NIMBYs in the twenty-first century

SINCE the publication of “Capital in the Twenty-First Century”, Thomas Piketty has won many plaudits for his work on inequality. The book has so far sold more than 1.5m copies. Its arguments have been praised by Nobel-prize winners and politicians alike.

In his book, Mr Piketty argues that over the long run the rate on return of wealth exceeds economic growth: a dynamic summed up in the equation r>g. Over time, this relationship increases inequality as the share of national income going to those who own capital (the rich) rises, while the portion going to labour (everyone else) falls. He also argues that the return on capital in recent history has been remarkably stable, even as economic growth has fallen, and that this trend will continue in the future.

On March 20th Matthew Rognlie (pictured), a 26-year-old graduate student at the Massachusetts Institute of Technology, presented a new paper at the Brookings Papers on Economic Activity. Mr Rognlie finds that the growing share of national income deriving from capital income has not been distributed equally across all sectors. The return on non-housing wealth, in fact, has been remarkably stable since 1970 (see chart). Instead, surging house prices are almost entirely responsible for growing returns on capital.

Mr Piketty used the historical evidence in his book to argue that a global tax of up to 2% a year on individual wealth should be introduced in order to prevent capital concentrating in the hands of the few. But if housing wealth is the biggest source of rising wealth then a more focused approach is called for. Policy-makers should deal with the planning regulations and NIMBYism that inhibit housebuilding and which allow homeowners to capture super-normal returns on their investments.

Well-off homeowners may for the moment be more responsible for rising wealth inequality than top-hatted capitalists or famous hedge-fund managers. But their NIMBYism is a very Piketty-like phenomenon.

Lessons From the 1937-38 Recession For the Fed

How fast should the Federal Reserve tighten monetary policy? Should it tighten at all? I recently wrote about these issues but didn’t have the space to explore a fascinating aspect of the debate: the mostly forgotten 1937-38 recession. To many, it’s a cautionary tale against adopting tighter policies too soon.

At the time, it was called the “Roosevelt recession.” It “came as a surprise to most Americans,” writes historian Alan Brinkley in “The End of Reform: New Deal Liberalism in Recession and War.” Until the summer of 1937, the economy was growing briskly, and “many New Dealers were boasting that the Depression was over.” Although civilian unemployment was still high (10 percent in 1936), it was much lower than the peak (23 percent in 1932) and was declining rapidly.

Signs of economic revival abounded. In 1935, the steel industry was operating at 47 percent of capacity; by 1937, that was 80 percent. “Railroads put on extra trains” for July 4, wrote Business Week. “Mountain and seashore hotels packed them in.”

And then the recession hit. It was a doozy. At its low point, the economy’s output had dropped by 18 percent. Industrial production was down by 32 percent, and unemployment reached a peak of 20 percent, according to economist Allan Meltzer’s history of the Fed.

With hindsight, there’s widespread agreement that this stunning reversal was caused by government policies – though there’s disagreement over which ones.

A final explanation involves gold. Since 1934, the United States had been receiving large gold inflows – reflecting fears of political instability or war in Europe – that stimulated economic expansion. The reason was simple. When the gold arrived here, it had to be sold to the government for dollars. Those dollars were then spent or lent, giving the economy a boost. But in late 1936, the Treasury – again, to quash incipient inflation – decided to offset this boost by draining money from the economy. In economic jargon, the gold flows were “sterilized.”

This turned out to be a massive miscalculation. The sterilization created a “pronounced monetary shock,” argues a paper by Dartmouth economist Douglas Irwin. Growth in the money supply, which had been rapid, halted. Stock prices fell, and interest rates rose. After the Treasury reversed its policy on sterilization in 1938, the economy recovered.

Exactly what government policies caused the 1937-38 slump remains unclear. Perhaps all of them. It almost certainly was some mix. With hindsight, the recession seems to have been preventable. This is a lesson that ought to weigh heavily on the Fed as it ponders what to do next. Though tighter policies are inevitable, a fragile economy is vulnerable to too much or too soon.

More Millennials Turn to Mom and Dad to Help With Homebuying

A growing number of homebuyers are expected to turn to the big bank of mom and dad to help finance housing purchases, according to a report released Tuesday by loanDepot consumer lender.

About 17 percent of parents with millennial-aged children – which loanDepot defines as individuals between 18 and 38 years old – expect to help their kids at some point in the future finance a home purchase. And a reported 13 percent of parents have done so in the last five years.

But only 19 percent of millennials aren’t expecting to receive any financial help from their parents, according to the report.

“Support from parents is playing a significant role in the housing recovery, and this new research indicates the trend will increase,” Dave Norris, president and chief operations officer at loanDepot, said in a statement accompanying the report. “Through the survey, 75 percent of millennial-age homebuyers who received financial support from their parents said that assistance made it possible for them to buy a home.”

Shaky housing market about to get even shakier

When will we all stop kidding ourselves?

While there are certain housing markets that today boast record-setting listing and sales prices, such as Beverly Hills, Manhattan and parts of the Bay Area, much of the rest of the country, where most middle-class people live, is experiencing a leveling off of home prices or even declines. The housing market is shaky today and is about to get shakier still.

Indeed, none other than CoreLogic [CLGX] recently reported that the share of homeowners with negative equity increased during the fourth quarter of 2014 with a collective LTV for all mortgages at 59.7%. This was compared to 59.2% in the third quarter. A barometer of home price trends, CoreLogic’s Housing Price Index fell by 0.7% during that same period.

Over the past several years, despite Wall Street and the current administration’s efforts to artificially prop up the housing market with historically low interest rates and foreclosure-alternative programs such as moratoria, HAMP, HAFA and others, we discovered that the so-called housing recovery was simply rhetoric. Talk is cheap – rhetoric is cheaper still.

As if this “news” isn’t bad enough, we are witnessing just how forgetful (or something) some in our industry must be. As if many in the housing and mortgage industries are unconscious of the fact that the housing market has always been cyclical and ignorant of the fact that the market is perhaps once again sitting on the edge of an abyss of another serious downturn, we see higher risk low-down payment programs coming from the GSEs and some private lenders. In addition, media reports are circulating suggesting that sub-prime mortgage-backed securities are potentially making a comeback.

An executive with the Housing Finance Policy Center at the Urban Institute was quoted recently in the media as saying that we do need a non-qualified mortgage market, and right now, that need is not being met. The executive went on to state that in a healthy market, you want all channels open and available… including securitization.

If that were all true, which it isn’t necessarily, we are hardly in a “healthy market.” Even if one concedes that the “new” subprime market will be different than the one that helped bring our financial system and economy to their knees (it will supposedly be based on credit history, not debt-to-income ratios, high LTVs and low FICO scores), this does not portend well for our economic future.

‘Foolish’ survey: Will rising rates doom housing?

Matt Frankel: I don’t believe the real estate market is doomed once interest rates start to rise again. Although even a marginally higher interest rate makes a significant difference over the life of a loan, mortgage payments on a monthly basis won’t get that much more expensive when rates begin to rise — at least at first.

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Jordan Wathen: I don’t think rising rates will doom the housing sector either, but I think it will have two broad impacts that will be measurable and noticeable.

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In all, I don’t expect rising rates to be a death knell for real estate. Rising rates will keep inventory off the market as it becomes less attractive to move, just as rising rates will push marginal homebuyers out of the market for a home. If anything, household formation, not rising rates, will have the biggest impact on real estate going forward. And household formation has been climbing ever since the depth of the recession in 2009, a trend that probably won’t stop in its tracks from a small move in interest rates.

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Dan Caplinger: Jordan and Matt make smart arguments for how the housing market could sustain higher rates, but I still think the housing sector will have a lot of problems once rates rise. One thing to remember is that homebuilders have also enjoyed the fruits of low rates, as they’ve been able to finance land purchases cheaply, giving them more latitude to develop new properties. If debt gets more expensive, they’ll have to be more selective about which projects they take on, and that could hurt their share prices.

New York Fed Says Path for GSE Reform ‘Does Not Look Promising’

The New York Fed reports that public actions supporting the GSEs succeeded in supporting the housing market and removing the GSEs as an “immediate source of systemic risk to the financial system. However, the conservatorships have not yet achieved the goal of reforming the system of residential mortgage finance.” The report cited white paper on federal mortgage reform issued jointly by HUD and Treasury in February 2011, just two years into the Obama Administration, which then-Treasury Secretary Timothy Geithner described as a fundamental plan to wind down the GSEs; however, the New York Fed said the white paper was just a “plan to develop a plan” and offered no specifics as to how to achieve the reform despite offering three broad possible alternatives. The New York Fed, in its report, quotes former Treasury Secretary Henry Paulson as saying in his 2010 book that the conservatorships of the two GSEs was as essentially intended to be a “time out,” or a temporary holding period while the government determined how to restructure Fannie Mae and Freddie Mac.

“The key recommendation of the U.S. Treasury and U.S. Department of Housing and Urban Development (2011) white paper – that Fannie Mae and Freddie Mac should be wound down – would in fact not come to pass,” the New York Fed wrote. “This would be a colossal missed opportunity to put U.S. residential mortgage finance on a more stable long-term footing.”

Six and a half years after the government seized control of Fannie Mae and Freddie Mac, the New York Fed report states that there is no longer the same “urgency” to wind down the GSEs as there was in the years immediately following the crisis.

“The path forward for reform of Fannie Mae and Freddie Mac does not look promising,” the New York Fed wrote. “As time passes since September 2008, the perceived urgency for reform seems to recede. Delay prolongs the uncertainty over the government’s future role in residential mortgage finance, which in turn is a deterrent to private capital re-entering the market, and makes the government’s role appear more difficult to replace. Delay also raises the likelihood that deeper reform will be judged as too difficult to accomplish, and raises the risk that the conservatorships are ended by returning Fannie Mae and Freddie Mac to private status with only minor changes to their charters.”