Housing
"Monetary policy is of limited use, given that price appreciation varies so widely across local markets," said authors James R. Follain and Seth H. Giertz.
"Countercyclical capital buffers—which would raise capital requirements for financial institutions during the initial stages of the price bubble and reduce them during the period of decline—are much more promising because they could be designed to put the brakes on only in those markets where bubbles appear to be developing."
They point out that during the recent nationwide bust, the extent of the damage varied widely in different locales. In some areas, home prices fell more than 50%, while in others prices barely declined. This proves that local market conditions played an important role in how the crisis played out.
There were new drivers of house price patterns that changed the fundamental dynamics, such as the size of the distressed real estate inventory, the pace of price appreciation and the amount of subprime lending.
Follain and Giertz said the design of the Home Affordable Modification Program was based on a number of critical judgments about borrower and lender behavior without having any strong empirical support.
Future crisis, they argue, would benefit from a different approach, starting with an initial focus on the hardest-hit markets to fine tune program parameters. They also call for the development of longer-term forecasts of local market home prices; greater efforts to foster more cooperation among all levels of government and fuller recognition of the inherent weaknesses of securitization.
