When broken down by price level - high-priced, mid-priced, and lower-priced homes - the housing boom and subsequent implosion affected each tier differently.Housing ; Housing - Prices

Carlos Garriga

Michelle T. Armesto

English

Research Papers in Economics

Economic SYNOPSES
short essays and reports on the economic issues of the day
2009 ￿ Number 34
T
he current housing crisis has been long and severe.
Some areas of the country—particularly California,
Florida, and Arizona—have been hit much harder
than other areas, such as the Midwest. A less-discussed
issue is that home price tiers—high-priced, mid-priced,
and lower-priced homes—each responded differently to
the mortgage boom and subsequent implosion.
Many factors caused the run-up in home prices. Interest
rates were at unprecedented lows. Mortgage market inno-
vations, including products such as interest-only loans and
negative amortization loans, attracted many additional
borrowers. Many first-time buyers rushed to buy a home,
hoping to “get in” before it was too late and homes became
even more unaffordable. Also, the ability to finance all, or
nearly all, of the purchase price artificially buoyed home
prices, as individuals could “afford” more because a lower
down payment was required.
Middle- and upper-tier homebuyers were more insulated
from many of these factors. They had less need for the newer
mortgage products, as most of these consumers were not
first-time buyers. As homeowners, they had equity to put
toward their purchase, in contrast to most lower-tier first-
time homebuyers.
The pattern individ-
ual cities display is the
same across the country.
Before the boom, house
prices in all tiers grew
at roughly the same rate.
Sharp appreciation of
home prices in all tiers
followed, but prices for
the lower tier increased
at a much steeper rate.
As home prices fell, the
tiers also fell dispropor-
tionately. The chart tells
the story vividly for four
metropolitan areas:
Boston, Cleveland,
Tampa, and Phoenix. These communities are representative
of the country’s 17 largest metropolitan statistical areas.
Each plot shows four lines: lower-tier, middle-tier, and
upper-tier home price indices and a national home price
average. The data are quarterly and each line is normalized
to 100 beginning in 1993.
Each city paints a different picture about the current
state of the housing crisis. If we consider the picture of
price stability to be the three lines reconverging to move
in tandem again, many still have far to go. Cleveland,
which had less of a spike than the other areas, appears to
have leveled off and may be near the end of the downslide.
Phoenix, on the other hand, may have overcorrected, with
Examining the Housing Crisis by Home Price Tier
Michelle T. Armesto, Senior Research Associate
Carlos Garriga, Senior Economist
When broken down by price level—
high-priced, mid-priced, and 
lower-priced homes—the housing
boom and subsequent implosion 
affected each tier differently.
75
125
175
225
275
325
375
1995:03
1996:03
1997:03
1998:03
1999:03
2000:03
2001:03
2002:03
2003:03
2004:03
2005:03
2006:03
2007:03
2008:03
2009:03
Price Index
75
125
175
225
275
325
375
75
125
175
225
275
325
375
Price Index
75
125
175
225
275
325
375
1995:03
1996:03
1997:03
1998:03
1999:03
2000:03
2001:03
2002:03
2003:03
2004:03
2005:03
2006:03
2007:03
2008:03
2009:03
1995:03
1996:03
1997:03
1998:03
1999:03
2000:03
2001:03
2002:03
2003:03
2004:03
2005:03
2006:03
2007:03
2008:03
2009:03
1995:03
1996:03
1997:03
1998:03
1999:03
2000:03
2001:03
2002:03
2003:03
2004:03
2005:03
2006:03
2007:03
2008:03
2009:03
Price Index
Price Index
Boston Cleveland
Phoenix Tampa
National
Low
Mid
Highthe lower-tier home price index plunging well below middle-
and upper-tier home price indices. Interestingly, Phoenix’s
middle- and upper-tier home prices spiked nearly as sharply
as those in the lower tier, and it is the only city in which
upper-tier prices peaked above middle-tier prices.
The chart implies hopeful recovery for some but con-
tinued hemorrhaging for others. In most cases, though, the
declines in house prices have moved toward convergence
and recent home price data do suggest that prices have
stopped falling as dramatically. Current governmental policy
offers an $8,000 tax credit to all first-time homebuyers,
and the Fed continues to keep the federal funds rate low.
Whether these actions, and the correction that has already
taken place thus far, will stabilize home prices remains to
be seen. ￿
Economic SYNOPSES Federal Reserve Bank of St. Louis 2
research.stlouisfed.org
Posted on August 3, 2009
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

Examining the housing crisis by home price tier

http://research.stlouisfed.org/publications/es/09/ES0934.pdf

Examining the housing crisis by home price tier

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics