AAF Housing Chartbook

Eakinomics: AAF Housing Chartbook Thomas Wade has delivered the latest update to the AAF Housing Chartbook, this one containing data through the end of 2021. There was a time early in this century when housing was practically the whole story of the macroeconomy, driving the expansion after the recession of 2000-2001 and cratering the economy with the bursting of the house-price and subprime mortgage bubbles. The chartbook was born of these circumstances and contains indicators of housing demand, housing supply, housing finance, and the overall state of the housing market. But for Eakinomics, the highlight of this edition is this chart: The explosion of house-price inflation has been breathtaking, with the Case-Shiller index up from zero percent year-over-year in 2020 to 20 percent last year. The Federal Housing Finance Agency measure clocked in at slightly above 15 percent. Both measures compare the prices of the same units over time so as to isolate the pure inflation and minimize the effects of changing lot size, house sizes, number of bedrooms, etc. Readers, unless they spent 2021 watching the WE tv Law & Order marathon, were probably roughly aware of this. But here is a striking corollary. If you cannot find something to buy, as is increasingly the case, the only game in town is renting. So, not surprisingly, the rental market is just as red-hot as the owner-occupied residential market. The chart below is reproduced from realtor.com. As with the residential housing market, rents – as measured by median rents in a sample of 50 cities – are up between 18 and 80 percent year over year. These data feed into two larger debates. The first stems from looking back in history to the popping of the housing bubble, massive mortgage defaults, financial crisis, and Great Recession. Will this happen again? It seems unlikely. While house-price growth will moderate and some areas may even see enough new building to experience house-price declines, neither would translate into widespread mortgage defaults. The quality of underwriting is much higher now than in, say, 2005. Buyers have sufficient down payments (or private mortgage insurance) to cover any losses and still pay off the mortgage. In short, no real evidence that a cooling housing market will threaten the economy. The second is looking forward to controlling inflation. Here there probably is a problem. The increases in the cost of shelter will only slowly moderate as the overall supply of shelter units changes slowly. That means that a portion of the budget that contributes a third of Consumer Price Index inflation will see its inflation moderate only slowly. (The only exception to this would be for the Fed to engineer a sharp recession in the near future.) In contrast to above, shelter inflation (and the policy responses to it) will threaten the economy. There are many more stories to be found in the Chartbook. Enjoy.