ECO Week 5
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ECO561Week5AssignmentEffectivenessoftheCounter-CyclicalPoliciesHousehold3.pptxEffectiveness of the Counter-Cyclical Policies
Introduction-Housing Market
During the 1800’s, there was no way for individuals to own a house
In 1860, the U.S. banking system stabilized the National Bank Accounts
By 1890’s, mortgages became very popular across the U.S.
Typical mortgages in the early 1900’s were given with five year terms and required a 50% down payment
Modern mortgages are given with thirty year terms and may not even require a down payment
Personal example of our home
How is it, that over a period of 218 years, the housing market has changed so drastically? There was a time, back in the 1800’s where individuals could never even think of the idea of owning a home. The words “home-owner” were foreign and meant nothing until the U.S. banking system stabilized the National Bank Accounts in the 1860’s. We fast forward thirty years or so, and the term mortgage was born. By this time, mortgages were offered at a 5 year, 50% down payment rate. Today, our modern mortgages are offered at a 30-year, possible $0 down rate. In this case of our house we bought two years ago, we managed a steal. We qualified for a USDA loan, which was a zero down payment mortgage. When we first started discussing the purchase of our new home, the down payment was a huge factor for our decisions. To be able to find a house, that qualified for this loan, was extremely fortunate for us, due to the fact that we did not have much extra savings lying around, to be able to be put down.
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Federal Housing Finance Agency (FHFA) Housing Price Index
FHFA index is calculated by:
Home sales price information from mortgages sold to, and or guaranteed by, Fannie Mae and Freddie Mac
House pricing up 7.3% from 2017 to 2018
The Federal Housing Finance Agency (FHFA), is in an index, that is calculated monthly, using home sales price information from mortgages sold to, and or guaranteed by, Fannie Mae and Freddie Mac. In an annual calculation, house prices in the United States rose by 7.3 percent (Johnson & Russell, 2018).
Johnson, S., & Russell, C. (2018, March 22). FHFA House Price Index Up 0.8 Percent in January l Federal Housing Finance Agency. Retrieved March 28, 2018, from https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-House-Price-Index-Up-0pt8-Percent-in-January-2018.aspx.
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Federal Housing Finance Agency (FHFA) Housing Price Index
All nine census divisions, seasonally adjusted from December 2017 to January 2018:
-0.7% in West South Central Division
+1.2% in New England and Pacific Division
+5.1% in West South Central Division
+10.0% in Mountain Division
In terms of the nine census divisions represented in the graph, there were some notable percentage drops and raises, over the course of one annual year. Some of these percentages were the West South Central Division (-0.7%), New England and Pacific Division (+1.2%), West South Central Division (+5.1%), and Mountain Division (+10.0%). So what do these percentages mean? These positive and negative percentages represent the overall growth, or decline, in the housing market in these nine divisions. As seen in the graph, and as previously mentioned, the Mountain division is currently growing at a 2.7% increase, in comparison to the United States alone. “The Federal Housing Finance Agency regulates Fannie Mae, Freddie Mac and the 11 Federal Home Loan Banks. These government-sponsored enterprises provide more than $6.0 trillion in funding for the U.S. mortgage markets and financial institutions” (Johnson & Russell, 2018).
Johnson, S., & Russell, C. (2018, March 22). FHFA House Price Index Up 0.8 Percent in January l Federal Housing Finance Agency. Retrieved March 28, 2018, from https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-House-Price-Index-Up-0pt8-Percent-in-January-2018.aspx.
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Reported Household Income
Surveying respondents about household income received in the past 12 months, from all sources, yields the following statistics:
30% of respondents report income less than $25,000
42% of respondents report income less than $40,000
Median household income range is between $40,000 and $49,999
Of these responses, over 63% report income from non-wage sources
Many demographic characteristics to consider when analyzing responses such as:
Age group
Education
Race/Ethnicity
Gender and marital status
Metropolitan area
Disability status
What is a measurement of economic well-being? According to Federal Reserve Bank (FRB), this measurement depends on whether a respondent feels they have a sufficient enough income to cover all of their expenses, without incurring debt. While completing a survey to find out how well-off respondents were, questions about their income, income sources, and rate of savings were asked (FRB: Income and Savings, Report on the Economic Well-Being of U.S. Households in 2015,” 2016). These survey results not only yield surprising statistics but, also demonstrates household income versus household savings.
Over the last 12 months, respondents reported on average, that nearly 30% make less than $25,000. Almost half, 42% reports income of less than $40,000. The median household income was between $40,000 and $49,999. Of the income reported, over 63% were from non-wage sources such as freelance/hobbies, interest/dividends, Social Security and Unemployment to name a few (FRB: Income and Savings, Report on the Economic Well-Being of U.S. Households in 2015,” 2016). . Other factors to consider include the age group, education, race/ethnicity, gender and marital status, metropolitan area, and disability status, when factoring household income.
FRB: Income and Savings, Report on the Economic Well-Being of U.S. Households in 2015. (2016, July 25). Retrieved March 28, 2018, from https://www.federalreserve.gov/econresdata/2016-economic-well-being-of-us-households-in-2015-Income and Savings.htm.
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Spending Relative to Income
48% of adults spent less than their income
31% of adults spent equal to their income
15% of adults spent more than their income
6% of adults had no income
When these same respondents were asked about their spending habits, in comparison to their overall income, the results were appropriate. Overall, 48% of adults reported spending less than their actual income, while 31% reported spending equal to their income, 15% reported spending more than their income, and 6% reported no income at all (FRB: Income and Savings, Report on the Economic Well-Being of U.S. Households in 2015,” 2016). As seen in the graph as well, of these statistics, each is broken down into similar categories on the previously mentioned slide. These household incomes are broken down into $40,000 and under, $40,000 to $100,000, and then those that are over $100,000. As seen, those that have a $40,000 or less household income, tend to spend equal to that of their income, in comparison to the household that is greater than $100,000, who spend actually less than their annual income (FRB: Income and Savings, Report on the Economic Well-Being of U.S. Households in 2015,” 2016). So what does this data tell us? This data tells us that the average, or median, household income (which as we remember was $49,999), spends less of their income annually, but is right in the same area of the overall figures of spending habits.
FRB: Income and Savings, Report on the Economic Well-Being of U.S. Households in 2015. (2016, July 25). Retrieved March 28, 2018, from https://www.federalreserve.gov/econresdata/2016-economic-well-being-of-us-households-in-2015-Income and Savings.htm.
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Housing Market Over the Last Ten Years
| Period | Median | Average |
| Dec 2007 | $227,700 | $284,400 |
| Dec 2008 | $229,600 | $263,100 |
| Dec 2009 | $222,600 | $278,300 |
| Dec 2010 | $241,200 | $291,700 |
| Dec 2011 | $218,600 | $262,900 |
| Dec 2012 | $258,300 | $299,200 |
| Dec 2013 | $275,500 | $321,200 |
| Dec 2014 | $301,500 | $373,200 |
| Dec 2015 | $297,100 | $352,500 |
| Dec 2016 | $327,000 | $382,500 |
| Dec 2017 | $340,100 | $398,700 |
In this self-generated table, we see the housing market’s median and average sales price over the last decade. With that being said, it is abundantly clear, that the housing market is well on the way to recovery from the crash in early 2000’s. We do see a slight drop in sales, around the year 2011, but what could that be from? Some economists say that the this was from enforcing the Dodd-Frank Reform in late 2010 by President Obama. (We’ll get into that more in later slides). Generally speaking, these increases in median and average sales prices of new homes sold in the United Sates, proves that our economy can be back on the right footing for the long haul.
Median and Average Sales Prices of New Homes Sold In United States. (2017). Retrieved March 30, 2018, from https://www.census.gov/construction/nrs/pdf/uspricemon.pdf
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The Great Real Estate Bubble Explained-Money Chasing Homes
“How much money” measures demand and “How many goods” measures supply
In other words, “How much money was chasing how many homes” in the Great Real Estate Bubble
Two factors determine the money chasing homes:
The amount of money people have
The amount of money people can borrow
The Housing Market has always been a mystery to many economists, with the fluctuations in prices, loans, and other variables, it becomes one of the hardest markets to predict. So what is it that causes these inflations, or “bubbles” in the real estate market? We refer to these inflations and deflations as the Great Real Estate Bubble because it really is all about how much money was chasing how many homes at one point. There are two factors that determine the money chasing homes and that is the amount of money people have and the amount of money people can borrow (Wake, 2018).
In the early 2000’s we experienced our Dot-Com Bubble burst, where the stock market crashed and our recession began. Due to this crash, the Federal Reserve lowered interest rates drastically. “The interest rates on 30-year fixed rate mortgages fell 3 percent points from 2000 to 2003” (Wake, 2018). These lower rates meant that people could borrow a LOT more money to chase any home they wanted. Combined with lower interest rates, homes began to skyrocket during 2004 and 2005, which is also when FED began increasing interest rates again. After 2006, home prices stopped increasing and foreclosures started erupting. In 2012, home prices bottomed out, falling nearly 30% nationally (Wake, 2018).
Wake, J. (2018, March 27). The Great Real Estate Bubble-Explained-Real Estate Decoded. Retrieved March 29, 2018, from https://www.realestatedecoded.com/the-great-real-estate-bubble-explained/
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The Great Real Estate Bubble Explained-Money Chasing Homes
“How much money” measures demand and “How many goods” measures supply
In other words, “How much money was chasing how many homes” in the Great Real Estate Bubble
Two factors determine the money chasing homes:
The amount of money people have
The amount of money people can borrow
The Great Real
Estate Bubble
POP!
This graph, released from the Federal Reserve System, reflects the effective federal funds rate in comparison to a 30-year fixed rate mortgage in the U.S. and the 1-year adjustable rate mortgage average in the U.S. “The federal funds rate is the central interest rate in the U.S. financial market. It influences other interest rates such as the prime rate, which is the rate banks charge their customers with higher credit ratings. Additionally, the federal funds rate indirectly influences longer- term interest rates such as mortgages, loans, and savings, all of which are very important to consumer wealth and confidence” (Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS, March 30, 2018).
Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS, March 30, 2018.
Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE30US, March 30, 2018.
Freddie Mac, 1-Year Adjustable Rate Mortgage Average in the United States (DISCONTINUED) [MORTGAGE1US], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE1US, March 30, 2018.
Wake, J. (2018, March 27). The Great Real Estate Bubble-Explained-Real Estate Decoded. Retrieved March 29, 2018, from https://www.realestatedecoded.com/the-great-real-estate-bubble-explained/
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How Dodd-Frank Affected the Housing Market-The Good and the Bad
Rules for the Dodd-Frank financial reform
Thousands of pages to fill out
Costs millions in software revamps, time, and labor
What has changed?
Not the down payment
The credit and ability to repay rules
Average large bank could underwrite almost 165 loans a month before Dodd-Frank
Average loans closed in a month since Dodd-Frank-almost 33
Since the enactment of the Dodd-Frank financial reform in 2010, by President Obama, the rules for loans has changed. There’s no more chasing any home a homebuyer wanted, due to the thousands of pages that have to be filled out, and the millions of dollars this reform has cost lenders in time, labor, and software revamps. At face value however, this reform is rather simple. CEO of Maryland-based Apex Home Loans stated, “It’s not hard to qualify, it’s hard to get through the process because of the massive amounts of additional documentation that is now required. You’ve got to fill out more paperwork, you’ve got to dig up more tax returns. You’ve got to find information related to retirement accounts, stuff that was never asked before.” (Olick, 2017). But the changes are not within just the paperwork portion, it’s in the credit and availability to repay rules as well. The Dodd-Frank reform not only adds complexity, it adds confusion as well. It now takes the average large bank longer to process even the most basic of loans. On average, an underwriter could process about 165 loans per month, but today, that number has feel to almost 33, according to a study completed by the Mortgage Bankers Association (Olick, 2017).
Olick, D. (2017, September 28). How Dodd-Frank changed housing, for good and bad. Retrieved March 28, 2018, from https://www.cnbc.com/2015/07/16/how-dodd-frank-changed-housing-for-good-and-bad-html.
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The Federal Reserve and The Financial Crisis
Two main tools of central banking:
Lender of last resort powers
Monetary Policy
Private-Sector Vulnerability-excessive/unnecessary debt
Public-Sector Vulnerability-Fannie Mae and Freddie Mac
Policy response was to learn lessons from the Great Depression
Global response was to work together and stabilize the financial system
The Discount Window
New programs allowed special liquidity and credit facilities
Consequences of the crisis
GDP fell
Manufacturing declined
Unemployment
Recessions with trading partners
Threat of second depression
There are two main tools of central banking, the lender of last resort powers and the monetary policy (“FED – The Federal Reserve’s Response to the Financial Crisis,” 2017). The lender of last resort power is more for financial stability whereas the monetary policy is more for macroeconomic stability. With each of these tools come vulnerabilities. These vulnerabilities are split by public and private sectors. The public-sector vulnerability is easier to define than that of the private-sector. The private-sector vulnerabilities include excessive and unnecessary debt. The public-sector’s vulnerability is more complex when Fannie Mae and Freddie Mac were involved. Fannie mad and Freddie Mac are private corporations, that were established by the Congress, and are referred to as government-sponsored enterprises, of GSE’s. “Fannie and Freddie were permitted to operate with inadequate capital to back their guarantees” (“FED – The Federal Reserve’s Response to the Financial Crisis,” 2017).
What are some of the lessons that were learned from the Great Depression? “In a financial panic, the central bank needs to lend freely to halt runs and restore market functioning and to accommodate monetary policy to support an economic recovery and employment” (“FED – The Federal Reserve’s Response to the Financial Crisis,” 2017). But what actions were taken in response to the financial crisis? The Federal Reserve and federal government took action in stemming the financial panic, supporting key financial markets, and limited the contraction in output and employment. But, the Federal Reserve was not the only ones whom took this action, the foreign central banks and governments did as well. It was agreed upon, by the G-7 countries to work together in preventing failure systematically and ensure financial funding and capital.
The FED tends to lend to banks through what is known as the discount window. This is in response to the crisis as well, and where we see a lot of the interests rates reduced. But it was the new programs that allowed FED to provide liquidity to a variety of financial institutions and markets. The consequences for these actions caused GDP to fall more than 5%, manufacturing declined by nearly 20%, and more than 8.5 million people lost their jobs (“FED – The Federal Reserve’s Response to the Financial Crisis,” 2017). To say that the threat of a second depression was real, was a complete understatement at the time.
The Fed – The Federal Reserve’s Response to the Financial Crisis. (2017, February 17). Retrieved from https://www.federalreserve.gov/aboutthefed/educational-tools/lecture-series-federal-reserve-response-to-the-financial-crisis.htm
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Conclusion-Housing Market
The unpredictable market-housing market
What factors influence unpredictability:
Household Income
Business Productivity
Housing Bubbles
Dodd-Frank Financial Reform
FED’s response to Economic Crisis
Key to success
The housing market has always been very unpredictable. There have been many issues to cause the unpredictability such as: household income, business productivity, and bubbles. Government policies also take affect when bringing the Dodd-Frank reform law in, in 2010, as well as the overall Federal Reserve’s response to The Economy Crisis. With all of this information provided, it is my hopes that you, as the reader, have a better understanding of the housing market, and all of the ups and downs, we have faced to get where we are today. The key to keeping a great, growing, housing market, is to keep the variables to a minimum. Remember the demographics, keep interest rates down, and comply with the Government rules and subsidiaries.
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References
Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS, March 30, 2018
FRB: Income and Savings, Report on the Economic Well-Being of U.S. Households in 2015. (2016, July 25). Retrieved March 28, 2018, from https://www.federalreserve.gov/econresdata/2016-economic-well-being-of-us-households-in-2015-Income and Savings.htm.
Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE30US, March 30, 2018.
Freddie Mac, 1-Year Adjustable Rate Mortgage Average in the United States (DISCONTINUED) [MORTGAGE1US], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE1US, March 30, 2018.
Johnson, S., & Russell, C. (2018, March 22). FHFA House Price Index Up 0.8 Percent in January l Federal Housing Finance Agency. Retrieved March 28, 2018, from https://www.fhfa.gov/Media/PublicAffairs/Pages/ FHFA-House-Price-Index-Up-0pt8-Percent-in-
Median and Average Sales Prices of New Homes Sold In United States. (2017). Retrieved March 30, 2018, from https://www.census.gov/construction/nrs/pdf/uspricemon.pdf
Olick, D. (2017, September 28). How Dodd-Frank changed housing, for good and bad. Retrieved March 28, 2018, from
https://www.cnbc.com/2015/07/16/how-dodd-frank-changed-housing-for-good-and-bad-html
The Fed – The Federal Reserve’s Response to the Financial Crisis. (2017, February 17). Retrieved from
Wake, J. (2018, March 27). The Great Real Estate Bubble-Explained-Real Estate Decoded. Retrieved March 29, 2018, from
https://www.realestatedecoded.com/the-great-real-estate-bubble-explained/
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