Differences in Rent Inflation by Cost of Housing
We know that different people experience different inflation rates because the bundle of goods and services that they consume is different from that of the "typical" household. This phenomenon is discussed in this publication from the Bureau of Labor Statistics (BLS), and this article from the New York Fed. But did you know that there are substantial differences in inflation experience depending on the level of one's housing costs? In this post, which is based upon our updated staff report on ?The Measurement of Rent Inflation,? we present evidence that price changes for rent, which ...
The Homeownership Gap Is Finally Closing
The homeownership rate peaked at 69 percent in late 2004. By the summer of 2016, it had dropped below 63 percent?exactly where it was when the government started reporting these data back in 1965. The housing bust played a central role in this decline. We capture this effect through what we call the homeownership gap?the difference between the official homeownership rate and the ?effective? rate where only homeowners with positive equity in their house are counted. The effective rate takes into account that a borrower does not in an economic sense own the house if the mortgage debt is greater ...
Structural change in the mortgage market and the propensity to refinance
We hypothesize that the intrinsic benefit required to trigger a refinancing has become smaller due to a combination of technological, regulatory, and structural changes that have made mortgage origination more competitive and more efficient. To test this hypothesis, we estimate an empirical hazard model of loan survival for two subperiods, using a database that allows us to carefully control for homeowners' credit ratings, equity, loan size, and measurable transaction costs. Our findings strongly confirm that credit ratings and home equity have significant effects on the refinancing ...
The parts are more than the whole: separating goods and services to predict core inflation
Economists have not been altogether successful in their efforts to forecast ?core? inflation?an inflation measure that typically excludes volatile food and energy prices. One possible explanation is that the models used to make these forecasts fail to distinguish the forces influencing price changes in core services from those affecting price changes in core goods. While core services inflation depends on long-run inflation expectations and the degree of slack in the labor market, core goods inflation depends on short-run inflation expectations and import prices. By using a composite model ...
Distressed Residential Real Estate: Dimensions, Impacts, and Remedies
On October 5, 2012, the Federal Reserve Bank of New York and the Rockefeller Institute of Government co-hosted the conference ?Distressed Residential Real Estate: Dimensions, Impacts, and Remedies.? This post not only makes available a compendium of the findings of the conference, but also updates and extends some of the analysis presented. In particular, we look across states to assess the differential impacts of judicial and non-judicial processes to resolve the foreclosure crisis. Controlling for the peak percentage of loans that were seriously delinquent, we find that non-judicial states ...
After the refinancing boom: will consumers scale back their spending?
Concerns are rising that the recent surge in home equity withdrawal has left consumers in a weakened financial position that will, over time, prompt a retrenchment in spending. However, a look at household assets and liabilities suggests that consumers have used the withdrawn funds to restructure their balance sheets and reduce their debt service burden. As a result, households may be in a better position to spend in the years ahead.
The impact of the current defense build-down
For the third time since the end of World War II, the United States is engaged in a long-term defense build-down. This article provides a broad macroeconomic overview of the current build-down relative to the build-downs following the Korean War and the Vietnam War. In addition, the authors examine regional and industrial impacts of cuts in defense spending.
The Debt Ceiling as a “Fiscal Rule”
A few months ago, the federal government was once again confronted with the need to raise the statutory limit on the amount of debt issued by the Treasury. As in the past, the protracted stalemate and associated uncertainty led to calls to eliminate the debt ceiling. In this post, I make the counterargument. Likely because of its straightforwardness, the debt ceiling has been an effective “fiscal rule.” The reduction of the federal deficit from the mid-1980s to the mid-1990s was due in large part to a series of budget compromises, all of which were accompanied by the need to raise the ...
Rebalancing the Economy in Response to Fiscal Consolidation
According to the Congressional Budget Office (CBO), under current policies the ratio of federal debt held by the public over gross domestic product?the debt-to-GDP ratio?will rise rapidly over the next decade. This unsustainable fiscal position presents the nation with two significant challenges. First, it requires fiscal consolidation that will, at a minimum, cause the ratio to level off in the not-too-distant future. Second, fiscal consolidation has to occur in a way that will keep the U.S. economy operating at as close to full employment as possible?a process known as rebalancing. While ...
Implied mortgage refinancing thresholds
The optimal prepayment model asserts that rational homeowners would refinance if they can reduce the current value of their liabilities by an amount greater than the refinancing threshold, defined as the cost of carrying the transaction plus the time value of the embedded call option. To compute the notional value of the refinancing threshold, researchs have traditionally relied on a discrete option-pricing model. Using a unique loan level dataset that links homeowner attributes with property and loan characteristics, this study proposes an alternative approach of estimating the implied value ...