again. Is there any evidence that seasonality still exists in these markets that are arbitragible? | 65 |
fomc | 2,005 | I haven't done the analysis. The way the story is told is that because the TIPS works off of the non-seasonally adjusted index, you do get these patterns because of pricing-- | 37 |
fomc | 2,005 | Yes, but we know what the seasonal is. | 10 |
fomc | 2,005 | Exactly. So, you would expect people to take advantage of that, which-- | 16 |
fomc | 2,005 | I think the explanation--based on my long-term recollection--is that people look at three years and they see, for three years, prices moving a certain way. Therefore, though there's no substantive reason, they base judgments for later years on that. And the fourth year, obviously, when they try to play it, they lose mo... | 69 |
fomc | 2,005 | I think the argument, Mr. Chairman, is that the residual seasonality is in the underlying. That is, the compensation you get is based on the not seasonally adjusted CPI, so the arbitrage is actually to have the real rate get a seasonal to offset the seasonality in the underlying. The one thing I would note in terms of ... | 191 |
fomc | 2,005 | Further questions for Dino? Mr. Vice Chair, would you move approval of the domestic operations? | 19 |
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