Hutchins Roundup: Housing prices, capital allocation, and more

Studies in this week’s Hutchins Roundup find that easy money has a particularly big impact on house prices during a housing boom, industries with the best growth opportunities don’t attract the most capital, and more.

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Loosening of monetary policy leads to house-price growth

Using data for 1980-2007, Daniel Cooper, María José Luengo-Prado, and Giovanni Olivei of the Boston Fed find that cutting short-term interest rates produces the biggest increase in house prices in times of a housing boom and in locations with the tightest land-use regulations. In particular, lowering the federal funds rate by one percentage point raises housing prices over the next two years by about 2.25 percent in non-boom years and 6.6 percent during a housing boom.

Capital may no longer flow to the industries with better growth opportunities

Dong Lee of Korea University, Han Shin of Yonsei University, and René Stulz of Ohio State find that from 1971 to the mid-1990s, firms in industries with the best growth prospects—those with the highest ratio of market value to the replacement value of their assets—attracted more capital than other firms. This trend reversed in the mid-1990s. Capital no longer flows to industries with the best growth opportunities because firms in those industries increasingly repurchase shares rather than raise money from capital markets.

Housing market distress during the Great Recession distorted labor market outcomes

Using data from a large online job search platform, Jennifer Brown of the University of British Columbia and David Matsa of Northwestern conclude that job seekers in areas with depressed housing markets applied for fewer jobs that required relocation. In particular, a 30 percent decline in home value was associated with a 15 percent decrease in the fraction of applications to out-of-town jobs, with bigger effects on underwater homeowners. Moreover, these job seekers were more likely to accept jobs below their skill or experience levels. The authors find that these labor market distortions were particularly pronounced in states that allow lenders to go after the borrower’s other assets if they default on their mortgage.

Chart of the week: The percentage of Americans moving over a one-year period fell to an all-time low in 2016

Quote of the week: “[M]y predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now,” says Fed Chair Janet Yellen.

“[W]ith 4.6 percent unemployment and a solid labor market, there may be some additional slack in labor markets. But I would judge that the degree of slack is diminished. So, I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment… I’ve continued to highlight the importance of spurring productivity growth that would be something that’s beneficial for the economy. Of course, it’s also important for Congress to take account of the fact that as our population ages, that the debt to GDP ratio is projected to rise.“