by Calculated Risk on 9/23/2014 07:44:00 PM

From Matthew Klein at FT Alphaville: Fix housing finance, fix the economy?

Oscar Jorda, Moritz Schularick, and Alan Taylor have just come out with a paper on the increasingly important role that real estate, particularly residential real estate, has come to play in the financial systems of rich countries.

The trio previously collaborated on a comprehensive study of every rich-world business cycle since 1870, which found that the rate of private credit growth during an economic expansion helped predict the likelihood of financial crisis and directly corresponded to the severity of the subsequent downturn even in cases when there was no financial crisis ...

The new paper covers a slightly longer period and somewhat larger set of countries, but the biggest improvement is its distinction of different types of credit and different categories of borrowers. Their basic finding is that it was mortgage lending rather than lending to businesses or consumer credit that can explain the enormous increase in total bank credit (a decent proxy for overall financialisation) over the past 35 years ...

In 2005, when I started this blog, I argued that housing was 1) in a bubble, and 2) was the key to the business cycle (so the bursting bubble would lead to a recession). Professor Ed Leamer argued in 2007 that "Housing Is the Business Cycle"!   The good news is this suggests the recovery should continue.

Wednesday:
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 10:00 AM, New Home Sales for August from the Census Bureau. The consensus is for an increase in sales to 430 thousand Seasonally Adjusted Annual Rate (SAAR) in August from 412 thousand in July.

• During the day, the AIA's Architecture Billings Index for August (a leading indicator for commercial real estate).