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Prepared by Martin Mühleisen and Martin Kaufman.
Concerns also exist regarding the commercial real estate market—where increasing vacancy rates have led to questions about the possible exposure of financial institutions—and to some extent the market for multi-family housing. However, this chapter focuses exclusively on the market for single-family housing, which is of wider macroeconomic relevance owing to its size and importance for household balance sheets.
See the accompanying chapter on household saving in this Selected Issues paper.
For example, the median square footage of new single-family houses has increased by 11 percent over the past decade (to 2,114 sq. ft. in 2002), and the share of new houses with warm-air furnaces as primary heating source has risen 6 percentage points (to 71 percent) over the same period.
OFHEO’s price index includes geometric weights based on transaction amounts and therefore gives a larger weight to higher priced houses. Both the median price and OFHEO index are adjusted for quality, although the OFHEO index covers only repeat sales of existing houses with mortgages of conforming size. The two series have moved closely together in the past, and have only recently begun to diverge.
The relationship between equity values and house prices is not a priori well defined. During a rise in equity markets, housing demand could either strengthen if households maintained a balanced asset portfolio; or weaken if households sought to shift out of housing and into stocks.
The number of legal immigrants to the United States averaged 900,000 per year in the 1990s—compared to an average of 730,000 in the 1980s—and census estimates also indicate a rising inflow of illegal immigrants.
Mortgage holders may also have benefited from the GSEs holding a large portfolio of securitized mortgages on-balance sheet. Since GSE purchases of MBSs are financed using the GSEs’ triple-A rating, this may have at least partially reduced costs to borrowers. This benefit is illustrated by the positive spread between mortgages of conforming size (which are eligible for GSE mortgage pools) and noneligible “jumbo” loans.
Transaction costs for new mortgages have on average declined from 250 basis points of the loan amount in 1985 to below 50 basis points in 2002.
For example, it is assumed that a household today allocates 25 percent of its disposable income to make payments on a new 30-year fixed mortgage at 6 percent interest. If nominal incomes grow by 4 percent per year, mortgage payments account for only 19.8 percent of income by 2008, compared to 22.2 percent under 2 percent nominal growth. After 10 years, the proportions are 15.6 percent and 19.7 percent, respectively.
Similar to the stock price-earnings ratio, an increase in the house-price rent ratio would suggest that house price levels may not be justified by the discounted stream of future rent or imputed rent income.
These markets are located in the states of California, Colorado, Florida, Massachusetts, New Jersey, New York, Washington, and the District of Columbia. Together, these states account for about 25 percent of the single-housing stock in the United States.
Regressions using prices adjusted for quality improvements failed to produce satisfactory results.
As discussed in Gallin (2003), it is hard to identify the statistical properties of house price models, since relatively slow price adjustments in the real estate market imply that the power of tests for co-integration remains rather low. Such a cointegrating vector was found in the model for new house prices, but none could be found for existing home prices, making the estimated coefficients as well as their statistical significance difficult to interpret.