Speech

Real Estate in the U.S. Economy IndustrialAssetManagementCouncil(IAMC)Convention St.Louis,Missouri October9,2007 My aim today is to review the basic trendsinthevalueofhouseholdrealestate facts on the size and cyclicality wealth,andplacethiswealthinthecontextof of the real estate sector of the U.S. householdfinancialwealth. economy. Especially given the Besidesnewconstruction,realestateisa seriousproblemsevidenttodayintheresidential long-livedassetandthereforehasimportantbal- side of this sector, it is important to maintain a ancesheeteffects.Forexample,apermanent longer-run perspective on this important indus- increaseinhouseholdnetwortharisingfrom try. Real estate exhibits regularities over the increasesinrealhousepriceslikelyspurssome business cycle; studying this history may help increaseinhouseholdexpendituresongoodsand us to better understand the current situation. services.Economistsgenerallyagreethatthereis Finally, I will discuss some of the current prob- awealtheffectonhouseholdbehavior,butthere lemsintheindustryandlessonsthatmaybenefit ismuchlessagreementonitsmagnitude. future policymakers, consumers and businesses. Anincreaseindemandforhousingstructures, Beforeproceeding,Iwanttoemphasizethat allelseequal,leadstoanincreaseinhousing theviewsIexpressherearemineanddonot startsandthusnewconstruction—knowninthe necessarilyreflectofficialpositionsoftheFederal nationalaccountsasresidentialfixedinvestment. ReserveSystem.Iappreciatecommentsprovided Currently,residentialfixedinvestmentcomprises bymycolleaguesattheFederalReserveBankof alittlelessthan5percentofGDP.Therearea St.Louis.KevinL.Kliesen,economistinthe myriadofdirectandindirecteffectsassociated ResearchDivision,providedspecialassistance. withrealestatethatspilloverintootheraspects However,Itakefullresponsibilityforerrors. oftheeconomy,suchasthedemandforlumber, laborandothercommoditiesusedintheconstruc- tionofstructuresorinremodelingactivity. DEFINING REAL ESTATE AND ITS Beyondtheresidentialsector,thereisasiz- ECONOMIC EFFECTS ablenonresidentialcomponentintherealestate Realestatecomprisesmanyimportantaspects economy.Thedeterminantsofnewconstruction ofeconomicactivity,bothdirectandindirect ofnonresidentialstructuresarequitedifferent effectsonthelevelandcompositionofrealgross fromthedeterminantsofresidentialstructures domesticproduct(GDP).Therearemanyways investment.Becauseacommercialorindustrial todefinetherealestatesector.Iwillconcentrate structureisalong-livedasset,firmswillonly mostlyonprivateconstructionactivityasitflows undertakethisinvestmentifitsrateofreturnis intotheGDPaccounts.Thisdefinitionencom- atleastequaltoitsopportunitycost—thatis,the passesconstructionactivitytoserveboththe rateofreturnonthenextbestuseofitsfinancial businessandhouseholdsectors.However,because capital. ahousehold’sresidenceisusuallythelargestsin- Manypublicpoliciesaffectrealestate.Fiscal gleassetitowns,I’llalsobrieflydiscussrecent policyaffectstherealestateeconomythrough 1 ECONOMICFLUCTUATIONS policiesthatchangethecostofcapitalandthe from78percentin1987to60percentadecade returnoncapital.Thesetypesofeffectsrange later.Thissharerosetoanall-timehighofnearly fromlanduseregulations—zoningrestrictions 85percentin2005,andthenslippedslightlyin andthelike—tochangesinpropertytaxrates, 2006. depreciationrulesortemporarytaxcredits Ausefulperspectivearisesfromexpressing designedtospurcommercialorindustrialcon- aggregatedatainreal,orinflation-adjusted,per structionactivity.Revisionsinthetaxcode,as capitaterms.Figure2showspercapitarealnet the1986TaxReformActshowed,canresultin housingwealth,whichhasrisenrathersharply dramaticchangesinincentivestobuildstructures. overthepastdecade.2Afterremainingatabout Otherinnovations,suchasthoseinthemortgage $25,000perpersonfrom1991to1997,realper financingarea,canalsoproducedramaticeffects. capitanethousingwealthrosebymorethan60 Ontheresidentialside,aswehavewitnessed percentto$41,600in2005.Althoughsignificant, overthepastfewyears,changesinpublicpolicies householdrealnethousingwealthisstillonly andfinancialmarketinnovationsthatallowa abouthalfoftheleveloftangiblefinancialassets largerpercentageofthepopulationtopurchase heldbyhouseholds.Attheendof2006,asseen theirownhomehavegreatlyenhancedresidential inFigure3,realhouseholdfinancialassetstotaled realestateactivity. about$37trillion,ornearly$186,000perperson. Econometricmodelscanestimateapproxi- Bycontrast,thevalueofhouseholdrealestate mateeffectsontheoveralleconomyfromchanges assetstotalednearly$18trillionattheendof inrealestateactivity.Still,economistsknowthat 2006,orabout$78,500perperson.3 ourknowledgeisincomplete.Itisnosecretthat thedownturninresidentialrealestateactivityis moreseverethanmostforecastersexpectedonly REAL ESTATE IN THE GDP afewmonthsago. RealGDPisthebroadestmeasureoffinal goodsandservicesproducedwithinthegeo- graphicboundariesofacountryinaparticular TRENDS IN RESIDENTIAL period.Figure4showsexpendituresharesofthe HOUSING WEALTH majorcomponentsofGDPsince1950.Thestruc- Accordingtotheflowoffundsdatapublished turesshare,roughly10percent,hasremained bytheBoardofGovernorsoftheFederalReserve fairlyconstantforthepast25years.Moreover, System,householdrealestateassetstotaledabout manyothergoodsandservicesaretiedinpartto $20.6trilliondollarsattheendof2006.Thus,with theproductionofstructuresinsomefashion, mortgageliabilitiestotalingabout$9.8trillion, suchasfurniture,utilitiesandroads. householdnetrealestatewealth—whichI’ll Figure5plotsprivatefixedinvestmentin simplycallnethousingwealthfromnowon— nonresidentialstructuresandresidentialstruc- totaledalittlelessthan$11trillionattheendof turesasapercentageoftotalprivatefixedinvest- 2006.1Ifwebenchmarknethousingwealthto ment.Expendituresonresidentialstructuresare GDP,asFigure1inyourhandoutshows,wecan usuallylargerthanonnonresidentialstructures. seethatitfluctuatesovertime—risingfor Currently,residentialfixedinvestmentcomprises extendedperiodsandfallingforshorterperiods. about30percentoftotalprivatefixedinvestment, Indeed,nethousingwealthasashareofGDPfell withnonresidentialstructurescomprisingabout 1 NominalflowoffundsdataforthehouseholdsectoraretakenfromTableB.100(BalanceSheetoftheHouseholdandNonprofitSector). 2 Realpercapitahouseholdrealestateassetsaredividedbytheciviliannoninstitutionalpopulation,ages16andover. 3 ThevaluesinFigure3aremeasuredingross,ratherthannetterms.From1995to2006,realhouseholdliabilitiesincreasedbyabout111percent. 2 RealEstateintheU.S.Economy Figure 1 Nominal Household Net Real Estate Assets as a Percent of GDP 100 90 80 70 60 50 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 SOURCE:BoardofGovernorsoftheFederalReserveSystemandauthor’scalculations. Figure 2 Real Per Capita Net Household Real Estate Assets $2000Dollars 50,000 40,000 30,000 20,000 10,000 0 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 SOURCE:BoardofGovernorsoftheFederalReserveSystemandauthor’scalculations. 3 ECONOMICFLUCTUATIONS Figure 3 Real Per Capita Gross Household Financial and Real Estate Assets $2000 Dollars 200,000 175,000 150,000 Financial Housing 125,000 100,000 75,000 50,000 25,000 0 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 SOURCE:BoardofGovernorsoftheFederalReserveSystemandauthor’scalculations. Figure 4 Real GDP Shares by Major Type of Product Percent 70 Services 60 50 40 Goods 30 20 Structures 10 0 1950 1957 1964 1971 1978 1985 1992 1999 2006 SOURCE:BureauofEconomicAnalysisandauthor’scalculations.Dataarequarterlythrough2007:Q2. 4 RealEstateintheU.S.Economy Figure 5 Shares of Nominal Fixed Investment by Type Percent 50 45 40 35 30 25 20 15 10 Nonres. Structures Residential 5 0 1950 1957 1964 1971 1978 1985 1992 1999 2006 SOURCE:BureauofEconomicAnalysisandauthor’scalculations.Dataarequarterlythrough2007:Q2. 20percent.4Theremaining50percentisfixed structionattheexpenseofnonresidentialcon- investmentinequipmentandsoftware.5Froma struction.Ifwedigalittledeeper,wefindshifts long-termperspective,thesignificantjumpinthe inconstructionsharessimilartothestructural shareofresidentialfixedinvestmentfrom2000 changesthatareoccurringintheeconomy.For to2006washighlyunusual. example,since1997therehavebeenmodest Table1revealsamoredetailedcompositionof increasesintheshareofconstructionoutlays constructionspendingintheprivateandpublic devotedtolodging,healthcare,communications sectors.Thetableliststhevalueofconstruction andpower,withmodestdeclinesseenincom- putintoplace,aspublishedbytheU.S.Bureau mercialandofficeconstruction,amusementand oftheCensus.Thesearethekeysourcedatathat recreation,andmanufacturing. feedintonationalincomeandproductaccounts Wecangainadditionalinsightbyexamining forfixedinvestmentinresidentialandnonresi- theshareofpayrollemploymentandafter-tax dentialstructures.ThroughAugust2007,con- corporateprofitsoftheconstructionindustry structionspendinghastotaledabitlessthan relativetootherlarge,privateindustries.Table2 $1.2trillionataseasonallyadjustedannualrate, showsthesevenlargestindustries,rankedbytheir withprivateconstructionoutlayscomprisinga employmentsharethroughAugust2007.These littlemorethanthree-quartersofthetotaland sevenindustriescompriseabout70percentof publicconstructionoutlaystheremainingone- totalpayrollemployment.In2007,thenumber quarter.Thetablealsoshowshowtheseexpen- ditureshareshavechangedoverthepastdecade, ofjobsintheconstructionindustrytotaled7.7 infive-yearincrements. million.Althoughconstructionwastheseventh Ingeneral,therehasbeenamodestupward largestemployer,theindustrycomprisesonly shiftintheshareofresidentialandpubliccon- about5.5percentoftotalnonfarmpayrolljobs. 4 Ihavecalculatedsharesfromnominaldata.Comparisonsofdollarmagnitudesovertimearebestmadefrominflation-adjusted,orreal, magnitudes. 5 Realvaluescalculatedwithchain-typepriceweightsarenotadditive,whichmeansthatdividingonerealseriesbyanothertoobtainshares isnotadvisable,especiallythefurtherawayonegetsfromthebaseyear. 5 ECONOMICFLUCTUATIONS Table 1 Total Construction Put Into Place NOTE:2007valuesareyear-to-dateaveragesofmonthlyfigures. SOURCE:BureauoftheCensusandauthor’scalculations. Infact,construction’ssharewasabouthalfthat industriesbytheirdomesticcorporateprofitshare ofmanufacturing’sandabout60percentsmaller since1998.6Thesesevenindustriescomprised thanthelargestsector,educationandhealthserv- about75percentoftotalcorporatedomestic ices.Whileconstruction’sshareoftotalnonfarm profitsin2006.7Byprofitshare,theconstruction payrollemploymenthasincreasedslightlysince industryisthesixthlargestdomesticindustry. 1998,thetwolargestindustries,whichareinthe However,likemostoftheothersixmajorindus- servicessector,haveseentheirsharesincrease tries,theconstructionindustryhasseenitsshare bylargeramounts. ofcorporatedomesticprofitsfallsince1998.By Inourmarketeconomy,profitsareanimpor- contrast,profitshareshaverisenstronglyforthe tantsignalingmechanismfortheallocationof financeandinsuranceindustryand,since2002, economicresources.Strongprofitssignalrising fortheinformationindustry.From1998tothe returnsinanindustryandtendtoattractaddi- peakyearof2005,constructionindustryafter- tionalcapital.Table3alsoshowsthesevenlargest taxprofitsrosebyabout19percentperyearon 6 CorporateprofitdataarebasedontheNorthAmericanIndustrialClassificationSystem(NAICS),whichareonlyavailablesince1998.Prior to1998,theyarebasedontheoldStandardIndustrialClassification(SIC)system,andthusarenotstrictlycomparable. 7 In2006(thelatestdataavailable),domesticprofitscomprised81percentoftotalafter-taxcorporateprofits.Theprofitshareofforeignfirms locatedintheUnitedStatestotaled19percentoftotalafter-taxprofits. 6 RealEstateintheU.S.Economy Table 2 Top 7 Private Industries by Employment Shares, 1998 to 2007,Ranked by 2007 Shares SOURCE:BureauofLaborStatistics,CurrentEmploymentStatisticssurvey. Table 3 Top 7 Industries by Domestic Corporate Profit Shares, 1998 to 2006, Ranked by 2006 Shares SOURCE:BureauofEconomicAnalysis. average,buttheyfellby21percentin2006and TheGreatModeration—thisperiodofrela- willsurelyfallagainin2007. tivelystableGDPgrowth—hasbeenaccompanied byaloweraveragelevelandreducedvolatility oflong-terminterestrates.Themorestablefinan- THE CYCLICALITY OF REAL cialenvironmentmakesiteasierforfirmsand householdstoplanforthefuture. ESTATE TheGreatModerationhasalsomadethejob Oneofthemostsignificantchangesinthe offorecasterssomewhateasier.Forecasterrorsfor U.S.economyoverthepastquartercenturyhas realGDPgrowthandinflationhavebeensmaller beenthemarkedreductionineconomicvolatility. thanbefore.Whilenosinglefactorcanexplain FollowingtheterminologyoftheGreatDepression thisdeclineinvolatility,economistshavepointed andtheGreatInflation,thisperiodofincreased toseveralfactors,suchasbettermonetarypolicy, stabilityhasbeentermed“TheGreatModeration.” structuralchangesintheeconomy,suchasjust- 7 ECONOMICFLUCTUATIONS in-timeproduction,andarisingshareofemploy- cyclepeakinMarch2001,registeringitslargest mentinthelessvolatileservicesindustries. negativecontributiontorealGDPgrowthinthe Overthepast25years,U.S.businessexpan- secondandthirdquartersof2000.Incontrastwith sionshavebecomelongerandrecessionsless thetypicalpattern,however,housingwasthena severe.Thecurrenteconomicexpansion,which netpositivecontributortorealGDPgrowthover beganinNovember2001,isnearlysixyearsold. thefirstthreequartersof2001. Onaverage,post-WorldWarIIexpansionslasted Thecontributionofbusinessstructures onlyalittlemorethanfouryears.Despitethe investmenttoGDPgrowthtypicallyhitsitszenith longerexpansionsandmilderrecessions,itis onequarterbeforetherecessionstarts,butitdoes stillthecasethatfluctuationsininvestment notbegintocontributenegativelytorealGDP spendingbyhouseholdsandbusinessesaccount growthuntiltwoquartersaftertherecession foralargeshareofGDPfluctuationsoverthe starts.Investmentinbusinessstructuresdoes businesscycle.8 notbegintocontributepositivelytorealGDP Tounderstandtypicalexperiencesincethe growthuntilnearlytwoyearsafterarecession KoreanWar,considerFigure6.Eachlineshows starts.Thelagreflectsthelongleadtimesassoci- theaveragecontributiontorealGDPgrowth(in atedwithlargeprojects,suchasofficebuildings. percentagepoints)eightquartersbeforeandafter Finally,thecontributionfrombusiness eachcyclepeakfrom1953to2001.Thereare investmentinequipmentandsoftwareexhibits threelinesrepresentingthecontributiontoreal characteristicsoftheothertwocomponents. GDPgrowthfromresidentialfixedinvestment Likeresidentialinvestment,equipmentandsoft- (housing),nonresidentialstructures(commercial warespendingmakesitslargestcontributionto andindustrial),andbusinessequipmentand realGDPgrowththreequartersbeforethereces- softwareinvestment.Thesearethemajorcom- sionstarts,butthenturnssharplynegativeone ponentsofprivatefixedinvestment. quarterintotherecession.InFigure6,thelargest Residentialinvestmenttypicallyturnsdown— averagecontributionfromequipmentandsoft- thatis,contributesnegativelytorealGDPgrowth— warespendingoccursonequarterintothereces- wellbeforetheothertwoinvestmentcomponents. sion,about0.75percentagepoints;itremainsat Thefigureshowsthat,onaverage,housingpeaks aboutthatlevelforanotherquarter.Butlikebusi- aboutthreequartersbeforearecessionstarts. nessinvestmentinstructures,equipmentand Second,ofthethreeinvestmentcomponents, softwareinvestmentdoesnotbegintomakea housingmakesthelargestnegativecontribution positivecontributiontorealGDPgrowth,onaver- togrowthduringtherecession,andonaverage age,untilnearlytwoyearsafterthecyclepeak, thisnegativecontributionoccursconcurrentwith thebusinesscyclepeak.Housing’scontribution bywhichtimetherecoveryiswellunderway. togrowththenbecomesprogressivelylessnega- Figure6makesclearthathousingbothleads tiveand,onaverage,turnspositivethreequarters theeconomyintorecessionandoutofrecession. aftertheonsetoftherecession. Moreover,whilehousing’sdragontheeconomy Forrecentbusinesscycles,however,thetim- duringtherecessionislargerthantheothertwo ingofrealestate’scontributiontorealGDPgrowth investmentcomponents,itsrecoveryisalsolarger: bothbeforetheonsetoftherecessionandduring Ayearandahalfaftertherecessionstarts,hous- therecessionisconsiderablydifferentfromear- ing’saveragecontributiontorealGDPgrowthis lierexperience.9Forinstance,inthe2001reces- 1percentagepoint—morethandoublethesum sion,housingdeclinedpriortothebusiness oftheothertwocomponents. 8 SeeZarnowitz(1999). 9 SeeLeamer(2007). 8 RealEstateintheU.S.Economy Figure 6 Average Contribution to GDP Growth: Components of Private Fixed Investment Percentage points 1.5 1 0.5 0 -0.5 -1 -1.5 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 Quarters around peak Equip. & Soft. Nonres. Struct. Residential NOTE:Peakquartersbeginwith1953:Q3andextendto2001:Q1. SOURCE:Author’scalculationsbasedondatafromtheBureauofEconomicAnalysis. CURRENT PROBLEMS IN REAL Unfortunately,recenteventssuggestthat housingwillremainweakforseveralmorequar- ESTATE AND LESSONS LEARNED ters;stabilizationmaynotbeginuntilwellinto Currentdifficultiesafflictingtherealestate 2008.Probablythemostimportantstatisticsin sectorhave,todate,beenconfinedtotheresiden- thisregardarethenumberofunsoldnewhomes tialsector;businessoutlaysforstructureshave stillonthemarketrelativetotheircurrentsales beenquitestrong.Sinceitspeakin2005:Q4,real rateandtherecenttrendsinhouseprices.Figure7 showsthattheinventory-to-salesratioofunsold residentialfixedinvestmentexpenditureshave newandexistingsingle-familyhomeshasrisen declinedby19percent.Overthesameinterval, sharplysinceearly2005.Thecurrentlevelof realbusinessinvestmentinstructureshas inventoriesrelativetosalesisaboutdoublethe increasedby21percent.Ifyouplotthesetwo averagelevelsfrom1999to2005. seriesonachart,theywouldlooklikescissors: Somepotentialhomebuyersarenodoubt onelinegoingupandonelinegoingdown—and delayingpurchasebecausetheyexpecthouse theirslopeswouldbequitesteep.10Indeedtheir pricestofall.AsseeninFigure8,priceshave slopessuggestthatthecurrentratesofchangeare deceleratedsharplynationwide.Accordingto notsustainable.Housingwillnotcontinuetofall thepriceindexpublishedbytheOfficeofFederal atdouble-digitrates,andoutlaysforbusiness HousingEnterpriseOversight(OFHEO),through structureswillnotcontinuetoincreaseatdouble- thesecondquarterof2007pricesarestillabit digitrates. aboveyearearlierlevels.11However,another 10Partofthestrengthinstructuresinvestmentreflectsincreaseddrillingandminingactivityintheenergysector.Thisisundoubtedlya responsetohigherenergyprices.However,thiscomponentisonlyabout15percentoftotalstructuresoutlays. 11TheOFHEOindexplottedinFigure8isforpurchasesonly;thatis,itexcludeshousepricesvaluedforrefinancingactivity. 9 ECONOMICFLUCTUATIONS Figure 7 Inventory to Sales Ratio: New and Existing Single-Family Homes 12.0 Aug. 10.0 New Existing 8.0 Aug. 6.0 4.0 2.0 1999 2001 2003 2005 2007 Figure 8 U.S. House Price Indexes Percent change from four-quarters earlier 20 OFHEO S&P/Case-Shiller 15 10 5 0 -5 1998 2000 2002 2004 2006 NOTE:Dataarethrough2007:Q2. 10 RealEstateintheU.S.Economy measureofnationalhouseprices—theS&P/Case- therearenonewlessons.Weakunderwriting Shillerpriceindex(SPCSI)—actuallydeclined3 practicesputfartoomanyborrowersintounsuit- percentinthesecondquarterfromayearearlier. ablemortgages.Asborrowersdefault,theysuffer Asubsetofthismeasure,indexesbasedonhouse theconsequencesofforeclosureandlossofwhat- pricesinthe10-and20-largestU.S.markets, everequitytheyhadintheirhomes.Itispainful suggeststhatpriceshavedeclinedevenmorein tohavetomove,especiallyundersuchforced thethirdquarter.InJuly2007,the10-citycom- circumstances.Investorsaresufferingheavy positehasdeclined4.5percentfrom12months losses.Thereisnonewlessonhere:Soundmort- earlierandthe20-citycompositehasdeclined gageunderwritingshouldalwaysbebasedon about4percent. analysisoftheborrower’scapacitytorepayand Adeclineinhomepricesonanationalaver- notontheassumptionthatabadloancanbe agebasisisrelativelyrare.Infact,usingOFHEO recoveredthroughforeclosurewithoutloss data,therehasbeennosuchdeclineoverfour becauseofrisingpropertyvalues. quarterssincetheinceptionofthepurchases Theotheraspectofthecurrentfinancialtur- onlyOFHEOindexin1991orsince1975using moilthatreaffirmsanoldlessonisthatitisrisky OFHEO’stotalindex,whichincludesrefinancings. tofinancelong-termassetswithshort-termlia- Itappearsthatweareinunchartedterritory,and, bilities.Consideraportfolioofanysortoflong- giventhatfact,aforecastofhousepricesmustbe termassetsorassetscarryingsubstantialcredit regardedashighlyuncertain. risk,suchassecuritiescollateralizedwithsub- AccordingtothelatestBlueChipsurvey,the primemortgages.Financingsuchaportfoliowith ConsensusexpectationisfortheS&P/CaseShiller commercialpapermakesthefirmvulnerableto housepriceindexinDecember2007tobe5.6 theriskthatholdersofthecommercialpaper willrefusetorollovermaturingissues.Overthe percentbelowthatfromayearearlierandforthe pastfewmonths,firmsthatstructuredtheirport- indextofallanadditional3.9percentin2008. foliosthiswayfoundthemselvesfacedwith TheBlueChipconsensusforecastalsoprojects exactlythisproblem.Nomanufacturingfirm thatrealresidentialfixedinvestmentwilldecline wouldeverfinanceaportfoliooffixedassetswith 15percentthisyearandbyanother7.6percent commercialpaper;oncemarketsentimentbecame in2008. distrustfulofsubprimeassets,theseassetslost valueandbecamenomoremarketablethan investmentsinfactorybuildings. CONCLUDING REMARKS TheFederalReservehasneitherthepower Thefinancialmarketturmoilthatbeganin northedesiretobailoutbadinvestments.Wedo Augusthithardanalreadystrugglinghousing havetheresponsibilitytodowhatwecanto market.Financialmarketsappeartobestabilizing, maintainnormalfinancialmarketprocesses. buttheyhavenotreturnedtonormalandare Whatthatmeans,inmyview,isthatwewantto stillfragile.Mostforecastershavereducedtheir seerestorationofactivetradinginassetsofall expectationsforGDPgrowthandbelievethat sortsandinallriskclasses.Itisforthemarketto downsideriskshaverisen.However,theemploy- judgewhethersecuritiesbackedbysubprime mentreportforSeptember,thelatestavailableat mortgagesareworth20centsonthedollar,or50 thistime,doesnotsuggestthatthedownsiderisk cents,or100cents.Obviously,themarketwill isoccurring.Asanaside,thesubstantialupward judgedifferentsubprimeassetsdifferently,based revisionstodatareleasedintheAugustreport oncarefulanalysisoftheunderlyingmortgages. remindusthatitisamistaketoplacetoomuch Thatprocesswilltaketime,asitisexpensiveto weightonanyonereport. conducttheanalysisthatgoodmortgageunder- Althoughthisepisodeoffinancialturmoilis writingwouldhaveconductedinthefirstplace. stillunfolding,mypreliminaryjudgmentisthat Althoughthereisasubstantialdistancetogo, 11 ECONOMICFLUCTUATIONS restorationofnormalspreadsandtradingactivity appearstobeunderway,andwecanbeconfident thatintimethemarketwillstraightenoutthe problems.Wedonotknow,however,howmuch timewillberequiredforustobeabletosaythat thecurrentepisodeisover. Thankyou.I’dbedelightedtotakeyour questions. REFERENCES Leamer,EdwardE.“HousingandtheBusiness Cycle.”PresentedataSymposiumSponsoredby theFederalReserveBankofKansasCity,Jackson Hole,Wyoming,August30–September1,2007. Zarnowitz,Victor.“TheoryandHistoryBehind BusinessCycles:Arethe1990stheOnsetofa GoldenAge.”JournalofEconomicPerspectives, Spring1999,13(2),pp.69-90. 12

William Poole (2007, October 8). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20071009_poole

@misc{wtfs_speech_20071009_poole,
  author = {William Poole},
  title = {Speech},
  year = {2007},
  month = {Oct},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20071009_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}