What do you think a graph of down payments in the 2000s would look like? It would be plummeting, right? That's how the banks pulled marginal households into the market, right?
Here's a graph from the FHFA of down payments on conventional mortgages on all homes, nationwide. (This is 100 minus the Loan to Price value in the source data.) From 2000 to 2005, down payments became substantially larger.
And, notice when they suddenly dropped to much lower levels: 2006 and 2007 - after house prices had leveled off and began to fall. The period where I have been arguing that the Fed was already creating a liquidity shortage. Then down payment levels recovered in 2008. Of course, by 2007, and especially by 2008, mortgage originations were very low. In fact, conventional loan originations had begun to fall by 2004 and 2005.
But, this is just conventional mortgages, right? Wasn't the real damage in subprime? Here is a table from the Demyanyk and Van Hemert paper that I referenced the other day. This lists several characteristics of subprime loans. This comes from loan level data from CoreLogic. Combined Loan to Value ratios on these loans rose from 79.4% in 2001 to 85.9% in 2006. This includes all loans, not just the first lien mortgage. Here we see a mirror image of the downpayments in the conventional loans, with a reduction in down payments as a percentage of the home price of 6.5%. That is something.
But, take a look at the average loan size. It grew from $126,000 in 2001 to $212,000 in 2006. That means that in dollar terms, in 2001 the average down payment was $32,690 and in 2006 it was $34,799. In dollar terms, down payments rose slightly, even among subprime loans.
Further, let's think of a hypothetical household moving from renting to owning. Using data from the Flow of Funds report and the BEA, for total owner-occupied real estate value and total imputed rent, the national average price to (annual) rent ratio was 15.6 in 2001 and 20.0 in 2006. (This is more conservative than the rise implied by the Case-Shiller indexes.) So, an average family in a home with $848/month rent could have purchased that home in 2001 for $158,690 - the average price for homes purchased with subprime loans that year. But, by 2006, rent on that home would have risen to $979/month and it would have cost $234,902. Even if they used a subprime mortgage, the average down payment for the average family went from $32,690 to $33,121.
Certainly averages hide some details about the distribution of mortgages. But, it seems unlikely that broad based changes in down payments could have been a causal factor in creating unsustainably high home prices.
This also confirms another pattern I have been seeing, which is that rent inflation has been high. That same hypothetical house was fetching more of the median family's income in 2006 than it had in 2001, even though real median household income had risen slightly. Households were not purchasing larger homes (or, more accurately, homes which would fetch higher rents). The average home purchased with a subprime loan in 2006 had rent that was a slightly larger portion of median family income, but over that time, subprime loans had grown from 7.6% to 23.5% of total mortgage originations. Using Debt-to-Income, Mortgage Rates, and Average Loan Size from the Demyanyk and Van Hemert table, I estimate that the average income of subprime loan borrowers increased by about 35% from 2001 to 2006. The average subprime loan borrower in 2006 was moving into a home with a lower rent/income value than the average subprime loan borrower had in 2001.
Demyanyk and Van Hemert also show that during the 2000s the premium borrowers had to pay via higher interest rates for having a low down payment was increasing as the boom progressed.
There certainly are some mysteries to be uncovered regarding the explosion of subprime lending in the 2000s, but the evidence suggests that, even among subprime borrowers, the trend from 2001 to 2006 was of higher income households making relatively larger down payments on homes with lower imputed rents relative to their incomes. And that understates the downsizing they were engaging in, because rent inflation meant the same rent was getting less home. Higher prices were not coming from lower income households making smaller down payments on larger homes.