House Prices and Mortgage Lending Patterns Across MSAs

Laura BerlinghieriUW – Eau Claire

House Price Appreciation in Miami

2000 2001 2002 2003 2004 2005 2006 2007 2008

-30%

-20%

-10%

0%

10%

20%

30% 25.5%Chart Title

Data source: Freddie Mac’s Conventional Mortgage House Price Index (CMHPI)

House Price Appreciation in Miami

2000 2001 2002 2003 2004 2005 2006 2007 2008

-30%

-20%

-10%

0%

10%

20%

30% 25.5%

21.4%

Nominal Appreciation Real AppreciationData sources: Freddie Mac; BLS

Real House Price Appreciation in Milwaukee, Minneapolis

2000 2001 2002 2003 2004 2005 2006 2007 2008

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%7.2%

8.0%

MilwaukeeMinneapolis-St.Paul

Data sources: Freddie Mac; BLS

Real Per Capita IncomeAverage Across Major MSAs

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 $30,000

$31,000

$32,000

$33,000

$34,000

$35,000

$36,000

Data sources: FRED database; BLS

Real Interest Rate on Conventional MortgagesAverage Across Major MSAs

1999 2000 2001 2002 2003 2004 2005 2006 2007 20080

1

2

3

4

5

6%

Data sources: FNMA’s Monthly Interest Rate Survey (MIRS); BLS

Housing Opportunity Index

1999 2000 2001 2002 2003 2004 2005 2006 2007 20080

102030405060708090

100

MSA Average Indianapolis San Francisco

Data source: National Association of Home Builders (NAHB)

Share of homes sold that would be affordable to family earning median income; 30-yr FRM; 10% downpayment

Mortgage Lending ActivityAverage Percentage Change Across Major MSAs

200020012002200320042005200620072008

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

Number of Mortgage Orig-inationsReal Dollar Volume of Mortgage Originations

Data sources: Home Mortgage Disclosure Act (HMDA); BLS

Fraction of Originated Mortgages Sold to Non-Governmental Agency Investors

Average Across Major MSAs

19992000

20012002

20032004

20052006

20072008

0

10

20

30

40

50

60

70

80

Share of Loans Sold by Number of LoansShare of Loans Sold by Dollar Volume of Loans

%

Data source: Home Mortgage Disclosure Act (HMDA)

Literature• Linneman and Wachter (1989)– Mortgage market innovations (e.g. ARMs) reduce borrowing

constraints, reducing barriers to homeownership• Mian and Sufi (2008)– Rapid increase in supply of credit to areas with high latent

demand for mortgages was primary cause of house price boom

• Lamont and Stein (1999)– In cities with large fraction of highly leveraged (e.g. high LTV)

households, house prices are more sensitive to income shocks

Expectations

• Households in MSAs with low housing affordability will be more sensitive to changes in income, availability of mortgages– House prices will be more sensitive to these

demand shocks

Housing Affordability

• By design, a larger number for NAHB’s Housing Opportunity Index (HOI) represents a high availability of affordable housing

• Define: Constrained = 1 – HOI– An increase in Constrained represents a larger

percentage of homes sold that can’t be afforded by family with median income and the “typical” mortgage

Measuring Mortgage Lending Activity

• Alternative measures of ΔLending variable:– Volume of single-family, purchase-only mortgages

originated• Measured by number of loans: NumLoans• Measured by real dollar volume of loans: VolLoans

– Share of originated mortgages sold to non-governmental agency investors: NGShare

– All three calculated from HMDA data

Basic Regression

• Panel data (N=26; T=9) estimated with fixed effects• Regression specification:

with three possible measures of ΔLending:ΔNumLoan, ΔVolLoan, or ΔNGShare

Empirical ResultsExplanatory Variable ΔLending =ΔNumLoan ΔLending =ΔVolLoan ΔLending =ΔNGShareΔIncome 0.349

(0.347) 0.265(0.364)

0.721**(0.307)ΔIntRate -0.417

(2.087)0.889

(2.366)2.292

(1.688)ΔLending -0.123***(0.020)

-0.061**(0.029)

0.101(0.076)Constrained 0.161***

(0.046) 0.160***

(0.052) 0.132***

(0.036)Constrained*ΔIncome 1.022**(0.421)

0.962**(0.476)

-0.212(0.329)

Constrained*ΔIntRate 0.528(1.358)

0.441(1.291)

-0.033(1.209)

Constrained*ΔLending 0.294***(0.043)

0.257***(0.054)

0.563***(0.081)

Notes: Robust standard errors in parentheses; Adjusted R2 is 0.69, 0.71, 0.72, respectively.

Next Steps

• Improve current regression setup– Should “constrained”/affordability measure be a

dummy variable?– Alternative measure of mortgage market activity: %

of mortgage originations that are high APR• Incorporate land share information from Davis

and Palumbo (2008)– MSAs with high land share are likely to experience

more house price volatility in response to demand shocks