Hindsight on the Housing Bubble From the Fed

The "House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy," which was released by the Federal Reserve on Monday, posits that the best way to prevent future housing bubbles would be to require lenders to be tougher in enforcing loan-to-income ratios for borrower.

The ponderously named “House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy,” which was released by the Federal Reserve on Monday, posits that the best way to prevent future housing bubbles would be to require lenders to be tougher in enforcing loan-to-income ratios for borrower. That’s something lenders have been doing since the housing bubble popped, but it’s a case of locking the barn after the horse has gotten loose.

Moreover, the report said, such rules need to be consistent to work. “In our view, it is much easier and more realistic for regulators to simply mandate a substantial emphasis on the borrowers’ wage income in the lending decision than to expect regulators to frequently adjust the maximum loan-to-value ratio in a systematic way over the business cycle or the financial/credit cycle,” the report noted.

Would such rules have prevented much of the misery that accompanied the last housing bubble? Yes, write authors Paolo Gelain, Norges Bank; Kevin Lansing, Federal Reserve Bank of San Francisco and Norges Bank; and Caterina Mendicino, Bank of Portugal. “As the boom progressed, U.S. lenders placed less emphasis on the borrower’s wage income and more emphasis on expected future house prices… It retrospect, it seems likely that stricter adherence to prudent loan-to-income guidelines would have forestalled much of the housing boom, such that the subsequent reversal and the resulting financial turmoil would have been less severe.”

Chicago Fed Activity Index still down

Separately on Monday, the Chicago Fed reported that its National Activity Index (CFNAI) was –0.13 in July, up from –0.34 in June. That is, economic activity was still below trend in July, but not as much as it was in June. The CFNAI is a weighted average of 85 existing monthly indicators in four categories of data: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders and inventories.

The less volatile three-month average (CFNAI-MA3, to be exact) was –0.18 in June and –0.21 in July. Not much of a change, and still strongly suggestive of below-normal growth in the economy. The growth level also, according to the Fed, suggests “subdued” inflationary pressure over the coming 12 months.

Unless, of course, the price of corn disrupts that pattern. The U.S. Department of Agriculture recently estimated that corn crops are around 15 percent to 20 percent below what would have been had the corn-growing states seen normal precipitation this year. On Monday, Ag began its annual Pro Farmer Midwest Crop Tour, in which 200 growers and industry experts will examine about 2,000 fields in seven states to get a more detail estimate of the damage the drought has done; the results will be published on Thursday.

FNC reports increasing residential values

FNC reported on Monday that its Residential Price Index (its 100 MSA index), which tracks U.S. residential property values, increased 1.1 percent month-over-month in June. Its other indexes, which track the top 10, 20 and 30 MSAs, were up between 1.1 percent and 1.3 percent. The results are for non-distressed home sales, and thus exclude foreclosure auctions, REO sales and short sales.

Year-over-year, the 100-MSA composite was down 0.2 percent in June. That’s still down, but it’s also the smallest decrease in five years.

Wall Street was down much of the day on Monday, but practically broke even by the end of trading. The Dow Jones Industrial Average lost a token 0.03 percent, while the Nadaq’s lost was even less, at 0.01 percent. The S&P 500 precisely broke even.