Housing and Monetary Policy

Interesting academic work on Housing Prices, Monetary Policy, and Subprime issues from Stanford’s John B. Taylor.  Incidentally, if you recognize the name Taylor — as in Taylor rule — they are one and the same  person.

Here’s the abstract:

Housing and Monetary Policy   

Since the mid-1980s, monetary policy
has contributed to a great moderation of the housing cycle by
responding more proactively to inflation and thereby reducing the boom
bust cycle. However, during the period from 2002 to 2005, the short
term interest rate path deviated significantly from what this two
decade experience would suggest is appropriate. A counter-factual
simulation with a simple model of the housing market shows that this
deviation may have been a cause of the boom and bust in housing starts
and inflation in the last two years. Moreover, a significant time
series correlation between housing price inflation and delinquency
rates suggests that the poor credit assessments on subprime mortgages
may also have been caused by this deviation.

That’s the academic overview. I found Taylor’s charts to be quite revealing:



For those of you who want to get into the details, Taylor’s academic paper (10 pages) is rather readable for an academic work.

Housing and Monetary Policy
John B. Taylor
Stanford University, September 2007

Housing and Monetary Policy
John B. Taylor
NBER Working Paper No. 13682
December 2007
JEL No. E22,E43,E52

John B. Taylor Home Page
Mary and Robert Raymond Professor of Economics at Stanford University
Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution

Taylor Rules
Athanasios Orphanides
Board of Governors of the Federal Reserve System, January 2007    http://www.federalreserve.gov/Pubs/FEDS/2007/200718/200718pap.pdf

The Taylor Rule and the Transformation of Monetary Policy
Pier Francesco Asso, George A. Kahn, and Robert Leeson
Federal Reserve Bank of Kansas City, Research Division, December 2007

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What's been said:

Discussions found on the web:
  1. Ross commented on Feb 14

    Happy Joyce Hall day to all!

    It is always nice when academia validates reality even if it is post facto.

    What I found truely amazing was the herding effect the housing bubble had on otherwise very sensible people. I know of a lot of people that traded up in houses simply because they could.

    Housing is a replacement cost business for the most part. The must haves in the 70’s were atriums, conversation pits, foiled and flocked wall paper and of course resilient vinyl flooring in the kitchen and playroom. Gee, even Formica had a butcher block look counter top surface.

    House prices today reflect better ingredients offset by lower carrying costs. Except for the really silly areas of the country, they are not as over priced as they seem. Can a house sell for under replacement cost? Of course. Just like equities…

  2. brian commented on Feb 14

    That graph doesn’t contain the latest data point. It shows a delinquency rate of a little under 5% – right now it’s 7.3%, the highest it’s ever been.


    and the bulk of the resets haven’t peaked yet…

  3. kk commented on Feb 14

    Ross, the “really silly areas of the country” have one thing in common, strong long term net population gains. Doesn’t make them a buy here, but the boom & bust cycle in those areas have happened many times before, and the housing market always recovered. In AZ, the longest bear real estate market (raw land) took about 15 years to recover. My guess is that the AZ, NV new home markets (prices) are currently 20% overvalued for owner occupied, and maybe 25+% for investors. I was shocked to see places like Ohio & Michigan get caught in the bubble. Good luck to those areas.

  4. John commented on Feb 14

    I guess “We’re all Austrians now.” I did my MA thesis on this topic (from a broader perspective looking at the effect of APL legislation on delinquencies and the mix of mortgages, but still home prices are one of the biggest determinants in my models). No offense to Taylor, but all of this was incredibly obvious to anyone who has read Ludwig von Mises, F.A. Hayek, or Murray Rothbard on the business cycle. At least Taylor isn’t a Rational Expectations theorist who doesn’t even believe business cycles are possible. Not every recession will be caused by pushing interest rates too low (relative to the natural rate), but this is the cause of many.

  5. JustinTheSkeptic commented on Feb 14

    Not to change the subject but did anyone catch the one trader pumping the markets say that China is opening a new power plant every 4 days. Is that possible? 91 per year…what’s the most that the U.S. has ever produced in a years time? These numbers being spewed about seem a little inflated…I believe the same thing happened back in the 90’s.

  6. Denny Crain commented on Feb 14

    Who the hell is Joyce Hall, and is she hot?

  7. Ross commented on Feb 14

    Denny Crain,

    She’s a he. Joyce Clyde Hall, founder of Halmark cards and some would say the ‘inventor’ of Valentines day.

    OT when I was a gradeschool kid in Kansas City in the early 50’s we took a field trip to Hallmark Cards. Back then it was a great place to work. Every few hours someone would come by with a cart loaded with coffee, soft drinks, juice, cookies etc. for the employees to munch on. Kinda like what I understand Google does today. As a tubby 9 year old, I always thought it would be a great place to work!

  8. BDG123 commented on Feb 14

    Must be about time to dump again. The posts on your blog are down.

  9. robster commented on Feb 14

    I interpret his analysis and conclusions as an obliquely worded criticism of Alan Greenspan’s last 7 years. Basically he deviated from Taylor’s recommended approach to policy and caused this mess. Bernanke has talked about being more data driven and presumably more in line with Taylor’s recommended approach to policy.

  10. Sekar commented on Feb 14

    So what he’s really saying is that rates never should have been as low as they were in 2002 and 2003. This was intuitively obvious to the most casual observer even then and I don’t have a degree in finance or economics. Where do I apply to Stanford ? Can I get a job at NBER ?

  11. Don commented on Feb 14

    Of course rates were too low from about 2001-2004. All you have to do is look at a chart of any natural resources or commodities fund from about 03 to 07/today to see that. No matter how many times they try to tell you that demand drove/is driving commodity prices higher, don’t believe it. Too many dollars drove commodity prices higher.

    Inflation, i.e., currency devaluation, creates an artificial demand, or appearance of increased demand, for a time, until the pernicious effects of too much money work their way into every transaction. then it’s “Katie, bar the door”–the artificially-inflated demand collapses and we have 1982 all over again.


  12. Denny Crain commented on Feb 14


    Should’ve known a guy was behind this VD nonsense. He’s probably some pencil-necked geek that diets on lummus dip who wouldn’t have a prayer for getting laid except that he’s “sensitive” to a woman’s needs.

    No real man would ever have created this stupid day, or even allowed it.

  13. Ross commented on Feb 14

    Come on now. Hall was a genious at getting women to force men to pretend to be sensitive…

    Show her you love her. A diamond is forever was brought to us by Cecil Rhodes and the Oppenheimers. Cecil was no sissy.

  14. jbh commented on Feb 15

    I must be dense. I dont see how short term rates are the culprit here. the chinese currency peg is what caused long term rates to be artificially low and kept mortgage rates low. if there’s a big elephant in the room isn’t it more likely this antimarket act than the fed?

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