The main paper at today’s US Monetary Policy Forum in New York, organised by the University of Chicago’s Booth business school, is about housing.
Written by Michael Feroli of JP Morgan, Ethan Harris of BoA Merrill Lynch, Amir Sufi of the Booth school, and Kenneth West of the University of Wisconsin, it’s a comprehensive breakdown of the channels through which the housing bust continues to affect the recovery and well worth a read. Not only for its assessment of the housing market, but also on the implications for policy.
One of the most interesting bits of the paper looks at the differences between US states that did not suffer much of a housing bust — of which there are a surprising number, including Texas, the Dakotas, Tennessee and Kentucky — and those that did. Not surprisingly, households in states with big house price falls have found it harder to refinance.
So far, so obvious. The interesting bit is when you look at how much that constraint on refinancing, because your house is not worth enough, has held back recovery in those states.
That house prices are even affecting car sales in states that suffered big falls is powerful evidence of the role that housing is playing in holding back the recovery.
The authors then use that to make a fairly subtle argument about the difficulty of stimulating housing using monetary policy: QE/low rates will give a strong stimulus to states with low house price falls, but you may need a huge — the authors suggest unfeasible — amount of stimulus to make refinancing possible in states that had big house price declines.
What did the Fed officials in the room make of it? Reactions were mixed.
Instead of an argument that QE cannot affect interest rates, the authors argue that “those that can respond to the lower yields have done so already and those that cannot will not be influenced by further policy actions because they are backed up against sharply binding collateral constraints,” noted St Louis Fed president James Bullard in his comments. Mr Bullard added that he found this “an interesting and plausible hypothesis.”
Not so John Williams, president of the San Francisco Fed. Mr Williams argued that every state was affected by the downturn in the sense that unemployment was higher across the board. He also pointed out that the recovery has been similarly weak across regions.
This, Mr Williams said, signalled there was little cause to think that exceptionally loose monetary policy risks stoking inflation in some states.
[The paper suggests that] by attacking a big output gap in one region, we could be overheating other regions. This concern is largely hypothetical. It’s not the case that some areas are overheating and others are languishing. Every region is facing substantial common headwinds.