Last week, the American Enterprise Institute (AEI) and the Collateral Risk Network (CRN) held its eighth annual housing conference, which brought together 175 academics, regulators, business leaders, analysts, and industry professionals for a two-day event. Hundreds more viewed via live-streaming. After welcoming remarks, the conference began with a panel on AEI’s comprehensive set of housing market indicators. During his presentation, AEI’s Tobias Peter showcased the AEI’s Housing Center’s new online interactive data tools, which included near-real time measurements of new construction activity and housing market indicators for every county.
During the second panel, Michael Fratantoni of the Mortgage Bankers Association, presented collaborative empirical research undertaken with AEI and the Federal Housing Finance Agency (FHFA) on the historical relationship between jumbo and conforming loan rates. The presentation explored why jumbo rates fell below conforming rates around 2014. Fratantoni explored the role of rising g-fees, the GSEs funding advantage, and the growing deposit base of banks as potential explanations and speculated why not more borrowers opted for the lower jumbo rate.
For the third panel, AEI’s Stephen Oliner presented his research undertaken jointly with the FHFA on mortgage risk since the early 1990s. This research, the most comprehensive undertaken to date, is based on examining loan level-detail pertaining to 92 million purchase loans. This is an effort to better understand the causes of the financial crisis by conducting a detailed look at how underwriting standards changed over time, particularly in the run-up to the Financial Crisis. Oliner noted that the seeds of the crisis had already been planted well before 2000-2002, which is considered a period of normal underwriting standards by some. He furthermore noted that plain vanilla risk in the form of higher CLTVs and DTIs or lower credit scores, accounted for almost half of the build-up in risk during the 2000s, again a result contrary to the views of many.
FHFA Director, Mark Calabria, delivered the luncheon keynote in which he discussed the necessity for trust and integrity in the mortgage market, the need to recapitalize Fannie Mae and Freddie Mac (the GSEs) and chart the path out of conservatorship. Also discussed was the duty of FHFA to foster competition in the mortgage market and decrease the extent to which the performance of a small number of financial players can pose a threat to the entire housing economy. He emphasized that the time to prepare for the real estate market’s eventual cyclical downturn is now. This requires the build-up of substantial capital cushions during when the economy is expanding. He noted that the key role of government sponsored entities like the GSEs is to be a backstop when markets turn downward and that the GSEs are ill-prepared to for such an eventuality.
During the fourth panel, FHFAs Will Larson presented ground-breaking research on land price measurement in the U.S., undertaken with colleagues from AEI and Rutgers University. As Larson explained, this research fills an important gap in the literature as no study has previously estimated land prices both within cities and over time in a systematic way. The study benefited from a unique use of data contained in millions of appraisals submitted to the GSEs over time. Researchers in the audience were particularly excited about the availability of land prices and land shares and the state, county, zip code and census tract levels.
The conference’s fifth panel explored potential solutions for expanding single-family supply. During his presentation, AEI’s Ed Pinto made the case for light-touch density (LTD) zoning (meaning allowing two-four unit single-family homes in areas currently zoned for one unit only). This broader mix of single-family units was commonplace up until the 1940s. A return to LTD zoning offers a market-based approach to measurably add to housing stock in existing developed areas, thereby taking advantage of built infrastructure. At the same time, it would reduce unsustainable home price appreciation over time. The Mercatus Center’s Emily Hamilton then presented a case study on a few New Jersey boroughs, which showed the potential effectiveness of light-touch density zoning in expanding supply. Her work was undertaken jointly with AEI.
The sixth and final panel of the day took the form of a roundtable discussion and explored the field’s research agenda. It featured Freddie Mac’s Doug Duncan, Corelogic’s Frank Nohaft, Black Knight’s Andy Walden, and Raven Molloy of the Federal Reserve Board. Each panelist commented on past research, focusing on material presented earlier in the day, their own involvement in current/ongoing research, and ambitions for future research topics. A common thread throughout the panel which reinforced in audience questions–data availability and methods to increase the quality, coverage, and accessibility of housing data.
The conference’s second day focused on valuation methods. During the seventh panel, Ed Pinto presented AEI’s new market trends report, a new tool aimed at reconciling a subject property’s market price to its intrinsic home value, through an analysis of market fundamentals pertaining to a property’s market area. AEI’s Shinai He presented research on the relationship between home price appreciation, walkability, and the availability of mortgage credit in the Washington, DC metro. Interestingly, she was able to explain over two-thirds of the variability of home prices by just these two variables and a control for the county.
The eighth and final panel of the conference was devoted to the appraisal process. Topics of discussion from panelists Corelogic’s Pete Carroll, John Russell from the American Society of Appraisers, and CRN’s Joan Trice included issues of trust and accountability, future areas of policy focus, and the history of the appraisal process in terms of regulation, data quality, and practices. Trice presented her vision for establishing a self-regulating organization as the means for addressing the challenges facing the collateral valuation industry.
For those interested in more, all materials and videos from both days are available online.
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