New Cleveland Fed Studies: Housing Market Gaining Steam; Households Ill-prepared for Retirement
(PRWEB) October 02, 2013 -- The recovery in housing markets appears to be gaining steam, but there’s a good deal of regional variation in home-price growth, say Federal Reserve Bank of Cleveland researchers Kyle Fee and Daniel Hartley.
Looking at national data, Fee and Hartley find that residential construction and permitting activity have picked up, inventories of homes for sale and vacancy rates have returned to historically normal levels, foreclosure inventories and mortgage default rates have begun to fall, and housing prices have increased by more than 10 percent (in nominal terms).
But the researchers also note that the national statistics obscure a good deal of regional variation in home-price growth. They say that home-price growth over the past year has been higher, on average, in counties where prices fell the most precipitously over the five prior years.
In addition, after adjusting for inflation, they find that most home prices are no higher than they were in 2000. Only in a set of coastal markets have inflation-adjusted home prices appreciated significantly since 2000, say the researchers.
Read Housing Recovery: How Far Have We Come?
Another Cleveland Fed researcher examines why so many households are ill-prepared for retirement. Vice President and Economist LaVaughn Henry rules out some possible explanations and highlights research that says households do not pay enough attention to financial planning.
Among the possible answers as to why households are not prepared for retirement are: 1) people are living longer and 2) defined-benefit pensions have largely been replaced by defined-contribution plans. But Henry says these explanations are inconsistent with a basic theory of household saving – the Life Cycle Hypothesis (LCH) – which says that households are rational and forward-looking and that they take changing trends into account when planning for retirement.
Henry says another possible explanation – bad luck – is at least consistent with the LCH theory. He says it’s not unrealistic to assume that households could not have anticipated the timing and magnitude of the financial crisis or its impact on their net worth. However, he says this explanation does not account for the steady rise in the National Retirement Risk Index since 1983.
The researcher says a different sort of explanation is provided by a growing body of research in behavioral economics, which says that most households do not pay enough attention to financial planning. Henry points to a study by Benartzi and Thaler which argues that, with a few changes to defined contribution plans, the majority of households could be better prepared for retirement. These changes include automatic enrollment, automatic investment, and automatic escalation.
Read Are Households Saving Enough for a Secure Retirement?
June Gates, Federal Reserve Bank of Cleveland, http://www.clevelandfed.org, 216-579-2048, [email protected]
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