Liberty Street Economics

September 8, 2021

Does the Rise in Housing Prices Suggest a Housing Bubble?

Andrew Haughwout and Belicia Rodriguez

House prices have risen rapidly during the pandemic, increasing even faster than the pace set before the 2007 financial crisis and subsequent recession. Is there a risk that another dangerous housing bubble is developing? This is a complicated question, and the answer has many components. This post, the first of two, provides a more detailed look at the recent rise in home prices by breaking it down geographically, with a comparison to the pre-2007 bubble. The second post looks at the potential risks to financial stability by comparing the currently outstanding stock of mortgage debt to the period before the financial crisis and projecting defaults should prices decline.

Posted at 7:00 am in Credit, Housing, Inflation | Permalink

September 7, 2021

The Housing Boom and the Decline in Mortgage Rates

Haoyang Liu, David Lucca, Dean Parker, and Gabriela Rays-Wahba

During the pandemic, national home values and housing activity soared as mortgage rates declined to historic lows. Under the canonical “user cost” house price model, home values are held to be very sensitive to interest rates, especially at low interest rate levels. A calibration of this model can account for the house price boom with the observed decline in interest rates. But empirically, we find that home values are nowhere near as sensitive to interest rates as the user cost model predicts. This lower sensitivity is also found in prior economic research. Thus, the historical experience suggests that lower interest rates can only account for a tiny fraction of the pandemic house price boom. Instead, we find more scope for lower interest rates to explain the rise in housing activity, both sales and construction.

Posted at 7:00 am in Housing, Macroeconomics, Monetary Policy, Pandemic | Permalink

September 1, 2021

Going with the Flow: Changes in Banks’ Business Model and Performance Implications

Nicola Cetorelli, Michael G. Jacobides, and Samuel Stern

Does the performance of banks improve or worsen when banks enter into new business activities? And does it matter which activities a bank expands into, or retreats from, and when that decision is made? These important questions have remained unaddressed due to a lack of data. In a recent publication, we used a unique data set detailing the organizational structure of the entire population of U.S. bank holding companies (BHCs). In this post, we draw on that research to show that while scope expansion on average hurts performance, entering into activities that are highly synergistic with core banking at a given point in time yields net performance benefits.

Posted at 7:00 am in Bank Capital, Financial Institutions, Nonbank (NBFI) | Permalink | Comments (1)

August 9, 2021

Unequal Burdens: Racial Differences in ICU Stress during the Third Wave of COVID‑19

Ruchi Avtar, Rajashri Chakrabarti, and Maxim Pinkovskiy

A critical risk during the COVID-19 pandemic has been the possibility of the hospital system becoming overwhelmed. COVID-19 not only has killed nearly 2 percent of people with confirmed infections but causes many more who contract it to develop severe complications that are potentially fatal if not treated in an intensive care unit (ICU). As ICU capacity is based on typical needs for intensive care before the pandemic, a surge of COVID-related ICU patients may leave no room for individuals requiring intensive care for other reasons—such as heart attacks—or may exceed the total ICU capacity to treat even COVID-19 patients. In this post, we investigate the extent to which members of different racial and ethnic groups faced different levels of hospital system stress during the “third wave” of COVID-19 in the winter of 2021, which, as the largest wave to hit the United States, briefly brought intensive care units around the country to the point of being overwhelmed. We find that while Black and Hispanic individuals faced the greatest exposure to overburdened ICUs over the course of the third wave from beginning to end, Asian American and Pacific Islanders (AAPI) went from experiencing more stable ICU capacities than the national average at the beginning of the wave to a nearly overwhelmed ICU system at its peak.

Posted at 7:00 am in Inequality, Pandemic | Permalink

August 3, 2021

Forbearance Participation Declines as Programs’ End Nears

Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw

The Federal Reserve Bank of New York’s Center for Microeconomic Data today released its Quarterly Report on Household Debt and Credit for the second quarter of 2021. It showed that overall household debt increased at a quick clip over the period, with a $322 billion increase in balances, boosted primarily by a 2.8 percent increase in mortgage balances, a 2.2 percent increase in credit card balances, and a 2.4 percent increase in auto balances. Mortgage balances in particular were boosted by a record $1.22 trillion in newly originated loans. Although some borrowers are originating new loans, struggling borrowers remain in forbearance programs, where they are pausing repayment on their debts and creating an additional upward pressure on outstanding mortgage balances.

Posted at 11:00 am in Credit, Household Finance, Pandemic | Permalink

August 2, 2021

Who Received Forbearance Relief?

Rajashri Chakrabarti, Jessica Lu, Joelle Scally, and Wilbert van der Klaauw

Forbearance on debt repayment was a key provision of the CARES Act, legislation intended to combat the widespread economic losses stemming from the COVID-19 pandemic. This pause on required payments for federally guaranteed mortgages and student loans has provided temporary relief to those affected by the COVID-19 pandemic, and servicers of nonfederal loans often provided forbearances or other relief on request as well. Here, using a special survey section fielded with the August 2020 Survey of Consumer Expectations, we aim to understand who benefitted from these provisions. Specifically, were there differences by age, race, income, and educational background? Did individuals who suffered job or income losses benefit differentially? Did renters receive more or less nonhousing debt relief than homeowners? Answers to these questions are not only key for understanding the economic recovery and implications for inequality and equitable growth, they can provide important insight into the expected effects of more recent and potential future legislation.

Posted at 7:00 am in Equitable Growth, Household Finance, Housing, Inequality, Pandemic | Permalink

July 14, 2021

Intraday Timing of General Collateral Repo Markets

Kevin Clark, Adam Copeland, R. Jay Kahn, Antoine Martin, Mark Paddrik, and Benjamin Taylor

Kevin Clark, Adam Copeland, R. Jay Kahn, Antoine Martin, Mark Paddrik, and Benjamin Taylor Market participants have often noted that general collateral (GC) repo trades happen very early in the morning, with most activity being completed soon after markets open at 7 a.m. Data on intraday repo volumes timing are not publicly available however, obscuring […]

Posted at 7:00 am in Repo | Permalink

July 12, 2021

Tailoring Regulations

Rebecca Reubenstein and Asani Sarkar

Regulations are not written in stone. The benefits derived from them, along with the costs of compliance for affected institutions and of enforcement for regulators, are likely to evolve. When this happens, regulators may seek to modify the regulations to better suit the specific risk profiles of regulated entities. In this post, we consider the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) passed by Congress in 2018, which eased banking regulations for smaller institutions. We focus on one regulation—the Liquidity Coverage Ratio (LCR)—and assess how its relaxation affected newly exempt banks’ assets and liabilities, and the resilience of the banking system.

Posted at 7:00 am in Bank Capital, Banks, Financial Intermediation, Liquidity, Regulation | Permalink | Comments (2)

July 1, 2021

Credit, Income, and Inequality

Manthos Delis, Fulvia Fringuellotti, and Steven Ongena

Access to credit plays a central role in shaping economic opportunities of households and businesses. Access to credit also plays a crucial role in helping an economy successfully exit from the pandemic doldrums. The ability to get a loan may allow individuals to purchase a home, invest in education and training, or start and then expand a business. Hence access to credit has important implications for upward mobility and potentially also for inequality. Adverse selection and moral hazard problems due to asymmetric information between lenders and borrowers affect credit availability. Because of these information issues, lenders may limit credit or post higher lending rates and often require borrowers to pledge collateral. Consequently, relatively poor individuals with limited capital endowment may experience credit denial, irrespective of the quality of their investment ideas. As a result, their exclusion from credit access can hinder economic mobility and entrench income inequality. In this post, we describe the results of our recent paper which contributes to the understanding of this mechanism.

Posted at 7:00 am in Credit, Demographics, Financial Institutions, Household Finance, Inequality | Permalink

June 30, 2021

Hold the Check: Overdrafts, Fee Caps, and Financial Inclusion

Jennifer Dlugosz, Brian Melzer, and Donald P. Morgan

The 25 percent of low-income Americans without a checking account operate in a separate but unequal financial world. Instead of paying for things with cheap, convenient debit cards and checks, they get by with “fringe” payment providers like check cashers, money transfer, and other alternatives. Costly overdrafts rank high among reasons why households “bounce out” of the banking system and some observers have advocated capping overdraft fees to promote inclusion. Our recent paper finds unintended (if predictable) effects of overdraft fee caps. Studying a case where fee caps were selectively relaxed for some banks, we find higher fees at the unbound banks, but also increased overdraft credit supply, lower bounced check rates (potentially the costliest overdraft), and more low-income households with checking accounts. That said, we recognize that overdraft credit is expensive, sometimes more than even payday loans. In lieu of caps, we see increased overdraft credit competition and transparency as alternative paths to cheaper deposit accounts and increased inclusion.

Posted at 7:02 am in Bank Capital, Banks, Credit, Financial Intermediation, Regulation | Permalink

Markets & Policy Implementation

Liberty Street Economics

Does the Rise in Housing Prices Suggest a Housing Bubble?

The Housing Boom and the Decline in Mortgage Rates

Going with the Flow: Changes in Banks’ Business Model and Performance Implications

Unequal Burdens: Racial Differences in ICU Stress during the Third Wave of COVID‑19

Forbearance Participation Declines as Programs’ End Nears

Who Received Forbearance Relief?

Intraday Timing of General Collateral Repo Markets

Tailoring Regulations

Credit, Income, and Inequality

Hold the Check: Overdrafts, Fee Caps, and Financial Inclusion

Economic Inequality

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