1. Housing Prices: Global Correction, Local Consequences
Presentation by:
Prakash Loungani
This presentation draws on work-in-progress with my IMF colleagues Charles Collyns, Marcello Estevao and Deniz Igan. The views presented here are those of the authors and should not be attributed to the IMF.
We thank Jair Rodriguez for excellent research assistance and Hites Ahir for helpful discussions.
George Washington University
Research Program in Forecasting
November 18, 2008

2. outline 1. a global boom and bust
2. how much further will house prices fall?
consequences of house price declines
a. adjustment of residential investment in OECD countries
b. adjustment of unemployment in U.S. states

3. data sets
selected OECD countries, quarterly data,1970 to present (shorter time series in some cases)
’51’ U.S. states, quarterly data,1975 to present

4. oecd countries: prices & quantities
1. global boom and bust
oecd countries: prices & quantities

5. a global boom in OECD countries ...

6. ... is now a global bust

7. magnitude depends on index: U.S. example

8. Residential investment has been plummeting in the U.S.

9. globally, a residential investment boom ...

10. ... is turning to bust

11. prices and quantities: up together ...
Change in Housing Prices and Residential Investment 00-06
USA
GBR
CHE
SWE
ESP
NOR
ITA
IRE
DEU
FRA
FIN
DNK
CAN
-40
-20 20 40 60 80
100
120
Residential Investment
Housing prices

12. prices and quantities: down together ...
Change in Housing Prices and Residential Investment 07-08
USA
GBR
CHE
SWE
ESP
NOR
ITA
IRE
DEU
FRA
FIN
DNK
CAN -7 -6 -5 -4 -3 -2 -1 1 2 3
-35
-30
-25
-20
-15
-10 5 10
Residential Investment
Housing prices

13. 2. how much further will house prices fall?
evidence from past cycles
evidence from short-run model
evidence from long-term relationships
a more careful look for U.S. (based on work by Deniz Igan)

14. Evidence from past cycles
OECD (2005)
Claessens, Kose and Terrones (2008)

15. evidence from short-run model

16. price-income ratios are above historical values ...

17. ... suggesting price gaps

18. price/rent ratios are also above historical values ...

19. ... suggesting price gaps

20. U.S. price-to-rent ratio (PRR)

22. housing affordability, then and now

23. price-to-rent ratio: adjustment to benchmark

26. 3. consequences residential investment: OECD countries
unemployment: U.S. states (based on Estevao and Loungani)

27. 3a. residential investment
What explains the cross-country variation in the impact of house price busts on residential investment?

28. cross-country variation in residential investment impacts of housing busts: role of interest payment to GDP ratio

29. cross-country variation in residential investment impacts of housing busts: role of mortgage debt- to-GDP ratio

30. cross-country variation in residential investment impacts of housing busts: role of mortgage market characteristics

31. 3b. unemployment
What explains the cross-state and cross-region variation in the impacts of house price busts unemployment?

32. U.S. state unemployment rates at present

33. Real Housing Prices and Unemployment Rates in the U.S. Regions
1995Q1
1981Q4
1979Q1
1988Q2 2 4 6 8 10 12 14
Jan-76
Jan-79
Jan-82
Jan-85
Jan-88
Jan-91
Jan-94
Jan-97
Jan-00
Jan-03
Jan-06 80
120
160
200
240
280
320
360
Housing Bust
Unemployment recession cycle
Unemployment rate (LHS)
Smoothed unemployment (LHS)
Previous peak
Trough
Real house price index (RHS)
(In percent)
(Index)
New England
East North Central
1982Q4
1979Q2
Middle Atlantic
Real Housing Prices and Unemployment Rates in the U.S. Regions
Note: Real housing prices defined as the OFHEO home price index in a census division divided by the CPI
of the larger census region.
Sources: Office of Federal Housing Enterprise Oversight (OFHEO); Bureau of Labor Statistics; and Haver
Analytics.

34. Real Housing Proces and Unemployment Rates in the U.S. Regions (cont.)
1979Q1
1989Q3
1993Q4
1990Q4
1981Q3
1995Q1 2 4 6 8 10 12
Jan-76
Jan-79
Jan-82
Jan-85
Jan-88
Jan-91
Jan-94
Jan-97
Jan-00
Jan-03
Jan-06 80
120
160
200
240
280
320
360
1976Q1
1982Q1
1985Q1
1988Q1
1991Q1
1994Q1
1997Q1
2000Q1
2003Q1
2006Q1
Unemployment: recession cycle
Unemployment rate (LHS)
Smoothed unemployment (LHS)
Previous peak
Trough
Real house price index (RHS)
South Atlantic
(In percent)
(Index)
1999Q1
2000Q2
1981Q4 14
East South Central
1988Q2
1982Q3
1979Q2
Housing Bust
Unemployment recession cycle
West North Central
Note: Real housing prices defined as the OFHEO home price index in a census division divided by the CPI
of the larger census region.
Sources: Office of Federal Housing Enterprise Oversight (OFHEO); Bureau of Labor Statistics; and Haver
Analytics.
Real Housing Proces and Unemployment Rates in the U.S. Regions (cont.)

35. Real Housing Prices and Unemployment Rates in the U.S. Regions (cont.)
1983Q1
1987Q1
1990Q4
1985Q4 2 4 6 8 10 12
Jan-76
Jan-79
Jan-82
Jan-85
Jan-88
Jan-91
Jan-94
Jan-97
Jan-00
Jan-03
Jan-06 80
120
160
200
240
280
320
360
1976Q1
1979Q1
1982Q1
1985Q1
1988Q1
1991Q1
1994Q1
1997Q1
2000Q1
2003Q1
2006Q1
Unemployment: recession cycle
Unemployment rate (LHS)
Smoothed unemployment (LHS)
Previous peak
Trough
Real house price index (RHS)
Mountain
(In percent)
(Index)
1981Q1
Housing Bust
Unemployment recession cycle
West South Central
1982Q3
1981Q2
1995Q1
1989Q4
Pacific
Note: Real housing prices defined as the OFHEO home price index in a census division divided by the CPI
of the larger census region.
Sources: Office of Federal Housing Enterprise Oversight (OFHEO); Bureau of Labor Statistics; and Haver
Analytics.
Real Housing Prices and Unemployment Rates in the U.S. Regions (cont.)

36. U.S. Regional Recessions4 5 6 7 8 9 10
-12M
Onset
12M
24M
36M
48M
Unemployment rate (percent)
Average for regional recessions without
a housing bust
Average for regional recessions with a housing bust
U.S. Regional Recessions

37. Regional Housing Busts and Unemployment Rates
Note: Events are centered at a peak in the real housing prices that was followed by a bust in one of the nine Census
divisions. Real housing prices defined as the OFHEO home price index in a Census division divided by the CPI of the
larger Census region.
Sources: Office of Federal Housing Enterprise Oversight (OFHEO); Bureau of Labor Statistics; and Haver Analytics.
-50
-40
-30
-20
-10 10 20 30
-16Q
-12Q
-8Q
-4Q 0Q
Beginning
of cycle 4Q 8Q
12Q
16Q
20Q
24Q
28Q
32Q
36Q
40Q
44Q 5 15 25 35 40 45 50
New England: 1988q q1
Middle Atlantic: 1988q q1
East North Central: 1979q q4
West North Central: 1979q q3
West South Central: 1983q q4
Pacific: 1989q q1
Census division : Beginning to trough
Real House price index (
cumulative percent change vis - à
vis
beginning of housing bust) 2 4 6 8 12 14 16
Unemployment rate
(around housing busts)
Housing busts:
Census division: Beginning to trough

38. Census division
Start 1/
Trough 2/
End 3/
Contraction 4/
Recovery 5/
Complete Cycle 6/
New England
Jul-81
Jun-82
Jan-84 11 19 30
Apr-02
Apr-03
Mar-07 12 50 62
Middle Atlantic
Sep-81
Jan-83
Dec-84 16 23 39
Nov-01
Dec-02
Jan-05 13 25 38
East North Central
Feb-91
May-92
Apr-94 15
Oct-01
Jul-03
May-06 21 34 55
West North Central
Oct-90
Mar-94 5 37 42
South Atlantic
Feb-81
Dec-82
Jan-85 22 47
Nov-90
Mar-92
Dec-94 33 49
Aug-01
Sep-05 26
East South Central
Jul-80
Jun-87 53 83
Jul-91
Jul-93 24 29
Sep-01
Aug-03
Sep-06 60
West South Central
Mar-82
Jul-83
May-84 10
Jun-92
Jul-94 36
Jun-03
Apr-06
Mountain
Dec-81
Dec-83
Jan-87
Jun-88 17 41
Sep-91
Sep-93 8
Mar-03
Dec-05 52
Pacific
May-85 28 44
May-03
Feb-05 40
Average
Apr-90
Nov-91
Mar-96 71
Jan-91
Aug-96 67
May-80
Nov-82
Aug-86 45 75
Sep-87 58 88
Jul-86
Mar-89 32 51
Mar-91
Nov-92
Dec-96 20 69 70
2/ Period with highest unemployment rate during the cycle.
3/ Actual unemployment rate falls below smoothed unemployment rate.
4/ Number of months from the beginning of the cycle to the trough.
5/ Number of months from the trough to the end of the cycle (recovery).
6/ Amplitude of total cycle (contraction + recovery).
Length of Regional Unemployment cycles.
1/ Point where actual unemployment rate is higher than smoothed unemployment rate. Unemployment rate
was smoothed using the HP filter.
Unemployment cycles (excluding cycles occurring around housing busts)
Unemployment cycles ocurring around housing busts
(In months)

39. Number of observations 28
Dependent variable:
(1)
(2)
(3)
(4)
(5)
(6) ?
rhp -1
0.52
0.19
0.33
-0.04
(0.59)
(0.58)
(0.47)
(0.42)
rin
-3.69 **
-2.57 *
-3.57
-2.88
(1.27)
(0.92)
bust
-4.35
-2.93
-3.30
-1.90
(1.12)
(1.22)
(0.88)
-0.31
0.31
0.69
1.24
(2.23)
(2.07)
(1.60)
(1.49)
Number of observations 28
Adjusted R 2
0.35
0.43
0.34
0.41
0.51
= percent change in real housing prices in the 12 months leading to the recession.
= percent change in real regional income in the 12 months leading to the recession.
Estimating the Effect of Past Changes in Real Housing Prices on Recession and Recovery Length using U.S. Regional Data.
Recession length (number of months)
Recovery length (number of months)
Real housing price and regional income respectively measured as the OFHEO home price index and personal income in the division
divided by the CPI of the larger census region.
There are 9 Census divisions and 4 census regions.
Figures in parenthesis are standard errors. * means 5 percent level of significance and ** means 1 percent level of significance.

40. Number of observations 28
Dependent variable:
(1)
(2)
(3)
(4)
(5)
(6) ?
rhp -1
-0.57
-0.28
0.49
-0.39
(0.56)
(0.51)
(0.43)
(0.38)
rin
-5.73 **
-4.79
-4.15
-3.24
(1.33)
(1.53)
(1.00)
(1.13) ( ) 2
0.28 *
0.12
0.23
0.10
(0.11)
(.08)
(0.08)
0.62
0.50
0.26
0.13
(0.30)
(0.33)
(0.23)
(0.25)
Number of observations 28
Adjusted R
0.18
0.40
0.39
0.21
0.43
0.45
= percent change in real housing prices in the 12 months leading to the recession.
= percent change in real regional income in the 12 months leading to the recession.
Estimating the Effect of Past Changes in Real Housing Prices on Recession and Recovery Length using U.S. Regional Data.
Recession length (number of months)
Recovery length (number of months)
Real housing price and regional income respectively measured as the OFHEO home price index and personal income in the division
divided by the CPI of the larger census region.
There are 9 Census divisions and 4 census regions.
Figures in parenthesis are standard errors. * means 5 percent level of significance and ** means 1 percent level of significance.

41. Housing bust magnifies impact of recessions on unemployment

42. Shock to employment Response House Prices Response Employment
Response unemployment
Response labor force participation

43. Shock to house prices Response House Prices Response Employment
Response unemployment
Response labor force participation