Thursday, March 5, 2015

Housing Tax Policy, A Series: Part 19 - Liquidity Crises, Sticky Prices, and the Yield Curve

(Yes, I know, "Housing Tax Policy" is probably no longer a fully descriptive title for this series.)

Previously, I had noted that the yield curve appears to have a bias that has prevented it from attaining a negative slope when one was called for.  While the yield curve, in general, seems to be a fairly unbiased predictor of future rates, it has failed to fully foretell sharp rate drops associated with contractions.  The yield curve would go slightly negative, which has been a decent predictor of contractions, but did not go negative enough to fully price in impending rate changes.

So, there appear to be unarbitraged profits available for buying long forward fixed income contracts when the yield curve flattens.  But, previously I didn't have a speculation about the reasons behind this.

Thinking about the 2006-2008 crisis, and the role of the money supply and housing, I now have some mechanisms in mind.  In fact, these mechanisms may have been especially relevant to this crisis.  As a start, nominal rigidity (sticky prices) clearly has a role in the series of trends that tend to work their ways through an economic downturn.  Most importantly, we consider sticky prices in wages, which contribute to unemployment.  We also consider the problem of nominal debt, which remains as an overhang on an economy that has suffered a disinflationary shock, so that debts must be repaid with dollars that are worth more than they were expected to be worth.

My basic intuition here is this:  For forward interest rates to fall, the spot prices of long-duration securities must rise.  But, bidders on long-duration assets require currency.  If forward interest rates are declining because the Fed is trimming currency growth, then long-duration asset prices would be upwardly sticky.  The currency would not be available to bid up the price of those assets, thus the interest rates on those assets could not be bid down.

Perhaps the inverted yield curve has been such a good forward indicator of recessions because in these conditions, forward credit markets become inefficient.

Additionally, I think there might be an important nominal rigidity issue in housing that has been neglected because there seems to be a reluctance to model home prices as a real security.  Mayer and Hubbard had it figured out already, in 2008.  Home prices are pretty well explained by real interest rates and rent levels, especially when real long term interest rates are very low.



Source
Incidentally, the monetary source of the crisis comes out pretty clearly in these two graphs.  First is a graph of M1 levels in the Euro zone, Canada, and the US.  Second is a graph of price to rent levels in various Western countries.
The US started crimping the money supply as early as 2004-2005, and US house prices began to drop at the end of 2005, and they stabilized after the Fed reintroduced liquidity, after 2008.  European monetary policy was accommodative until M1 growth began to flatten in 2007-2008, then again after 2009, and their home prices began to drop in 2008.  Canada didn't induce a liquidity crisis, growing M1 quite steadily throughout the period, and Canadian home prices continue to grow as long term real interest rates remain very low.  Liquidity dislocations in the other nations have pushed home prices down typically by something around 30%, if Canadian prices are a guide.

As I have been outlining in this series, these drops in housing prices are from disequilibrium in the housing market.  Because of the frictions specific to housing, the yield curve implied from home prices is equivalent to 30 year treasuries yielding something like 6%, while actual 30 year treasuries trade for less than 3%.  So, we continue to live within a context, in the extreme, where this price stickiness pushes the yield curve upward, at least in the housing market.  Because these frictions do not exist in the bond market, rates on treasuries have been able to fall along with short term rates.  The arbitrage opportunity made available by these frictions in the homeowner-occupier market has led to an unprecedented movement of cash from investors into the housing market, which began in 2006 when this rate rigidity was first triggered by tight monetary policy, and has continued as the gap between implied housing yields and treasury yields has widened.
We can see the secular trend of deleveraging here.  Profits have increased
at a higher rate than compensation, and interest payments have increased
at a lower rate than compensation.  The total return to capital (the sum of
interest and profit) has increased at roughly the same rate as compensation.
Analysts pointing out high profits usually do not understand this shift.

This graph outlines what, I think, is a conventional view of business cycle dynamics.  As much as 2 to 3 years before the drop in NGDP associated with recessions, profits begin to fall.  We can see that compensation follows a very stable path, relative to profits.  The general price level follows an even more stable path, which follows partly from our current inflation targeting monetary policy.  If I included total employment levels on this graph, we would see that, because wages tend to be sticky, a significant part of this barely perceptible drop in compensation comes from a drop in the quantity of employment, not from a drop in wages.  So, equity holders take the brunt of the downturn, in terms of income.  (That's why they earn the big bucks!)

Credit Market Instruments have been scaled x 3 for visibility
So, where we normally think about sticky prices is in the recovery from a downturn, where debtors default while attempting to repay debts with relatively deflated dollars and unemployment rises as a sort of temporary price floor on labor creates a shortage.  And, we look to moderate inflation as a salve to these issues, inflating those repaid dollars and pushing real wages down to a market clearing level.

But, I think we might step back in time, and consider that while those nominal rigidities are a result of the economic downturn, rigidities in asset prices could be a cause of it.  First, let's walk through the market for corporate debt.

We might expect that our canary in the coal mine, profits to equity, will start to signal a fall from trend NGDP.  This tends to happen along with the yield curve inversion.  In the 2001 episode, this happened a couple years before the precipitating inversion, but this could be related to the deferred earnings expectations of the internet boom, or the flirtations with yield curve inversion that happened in the late 1990s.

Both short term and long term rates tend to be high when the yield curve inverts, and we see a shift from equity to debt in corporate capital balances.  Could this be, in part, due to the attempt by savers to bid on debt securities that are priced below equilibrium?  Gross domestic investment drops during these episodes.  Yet, absolute levels of debt rise, and frequently even accelerate upward.  Could the lack of liquidity create a sort of price ceiling, leading to a surplus of buyers (debt buyers) and a shortage of sellers (corporate investments) and a drop in the demand for substitutes (equity)?

When currency growth and inflation were high, in the 1970s, note that the yield curve was able to invert substantially.  And, these cyclical movements between equity and debt values were less extreme.  The 2001 episode is somewhat difficult to consider because of the currency fluctuations related to the Y2K scare.  But, let's look at the previous two downturns more closely.

This graph shows 10 year treasury rates and the Fed Funds rate, as well as the rate on a 30 year TIPS bond maturing in 2028.  It also includes:

Total market value of nonfinancial corporate equities/GDP.  These will tend to move up and down with aggregate demand and growth expectations.

Total nonfinancial corporate debt/GDP.  This quantity tends to move, both cyclically and secularly in the same direction as nominal interest rates (which I have noted before, and is clear in the graph above).  Here, I am positing that the cyclical movement results from an inflow of savings because of upwardly sticky prices during periods of low liquidity.  One thing to think about here is that supply of debt reflects underlying risk postures of savers, so that savers would react to this price disequilibrium by increasing quantities, whereas firms would be indifferent to capital balance, and would adjust debt to equity levels based only the market price of these capital forms.  I don't think firms would necessarily be induced to change their capital balance by inefficiencies in rate levels, and market rates would be their only clue to investor risk appetites.

Home equity/GDP.  Because cash flow (rent) is relatively stable, and adjusts with inflation, home values tend to move inversely with real long term interest rates.  The disequilibrium that pulled savings into mortgages and corporate debt could not find their way to this asset class in the 2006-2008 episode because of frictions in the real estate market, including limited access to credit and the ubiquity of owner-occupiers who would be individually limited in scale.

Mortgages/GDP.  During this period, mortgage levels should move roughly in line with home equity.  However, along with corporate debt, I also posit that savings was induced by the disequilibrium into funding mortgage debt.

When the yield curve inverted in June 2000, both real and nominal long term rates began to fall reasonably well.  Home values rose significantly, and corporate debt rose slightly.  Equities fell significantly, due to falling profits and growth expectations.  By December 2000, the Fed was already lowering short term rates, and as soon as they did, long term rates took an extra step down.  I believe that this is normally attributed to a rational expectations cause - that the lower long term rate reflects lower expectations for forward rates.  But, I have always found this to be unsatisfactory, since lower short term rates (all else equal) should lead to higher rate expectations at some future point on the yield curve.  Here, I am suggesting that there was a price disequilibrium in credit markets, due to the lack of currency that would be needed to bid up the price of long term securities, and the liquidity associated with the reduction in short term rates relieved that constraint.

That problem must not have been severe, since home equity was rising during this period, but this was partially funded by mortgage growth.  Also, corporate debt stopped growing when the yield curve turned positive again.  Also, see the graph to the right.  Foreign dollars piled into the US during both of these periods, at unprecedented levels.  Also, note from one of the earlier graphs that, except for the odd currency fluctuation around Y2K, currency was still growing by nearly10% per year (2.5% per quarter in the graph).

Summary for the 2001 episode:  The downward jump in long term rates when short term rates were decreased, the inflow of foreign dollars, and the slight increase in corporate debt levels concurrent with the yield curve inversion suggest that there was a small disequilibrium in long term rates, but a quick shift to short term rate cuts, those foreign inflows, and especially the still relatively healthy growth in currency, all helped to keep enough liquidity in capital markets.  The sign of this success is that home equity was able to rise as long term real rates decreased.

In the 2006-2008 episode, long term rates began to fall after the inversion, but then stalled.  Corporate debt rose slightly in this early part of the episode.  But, here, the Fed did not introduce liquidity that would have lowered short term rates and allowed long term rates to continue to fall.  So, by the beginning of 2007, savings was pushing more into mispriced corporate debt, causing its growth to accelerate.  Foreign dollars were again rushing into the US (and continue to), but currency growth was negligible by this time.

The leveling off of home prices up to early 2006 might have been a natural movement in the equilibrium price of homes associated with naturally rising real long term rates.  But, by the beginning of 2007, the lack of liquidity was keeping real estate prices from rising, and the stable long term real rates were a product of disequilibrium.  Households were tapping the mortgage credit market in an attempt to purchase homes which were now underpriced, greatly increasing homeowner leverage in 2006.  But, this avenue was used up by early 2007.  If the Fed had loosened during this period, long term rates would have fallen and home prices would have risen, as rates across asset classes would have moved together in equilibrium.  But, 2007 marks the beginning of extreme disequilibrium in long term fixed income markets (including housing).

When rates finally did drop, the feedback to the mortgage credit markets from the dislocations in the real estate market had overwhelmed the housing market, and since that time, fixed income has been split between high yielding real estate and low yielding long term bonds.  In fact, 10 year treasuries held up at above 3.5% through the summer of 2008, while the Fed Funds rate dropped to 2%.  I wonder if this separation still reflected a decent disequilibrium, so that the drop in long term rates in November and December 2008 was a return to equilibrium, while the subsequent rises in long term rates were associated with forward real and nominal rate expectations related to the QEs.

Foreign capital and investor capital for the rental market continue to push into the real estate market in a bid toward equilibrium prices.

In future downturns, if currency growth remains very low, we might be wary of signals coming from stable long term interest rates.

PS.  I admit, the behavior of equities in the 2006-2007 period doesn't fit well into my narrative.  Profits were falling and currency was scarce.  I do not see the source for corporate capital gains.  Even without viewing the period through this model, I have been perplexed by the solid growth of equity values during that time.

Wednesday, March 4, 2015

Housing Tax Policy, A Series: Part 18 - I was kind of wrong about the distributional effects of the housing shortage

I had previously written a couple of posts about the fact that lower compensation share hasn't been going so much to corporate operating profits as much as it has been going to home owners.  The housing shortage means that rents are rising and imputed returns to home ownership are rising, in absolute terms and relative to mortgage payments.  So, home owning households have de facto real incomes that are rising faster than reported real incomes. (Imputed rent is not counted as income.)  I had assumed that this was a purely regressive income transfer, since home owners tend to have higher incomes.

But, over the last few posts, I have discovered that real estate is actually a higher proportion of low income families' assets and incomes than of high income families, even accounting for the lower home ownership rates.  I am sure that much of the reason for this is that many of these families are retired households that own their homes, so that they have low incomes and low or no debt, and a house that is large relative to their income.  (Well, I say I am sure, but I am less sure of a lot of things after digging through this data.)

Thinking about this, I began to wonder what the distributive effects of the housing shortage really were.  And, as has been typical in this series, the answer is more stark than my newfound intuition suspected.

The first graph shows the level of net imputed rent (before interest expense) earned, per household, by income quintile. This is the average for all families (renters and owners).  This amounts to about 6% of income.  I have used the data from the Survey of Consumer Finances and data from BEA table 7.12 on rental income.  I don't think this imputed rent is counted in any typical measure of household income.  In the BEA construction of Gross Domestic Income, it is reported under Operating Surplus (capital income) as Rental Income.  This should figure into our discourse regarding the behavior of incomes over the past 35 years, because imputed rent has represented an ever-increasing portion of national income.

So, as we can see in the first graph, most rental income is claimed by high income families, in absolute terms.  But this relationship reverses when we look at imputed rental income as a proportion of family income.  The next three graphs are in terms of proportion of income.

Note that, since low income homeowners tend to be much less leveraged than high income homeowners, we have the interesting finding that net rent before interest tends to flow to low income families and interest expenses tend to flow from higher income families.  So, net rental income, after interest expenses, flows overwhelmingly to low income families!  I have been assuming that the recent gains in capital income going to homeowners had been mostly a high income phenomenon, but I was wrong.  Relative to compensation and corporate sources of income, Rental Income is weighted to low income households.

The Net Imputed Rent after Interest Expense/Income is roughly equivalent to the BEA measure of  Share of GDI as Rental Income to Persons with Capital Consumption Adjustment.  My measure runs slightly higher than the BEA measure, because mine is as a percentage of household income while the BEA measure is as a percentage of GDI.  In the SCF data, 1989 appears to be a bit of an outlier, for reasons I haven't dug into, so I will use 1992 as my baseline, so as not to inflate the effects I am describing here.

In 1992, imputed rent after interest was 1.3% of all incomes.  By 2013, it was up to 4.2%.  Please note, this has nothing to do with home prices.  The BEA uses rates in the rental market to estimate the expected rental rates of owner-occupied homes.  In fact, I believe growth in rents as a portion of GDP and growth in net rental income to home owners largely comes from two sources.  (1) Tax preferences to owning, implemented since the 1980's, which have increased housing demand for owner-occupiers, and (2) the collapse of the mortgage credit market after 2007, which has decreased housing supply.  Both of these factors benefit owners at the expense of renters, in terms of income.  (The credit market collapse harms owners, in terms of capital gains and losses.)

As I have argued previously, the BEA measure of rental income is somewhat incoherent, because it subtracts a nominal capital expense (interest expense) from a real capital income (rental income).  In order to correct for this, we need to only subtract the real interest expense from rental income in order to arrive at net rental income for the homeowner.  The inflation portion of the mortgage interest expense is really a pre-arranged savings plan, when considered in real terms.

This next graph shows the effect of imputed rental income on the true income of homeowners (renters are not included in this graph), using real interest expense.*  For all home owning families, this has increased from 4.8% of income in 1992 to 6.3% of income in 2013.  Note that the gains in rental income per household rise in the graphs above in 2001 and 2004, but remain fairly stable in those years in this graph that only includes homeowners.  That is because the growth in rental income in those years was being claimed by new home owners, as the rate of ownership was increasing.  The ownership rate has been falling since the 2004 survey, so the rental income per household is increasing both in terms of the average family and the average home owner.

But the overwhelming take-away from this graph is that changes in this source of income are much more significant for low income families than for high income families.  In 1992, net rental income for owner households in the lowest quintile amounted to 22.3% of reported income, and rose to 28.1% by 2013.  For the median family, it was 6.9% in 1992 and 8.9% in 2013.  For the top 10%, it was 3.3% in 1992 and 4.6% in 2013.

This makes sense because rent claims a smaller portion of income as income rises, and a large portion of families in the lowest income quintile are young renters or retired owners.  The retired owners established home equity over their working lives specifically for this purpose - to lower their retirement cost of living and to hedge against shelter inflation.

So, what if we add this imputed rent income to measured incomes, and track real incomes over time?  The first graph here is indexed to 1992.  We see a jump of about 20% among all income groups, except the top 10%, which sees a jump of about 60%.  The effect of housing is overwhelmed by what I presume is mostly a product of the technology boom.

But, in the next graph, indexed to 2001, we see real incomes which have been stagnant for 12 years because of two significant economic contractions.  Here, all income groups have moved sideways, and here, the best performing group is the lowest quintile.  This should match our intuition, because households in the lowest income quintile have low labor force participation, so they are less affected by economic upheavals.  The incomes of the top 10% have begun to climb again, as recovery takes hold after the 2008 crisis.  And the middle incomes have moved down in real terms.

And, during this period, we see that imputed rent from homeownership takes on more importance, especially among the low income households.  Rent, or implied rent, is an unusually large relative expense for both renters and owners in the lowest income group, so here we can see that perhaps the most significant income effect of the housing bust has been a passive transfer of aggregate income from low income renters to low income owners.  (Well, the most significant effect has been the subsequent crisis that dropped incomes across households.)


PS:  Here is an old post on median household incomes.  The reduction in incomes since 2001 appears to come entirely from the decline in the number of earners per household, which has also been reflected in falling labor force participation that is largely the product of aging.  As Scott Sumner points out, average wages have been growing during this period.





* There are some assumption I have to use in this case.  I have to assume that within each quintile the mean income for home owners is the same as the mean income for renters.  I have a mean income figure for renters and owners for all families, but I don't have one within quintiles.  While there might be some difference, I don't think it would change the outcomes significantly.  I also have assumed that home prices are relatively efficient until 2010, so that implied rental income can be deduced by using families' reported value of their primary residences.  Survey data does tend to overestimate these values, so I did adjust for this by comparing the total survey values to the reported value of owned residences in the Federal Reserve Flow of Funds report.  In 2010 and 2013, home prices are not efficient, so the inflation premium of mortgages that is implied by comparing real returns on homes to nominal effective mortgage rates becomes unreliable.  For these years, I manually set the inflation premium at 1.5%.

Tuesday, March 3, 2015

Housing Tax Policy, A Series: Part 17 - Political Postures and Mortgage Modifications

There is now a common political script that bemoans the influence of moneyed interests on federal policy - talk of Wall St. vs. Main St., bailouts, etc.

One of the favorite complaints from this script is that we chose to bail out the "predatory" bankers instead of bailing out households.  A favorite policy of this script is loan modifications.  If only we had done loan modifications instead of bank bailouts.
I will forgive, for the sake of this post, the broader problem with this complaint, which is the fact that there have been numerous loan modification programs, aimed explicitly at erasing debts owed by households to the banks, while no program intended to help "Wall Street" or the banks was implemented with terms so deserving of the term "bailout" as that.  Part of the complaint might be that those loan modification programs didn't amount to much.  As the Survey of Consumer Finances data shows, they couldn't have amounted to much, at least with regard to being a source of redistribution.

As this first graph shows, mortgages as a percentage of total family assets are highest for the 40%-90% income range.  Low income families do not tend to hold highly leveraged real estate.  That's not to say that they don't own real estate.  Real estate as a proportion of assets peaks for families in the 20%-39% income range.

Share of mortgages with principal balance exceeding estimated home value: 2009:Q4
Share of mortgages with principal balance exceeding estimated home value: 2009:Q4
Source: San Francisco Fed
So, keep this in mind when you read an essay that describes quantitative easing as a bailout for Wall Street and moans that we didn't do enough to restructure mortgages for underwater households.  Mortgage modification would tend to support households in the upper half of the income distribution and higher real estate values would tend to support households in the bottom half of the income distribution.

Here is a map from the San Francisco Fed that demonstrates the significant geographic influence on underwater mortgages.  Even after accounting for the scale of mortgages held, by income groups, we should keep in mind that nationally, defaults have been strongly related to Loan to Value levels, which are much more related to geography than to income.

One might protest that mortgage relief should be means tested.  Here is a graph of the total value of real estate, mortgages, and selected financial assets, by household.  If mortgage restructuring managed to reduce total mortgage levels by 10%, that would amount to a one-time transfer of $82 billion to the bottom 40% of households and $108 billion to the middle income quintile.  Households in the top 40% of incomes would claim $737 billion in the absence of means testing, in this scenario.

As a demand-side stimulus, this would amount to less than 1% of a single year's GDP, even if a full 10% of all mortgages outstanding to households in the bottom 60% of the income distribution were forgiven.  And, remember, low income households are not highly leveraged, so this probably overstates the total.

Also, to the extent that more aggressive loan modifications would damaged bank balance sheets even further, this would pull down aggregate demand.

Sunday, March 1, 2015

Housing Tax Policy, A Series: Part 16 - What a difference framing makes.

Here is a graph of the Price to Rent ratio for housing, from CalculatedRiskblog.com .  That really looks like irrational exuberance.  A case of national insanity, which has fallen back to reality.

What if we flipped this over, so that it is in terms of yield, like a bond?  Here is a graph of Rent to Price Ratio for housing.  (Here I am using annual data from the BEA for rent and the Federal Reserve for real estate values, which has similar behavior to the Case-Shiller National index in the first graph.)  I have also included two other real financial indicators - real GDP growth and real 20 year treasury bond rates.  I have also included a Net Rent to Price ratio, in order to provide a more accurate comparison between the bond returns and the net returns to homeownership.

No more insanity.  It was that easy.

Here's what happens when I try to create a Price/Rent version of 20 Year TIPS bonds and real GDP growth rates.  I added a 1% "premium" to the GDP growth rate and the treasury bond, before inverting them.

The treasury bond market and the residential real estate market are similar in size.  Could it be that long term TIPS should be yielding about 2%, nominal long term treasuries about 4%, and homes about 3%?  And, the dislocation in the housing market is keeping capital out of housing, and pushing it into treasuries, pushing home returns up (prices down) and treasury yields down?

This is a reason why, while I think a big inflationary boost would help get housing back in order, if we aren't going to get that, I am fairly sanguine about near term interest rate movements.  The demand (investment) end of the credit market would probably be pulling long term treasury rates up to 4% or so if we didn't have this supply (savings) glut.  And, rates would really have to jump before it would move home returns below the alternatives.

By the way, here is a graph of YOY changes in home prices, adjusted for rent inflation.  There is nothing unusual about the 2000s.  And, we can see from the graph above that Price to Net Rent ratios in the late 1970's were not substantially lower than they were in the 2000's.  Real interest rates and real GDP growth were also relatively low in the late 1970's.  There is no mystery to solve here.

I just don't understand why sophisticated, numerate observers are so insistent on finding a cause to the non-existent problem of the housing boom.  (I do think that homes have moved to permanently higher prices because of tax issues, which should be reversed, but this is simply another explanation for the price level.  There is still no mystery.)

Look at the first Fred chart above.  Net rent to price has been above real GDP growth almost permanently since the late 1980's.  Before that, real GDP regularly pushed well above implied returns to homeownership during expansions.  This suggests that home prices have been too low for the past 30 years, if anything.

Thursday, February 26, 2015

Housing Tax Policy, A Series: Part 15 - The Subprime Crisis and Inflation Targeting

Ok, one more graph on the timing of the crisis.  Here we can see the problem of inflation targeting.


There has been some discussion about how commodity prices bumped up in 2007 & 2008, which caused the Fed to be too hawkish.  And, I have discussed how current inflation is negligible, but for supply-shock shelter inflation.  But, I think we can step back even further, and see this problem even earlier.

I have looked at the period around 3Q 2006, when the yield curve inverted.  But, let's look even further back, to 2Q 2006 (0b), or even 4Q 2005 (0a).  Even before the yield curve inverts, we can see that liquidity is having an effect on the housing supply.  (Remember that currency growth, which has tended to be between 7% and 10% since the 1970's, fell under 5% by 2005.)  By 4Q 2005, shelter inflation took a sharp turn upward.  This was a monetary-related supply shock.  Because everyone was so thrown off by high nominal home prices, this seems implausible.  But, if we pull shelter out of the inflation indicators, we see that non-shelter inflation collapsed by 4Q 2006, with Core CPI less Shelter falling all the way to 0.7%.  Core CPI with Shelter included was still at 2.1%!  Seemingly above target.

Keep in mind that shelter inflation takes a 3 sigma turn upward between time 0a and 0b when we look at the next graph.  (It is normally a fairly stable measure, like Core CPI is.)  While shelter inflation is soaring, home prices are stagnating and new home supply is collapsing.  How can this be interpreted as anything other than a massive supply shock?  And this all happened before 3Q 2006!  But, because the narrative of predatory, reckless banks is more believable than the mathematical relationship between yields and prices, nobody can believe this was the case.

Note here that currency growth falls in 3Q 2006 also, and will remain around 2% until 2008.  So, keeping all of these things in mind, we can think about mortgage growth, shown in this graph.  At this point, mortgage growth isn't funding new homes anymore.  It's not funding home price appreciation any more.  At this point, mortgage debt has become a source of desperation liquidity.  Mortgage levels as a percentage of home values turned up sharply by around Q1-Q2 2006.  As I showed in Part 12, this liquidity coming through mortgages between 2004 and 2007 all came from households in the top 40% of incomes.  Households in the bottom 60% of the income distribution were not increasing their outstanding mortgages during this period.

It looks to me like the Fed created its own supply-side inflation shock, then mistook that for a positive demand shock, and subsequently worsened what was already a negative demand shock.  But, can we blame the Fed when the entire country is seemingly wrong about housing?

I am hoping that I can make some inferences about tax benefits of home ownership and the relative supply of housing in later posts.

Housing Tax Policy, A Series: Part 14 - The Subprime Crisis and Incomes

A couple more graphs regarding the shape of the mortgage market during the housing boom.

Here, I have estimated the income levels of the family holding the median dollar of mortgage debt, the median net new dollar of mortgage debt, and the median homeowner.

As with earlier summaries I have done of the Survey of Consumer Finances, these measures also show that new mortgages were not going to lower income households during the boom.  The income percentile of the average homeowner was roughly flat throughout the period, and mortgages went to families with slightly higher incomes in the 2000s compared to the late 1990s.

You can think of the median mortgage holder measures I am using here in this way.  Imagine that the banks line up all of the dollars they have lent out in mortgages, in order, by the incomes of the debtor families.  Then they start counting up, until they have counted half of the total.  These measures are the measures of the income level of the family that holds that mortgage.

Interestingly, while the median income of home owners didn't decrease between 1992 and 1998, during the time when the CRA might be credited with expanding home ownership, but before home prices began to rise, the median income of mortgage holders did decrease.  During this period, homeownership increased across incomes (slightly more among high incomes).  But low income households did tend to buy relatively more expensive homes.

The two years where the median holders of net new mortgages are out of whack here are 1995 and 2010.  That's because in 1995, high income families were reducing their mortgage debt while low incomes families were increasing it.

In 2013, families were reducing their mortgage debt, and this was especially pronounced in low income families (presumably because many lost their homes in the aftermath of the crisis).  So, the low median income of the net mortgage loser has caused the median income of the remaining mortgage holders to rise.

This is not a picture, during the boom, of low income families being herded into large mortgages.  This is the picture of a fairly normal real estate market.

The 1990s and 2000s follow reasonable patterns of real estate investment, across incomes, whether in terms of total cash payments as a proportion of income or as compared to alternative fixed income investments outside of real estate (see previous posts in this series).  The picture of haves and have-nots comes in 2013, where only high income families can enter the mortgage market, and those that can enter, earn extremely high returns, in terms of (rent value / home price).  These are classic excess returns due to exclusivity, which are increased even more, by the way, by friendly tax policies.  (Although, one should not forget that most of these homeowners were dealt a large unrealized capital loss after 2006.)

This problem was mostly created by disastrous Fed monetary policy and by pro-cyclical bank regulations.  It would be solved by less volatile monetary policy (NGDP level targeting is a good place to start), the elimination of pro-owner and pro-borrower tax policies (which, because of the substantial value of untaxed imputed rent, can probably only be fully eliminated by eliminating capital and corporate taxation), and less cyclical regulatory meddling.

Is there anyone pushing to solve this problem with more regulation who has even stated an understanding of the relationship between prices and rents, and how universal access, liquidity, and fairness would have to be associated with significantly higher home prices?  Price = Income / Yield.  We're not going to move these measures by changing rents.  Rents are pretty stable.  The only way to keep prices down is to keep yields up.  The only way to keep yields up is to make an exclusive, non-arbitrageable market.  That is our current policy.

If you're complaining the home prices are too high, you're not helping.
If you're complaining that we're not being punitive enough with the banks, you're not helping.
If you're complaining about speculators in the housing market, you're not helping.

Housing Tax Policy, A Series: Part 13 - The Crisis Timeline with Lending Standards

Here is one more graph.  This one includes lending standards.

As with the previous posts, here again we see credit and pricing pressures first, followed by rising delinquency.  (Here is a set of slides from the Richmond Fed, with delinquency broken out by mortgage type.  It looks like the same story to me.  Subprime delinquencies are higher in general than other mortgage types.  But, it looks to me like all mortgage types had delinquency rates that crossed above the previous average levels in about 2Q 2007.)

Loan to Value was rising during this period, but FICO scores remained stable, even on (pdf) subprime loans.  Low equity could plausibly lead to more systemic risk in a downturn.  On the other hand, by 3Q 2008, home prices had already declined by more than 20%, so even a 20% down payment would not have served as full insurance.  And, even by then, delinquency rates were less than halfway to their eventual peaks.

The same Federal Reserve paper that mentions the FICO scores also notes that investor buying didn't appear to accelerate as a proportion of subprime & Alt-A loans in the 2005-2006 period.  That is surprising to me after my findings from the Survey of Consumer Finance data.  But, we should keep in mind that these loans were increasing as a proportion of all mortgages, so investor mortgages as a proportion of all mortgages would have been rising strongly.  These loans are also more likely to engage in a tactical default if property values fall.

So, we have 3Q 2006, when the Fed finishes hiking the Fed Funds Rate, but pegs it at a level even higher than long term rates, which, according to a well-known Fed model, is a yield curve characteristic that tends to portend recessions.  In the same quarter, mortgage loan growth begins to sharply slow, and home price growth turns negative.

The next quarter, banks report tightening standards on mortgages.  (The graph is a little messy because the bank lender series were re-categorized in 2007.)

Then, in 2Q 2007, delinquencies rise above the average for the previous decade for the first time.  The rise in delinquencies is a mirror image of the decline in home prices.

I have included Banking standards on Consumer Loans in the graph, too.  This is one indicator that does tend to lag the problems in the home market.  I would have pointed it out as evidence in favor of my narrative if it had led or been concurrent with the housing indicators.  But, it didn't.  So, I can't.

But, generally, I consider this to be more evidence in defiance of the narrative that default rates on toxic mortgages to low income homeowners who couldn't make the payments were the causal factor here.

Wednesday, February 25, 2015

Mortgage market still lackluster

Well, I was hoping that the lighter touch from regulators announced late last year would lead to a V-shaped recovery in real estate credit.  There has been a slight shift.  Closed-end real estate loans held at the banks had been declining at a pace of about 4% annualized since the taper had wound down.  And, it looks like this has turned around to a growth rate of about 2% over the past few months.  That's a total change in trend of about 6%.  But, between QE2 and QE3, mortgages at the banks were growing by 6%, so I would have thought we could reach a growth rate higher than that.

If the turnaround in mortgage credit has a long, slow buildup, the natural recovery of market interest rates will be slow.  I think we really need to see mortgage levels growing by 10% or more for several years in order to get homes back to intrinsic values, and to serve as an outlet for all the excess savings that has been left without an investment outlet since 2007.

Home equity lines continue their slow descent, too, which also suggests that we haven't hit any sort of regime change in the credit markets yet.  From a speculative point of view, if this is how it's going to play out, I guess the best hope is for the Fed to call off the dogs and leave rates at 0.25% longer than expected, which would cause a pull back in intermediate rates.  Once the mortgage market gets its feet under it again, there should be a virtuous cycle of real production growth and credit growth that would cause an acceleration in the recovery, and in the recovery of forward interest rates.  Maybe, in 9 months or so, June 2017 Eurodollar contracts could be sold at 98.5, and bought back a year later at 97 or less.

As things are proceeding now, though, until then, I'm afraid the forward interest rate market is just muddy water.  If the Fed does go ahead with rate hikes before mortgages gain steam, I think they might be able to push up to 1% or 2% without doing much damage to the short term non-real estate economy.  I'm not sure there would be a clear position to take on the way up, and I don't know how confident I would be about the timing of the ride back down that would come if/when they tighten too much.

I would have hoped for a clearer picture to arise by now.

Tuesday, February 24, 2015

Housing Tax Policy, A Series: Part 12 - Low income mortgages couldn't have caused the recession.

I have been outlining data from the Survey of Consumer Finances to double check the story that the bank delinquency data seems to tell, that the widely believed story about the housing boom and the recession is based on evidence that is much more flimsy than we might have thought.  In the previous post, I introduced data from the SCF that showed how the growth in homeownership came from high income households and that households didn't increase their debt payment/income ratios or their relative consumption of housing during the boom.  The evidence against the standard narrative is even more stark when we look at dollar levels, because, despite frequent implications to the contrary, low income households don't tend to take on nearly as much debt as high income households.

(In fact, the normal relationship is overwhelming.  Higher debt is associated with higher incomes, whether comparing over time, comparing cross-sections of a population, or comparing across nations.  When we hear a story about desperate American households accumulating debt just to keep their heads above water, our BS sensors should go up.  We should be thinking, "That contradicts practically everything we know."  I think this is from a confusion between thinking of states of disequilibrium and states of equilibrium.  We think of our own lives, and the times that are memorable to us are times where something went wrong, and we took drastic measures that might be unsustainable without some good fortune.  So, we remember that time when we lost our job, and we ended up with $15,000 on our credit card, and wondered how we'd ever get our life back in order.  But, we don't think about the fact that, 10 years later, when we were pulling in $100,000 a year, we took out a $200,000 mortgage.  Even within an individual life with periods of upheaval, the correlation between debt and economic success is massive.  The story that says an entire economy has been in a constant state of disequilibrium for decades is highly suspect.  Especially when it coincides with a massive bidding war on the most fundamental middle class asset.)

To the charts!

The first chart shows the mean level of debt per household, by income level.  In 1989, the average household held about $32,000 in mortgages.  By 2007, this had risen to about $82,000.  But this debt is overwhelmingly held by high income households.

The second chart makes this even more clear.  This is a measure of the total level of mortgage debt in the US.  The top 20% have never held less than 50% of total mortgage debt.  The top 40% have held roughly 80% of mortgage debt throughout this period. From 1992 to 2013, the bottom 40% of households held 7-10% of mortgages outstanding.  In 2007, this amounted to $857 billion out of a mortgage market worth nearly $11 trillion.

Keep in mind, the homeownership rate has been over 64% since the 1960's.  The homeownership rate of the bottom 20% of households has floated around 40%, and the 20-40% quintile has a homeownership rate over 50%.  So, this bottom 40% represents more than a quarter of all homeowners, and has for decades.  They just don't have much mortgage debt.

There are widely read authors - many, in fact - who claim that (1) the gains in the economy have been going to the "top 1%", and who also claim that (2) the reason the economy failed is because low income households have been living on massive levels of debt, just to get by.  They claim that the economy finally toppled due to the unsustainability of that process.

How could they be so wrong?  Let's forgive for a moment that those frightening graphs of rising household debt are showing debt that is 80% held by the top 40% of households.  Maybe low income households don't have high debt levels in absolute value, but maybe they are high compared to their own incomes.

Yesterday's post included this graph of debt payment / income ratios.  For 24 years, debt payments look pretty manageable and stable.

Here is a graph of total debt / income.  Aggregation is always dangerous, and here, for instance, we know that the aggregation within income quintiles hides the difference in leverage between renting and owning households.  But, that being said, mostly what is striking to me here is how uniform debt/income ratios are throughout the income ranges.  Debt levels did rise somewhat over the first 12 years, then they did rise quite sharply in 2004, concurrent with the sharp rise in home prices.  Then, they remained high after the crash.  But, the pattern is very similar among the entire bottom 90% (except for the bottom 20% after the crash, which is probably an artifact of formerly high income families moving down the income scale).  Are we to believe that 80-90% percentile households, with incomes over $100,000, are exhibiting the same distressed debt accumulation as the bottom 20%?  And, if this debt is a product of distress, how in the world does that result in a tripling of home prices over the course of a decade?

As I have argued before, the anchoring of real estate value on the future value of expected rents means that when long term interest rates decline, nominal home values must rise.  There is no way that households could have held debt levels steady in this environment.  And, the stability of debt payments is a signal of this issue.  The increase in debt is all mortgage-based.  There is some rise in non-mortgage debt in the bottom 40%, but some of the same issues could be at play to a lesser extent regarding other debt secured by durables, such as auto loans.

But, let's not lose sight of the broader problem here, the notion that mortgages which were pushed on low income households created a systemic crisis.

This next graph shows the net additional mortgage debt held by households, disaggregated by household income quintile, with 1992 as a baseline.  For instance, in 1992, the average bottom quintile household held $4,500 in mortgage debt.  By 2007, they held $12,500 in mortgage debt, a net gain of $8,000 per household (in 2013 dollars).  In total, households in the lowest quintile held $185 billion in net extra mortgage debt by 2007.  The second quintile held $324 billion in extra mortgage debt.  These together represents 9% of the new mortgage debt.  77% of the new debt over that time went to the top 40% of households.

So, if every single net new mortgage debt issued to the bottom 40% of the income distribution had defaulted, the total value of the losses, before recovery, would have been $324 billion.  Keep in mind that homeownership rates did not rise among these income groups during the boom, and that this income group had stable home ownership rates for decades before this.

Homeownership rates did rise for the median income quintile, from about 62% to 72%.  If every single net new dollar loaned to them during this period defaulted, that would amount to $833 billion before recovery.

What if the entire bottom 60% of the income distribution had sub-prime level 10% default rates on these net new mortgages.  That's a loss of $116 billion before recovery.  In dollar terms, that's 1.1% of mortgages outstanding.

The bottom 60% of the income distribution represents about 1/2 of all homeowners.  At the highpoint, subprime mortgages were around 20% of originations, reaching more than $600 billion per year.  That is almost the entire level of mortgages outstanding for households in the bottom 40% of incomes.  If every single mortgage origination going to the bottom 60% of households, by income, was subprime, it would have been a small share of subprime loans.

Between 2001 and 2007, when subprime originations increased from $173 billion to over $600 billion each year, total mortgages to the entire bottom 60% only increased by $908 billion over the entire period.  Mortgages to the top 40% (all with incomes over $100,000 $85,000 per year in 2013 dollars), increased by $3,527.  Mortgages to the top 40% didn't just increase more in absolute terms; they increased at a faster rate than low income mortgages.

There simply isn't any way that more than a small handful of subprime loans were going to low income households.  And, here, again, it's useful to look at the timing of events.  Here is a graph from this St. Louis Fed summary of mortgage originations.

Think about the timing here.  Short term rates were rising by 2004.  The proportion of subprime and Alt-A loans was still very low in 2003.  There weren't that many subprime loans originated when rates were low.  Subprime and Alt-A originations were increasing at high interest rates.  More than $2 trillion worth of these loans were originated at higher rates.

As the St. Louis Fed points out, many of these loans were for investment homes.  Here is a graph of mortgages for non-Primary residential real estate.  These subprime loans were going to the top 10% of households.

Thousands of 2013 $, per household
Next is a graph of non-primary residential mortgages, by age.  (Some of the 75+ group movement could be affected by outliers with small sample sizes.) These loans were funding investments by high income baby boomer professionals who were lining up long-term low-risk income for their retirement.  Even in 2004, homes were a good alternative to bonds.  Even now, with all that has happened, those homes over a 20 or 30 year period will earn decent income for their owners who held on to them.

In the aggregate, this is not a story of poor workers duped into overpriced homes with toxic mortgages.  This is a story, mostly, of very wealthy, very high income individuals making reasonable investments, given their alternatives, and then, after the nominal values of those assets were impaired, making the decision to put them on the banks, which again, given their alternatives, was reasonable.  Along with that, a wave of unemployment caused by the dislocation drove more Americans out of their homes because of income shocks.


Here is an estimate of homeowner equity.  (I show the equivalent measure from the Fed's Flow of Funds report.  It has a similar pattern, but with lower equity.  The debt levels from both sources are similar, since they are easily documented.  The difference appears to come from what survey takers think their own homes are worth versus what a grumpy economist at the Fed thinks it's worth.  The truth is probably closer to the Flow of Funds number, but the patterns should be similar.)  Equity did fall (leverage rose) from 1989 to 1992, then generally leveled off until the crash destroyed home values.  But, note that low income households tend to have very low leverage, because they are mainly divided between renters with no mortgage debt and retirees with years of equity.  Typical leverage levels increase as income increases.  The mortgage interest deduction might have a lot to do with this.  Someday, I'd like to see if this differs from the pre-1986 period.

Here, we see the net new mortgage debt, averaged per household.  In 2007, the median household ($47,000 annual income) had seen their mortgage grow by $36,000 while their home's nominal value had grown by $74,000 over 15 years (in 2013 dollars).

In this last graph, I think we have a window into the distributional effects of housing tax benefits.  Over time, to the extent that I can estimate the portion of home price appreciation that can be explained with tax policies, the distribution of the change in real estate values provides a sort of present value of future tax savings.  And, the distribution of real estate capital gains suggests that these benefits skew extremely toward high income households.  They simply hold much more real estate and much more debt than other households do.  This value would represent taxes saved.  At the other end of the spectrum, taxes on real estate without those benefits are paid by tenants, embedded in higher rents, and paid to the government through their landlords.


How Can We Be So Wrong

If you have an epileptic fit, and there happens to be a witch in the room, it really, really seems like the witch is the culprit.  The American public was convinced that homes and mortgages were a problem before the crisis even began.  The same political zeitgeist that led to the Fed's disastrous policy already had its scapegoats built in.  The tight money policy itself was a product of distrust of the housing and mortgage industry.  Yes, there were shady characters out there.  There were financiers who were too aggressive.  There were bureaucrats pushing dangerous programs.  There were investors using specious logic.  There were traders who thought the traders on the other side of the deal were making a bad trade.  (Can you imagine?!)  But, there are always all of these characters, in every industry, every walk of life, in good times and in bad times.  The reason we have the narrative we have is because bankers are today's witches.  If a banker is in the room, you don't need to confirm the connection.  We all know bankers cause crises.  What is there to prove?  And, once you are there, it is really easy to blame a financial crisis, of all things, on them.  The dots practically connect themselves.  There are plenty of anecdotes and empirical data to build a satisfying, if careless, narrative.  And being careless is the easiest thing in the world to do.  (Added:  Even if the witch is in the corner, doing incantations about seizures, that is still not evidence that the witch caused the seizures.  But, if you believe that witchcraft is a powerful problem, you will have a very hard time accepting this caveat.  This error is central to the human condition and to the greater part of human existence.)

Monday, February 23, 2015

Housing Tax Policy, A Series: Part 11 - Low income mortgages did not cause the recession.

I have suggested that the timeline of the recession does not point to subprime lending as the cause and that the scale of subprime lending was not sufficient to create a crisis.  But, we don't have to guess about these things.  The Federal Reserve has a nice history in the Survey of Consumer Finances.

First, regarding the Community Reinvestment Act, I have attributed the sharp upward trend starting in 1994 to changes in the CRA.  But, I have noted that the growth in home prices didn't happen until several years later, after half of the increase in homeownership rates had already happened.  So, CRA might have led to more homeownership, especially among lower income households, but that it doesn't seem to have contributed much to rising home prices.


note: the y-axis is not anchored at zero, in order to magnify changes.
Here is a graph of homeownership rates.  (There is a jump in the lowest quintile from 1989 to 1992, but this appears anomalous to the present topic.)  The growth in homeownership happens entirely above the 40% income percentile.  This could mean that the CRA, despite the evidence of its importance among some mortgage originators, didn't really affect total mortgage originations, but simply shifted credit for them.  Or, it could mean that there were large numbers of households in the top-half of the income scale who weren't being served by the mortgage market, and the CRA actually helped high income families buy homes.
This seems plausible to me.  Retired households, households headed by adult students, and rural households in low cost-of-living areas should account for a large number of the bottom 40%.  It could be that urban families who were the marginal homeowners affected by the CRA had middle-to-upper-middle class incomes, and that the high cost of urban property was an impediment to ownership for them.  So, it could still be the case that the CRA was both (1) the cause of some of the rise in ownership and (2) not responsible for mortgage growth among low income households.

Whatever the case, the commonly repeated anecdotes of janitors and checkout clerks being
handed $300,000 mortgages on a hope and a prayer do not appear to be representative.  On net, all the new mortgages went to families with incomes around $45,000 and higher.  (Don't get me wrong.  For the vast majority of new home buyers, this was a very profitable decision.  If any low income households had bought homes too large for their budget in the 1990's, it would have paid off handsomely.  Home prices are more than double what they were then.)

Here is the same chart, showing the total growth of homeownership, subdivided into income quintiles.  From 1992 to 2004, homeownership grew from 64% to 69%.  About 1.4% was from the top quintile, 1.4% from the 4th quintile, and about 1.9% from the middle quintile, even though most high income households already were homeowners.  Additional homeowners would naturally tend to skew total ownership to lower incomes, but this was, surprisingly, not the case in the 1990's and 2000's.  Throughout that period, the average relative income level of homeowners was rising!

We see the same story in household debt.  Debt payments were rising in the 1990's.  But, in the 1990's, home prices were very low.  And, furthermore, debt was rising both among owners and renters.  In the late 1990's, debt payments rose among the 40%-80% income quintiles, which probably reflects the large increase in new homeowners among these households.  But, I'm pretty sure that upper-middle-class households slightly increasing leverage to buy homes in a buyers' market is not widely considered to be a systemic problem.  Also, note that the boom in home prices would first show up in the 2001 survey, and the 2007 survey should show the first signs of distress.  During this period, there was no rise in debt payment levels.  There is a distinct rise in debt payments in 2007 among 60%-90% income households.  Then there is a distinct rise in <20% households in 2010.  These are likely the result of households dealing with the aftermath of the crisis, first through upper-middle-class households drawing on home equity to make up for the currency shortfall (in 2007 - not in 2001 or 2004) and then, households who have been moved from high incomes to low incomes by the dislocations of the crisis in 2010.

Note that, even after the crisis reduced incomes across the board, families never had debt payment ratios as high as they had been in 1998 - neither owners nor renters.

The crisis did lead to dislocations among selected, unlucky, households.  Here is a measure of the number of households who had debt payments amounting to more than 40% of income.  Again, note that this level was rising in the 1990's - when homes were inexpensive.  But, it was level in the 2000's - until 2007.  And, notice that the rise is all coming from the top half of the income distribution.

So, we have seen an unsustainable debt-fueled economy.  It happened in 2007, among high income households, after the Fed sucked the currency out of the economy.

Then, in the last chart, we see a measure of delinquency.  Notice that delinquencies are flat for owners until 2010.  They rise slightly for renters until 2004.  Possibly that is due to the rise in interest rates.  But, it is interesting that it is among renters, not homeowners.

Then, in 2010 and 2013, delinquencies rise among all household groups, across income groups (not shown), among owners and renters.

So, again, we find a shocking disconnect between the common narrative and reality.  The narrative says that low income households were pressured into overpriced homes with oversized mortgages, until the inevitable end to the charade brought everything crashing down.  First, the low income, subprime homeowners crashed, and then this led to a wider recession.

But, just as with the bank delinquency numbers, the story these household numbers tell is quite the opposite.  As home values skyrocketed (I said, "home values") in the 2000's, households retained a very reasonable level of debt and debt payments.  In the 1990's and 2000's, high income households were enticed into the housing market by the new higher value of homes (which I will argue through this series of posts was mostly a product of low long term interest rates and tax policy.  In fact, the fact that high income households were the net homebuyers, is a predictable result of homeowner-friendly tax policies, since these are overwhelmingly utilized by high income households.)  Then, as the Fed began implementing monetary austerity, high income households initially were able to counter the liquidity shock through credit expansion.  But, when the Fed refused to relent, by late 2008, households did, and subsequently incomes fell across the board.


Finally, here are two graphs showing rent payments relative to incomes.  Here, I have taken real incomes from SCF Table 1 and compared them to total rent paid by owners (imputed) and tenants, from BEA table 7.4.5 (adjusted by the GDP deflator and the census count of households).  (Some care should be taken here, because of the mix of data.  For instance, my inflation adjustment for rent is not the same as the inflation adjustment used for incomes.)

First, simply looking at real incomes, from SCF Table 1, we see that median incomes rose slowly until the crisis, while mean incomes rose quite sharply.  This suggests that as we moved through the housing boom, the distribution of homeowners skewed more positively.  In other words, the net new owners were unusually high income households.  And we see the opposite movement among renters.  They began the period with a typical positive skew (a higher mean income than median), but as we moved through the boom, the median grew while the mean remained stable.  This is because it was the highest income renters who were moving into homeownership, so the positive skew of renter income declined over this period (until the crisis reversed the trend, making many high income households renters again, or maybe more precisely turning high income owners into new low income renters).

Now, let's move to the rent to income measure.  From 1995 to 2001 - even to 2007 - rent to income was declining among owners.  In other words, owners were not moving into houses too large for their budgets; they were actually pulling back on real housing consumption as the boom matured.  Much of this shift could be simply from the fact that the new owners tended to have higher incomes, and would naturally spend less of their income on rent.  So, we see the mirror image in tenant rent/income.  As the high income households moved from renters to owners, the remaining pool of renters tended to have higher rent/income ratios.

I also want to point to the change in rents since 2007.  It has been level among owners but very high among renters.  This is a complex issue, but I believe that as I work through the details in this series, I will show that both our owner-friendly tax policies, and the severe supply shock that has devastated the housing sector since 2007, create rent inflation that falls specifically on renters.  Owners took a big hit through capital gains losses after 2005.  But, the hit to real incomes has been much heavier on renters than on owners, mostly because tax policies and the supply shock create outsized inflation on tenant rental expenses.

The solutions to this problem are (1) to allow mortgage credit to flow and home prices to rise and (2) to eliminate taxes on capital.  Don't hold your breath.

But, how to square this with the rise in subprime lending?  I suspect that there isn't that much of a correlation between subprime and incomes.  My mortgage wasn't "subprime", but I was self-employed with variable income.  So, getting a conventional mortgage was especially hard, relative to what it should have been.  How much of the subprime market was going to these kinds of households?  Or high income households investing in second homes for rental income?  I think it is plausible that the subprime boom was mostly related to high income households with unusual income profiles.  They would have unusually high default risk, even though their incomes would be high.  And, the added value (after tax) of homeownership in a tax-friendly, low interest context, would lead those households, reasonably, to take on the risk of leveraged home ownership.

Next, I will look at debt levels from SCF.