Tuesday, August 30, 2016

Housing: Part 176 - Homeownership and Mortgages

During the housing boom, there was a shift from unencumbered to mortgaged ownership.  There was about a 4% decline in unencumbered ownership and about an 8% increase in mortgaged ownership, for a net gain of about 4-5% ownership between 1995-2004.  Then, the trend reversed.  (In the graphs here, the two graphs would add up to total ownership for each group.) Mortgaged ownership grew the most in the 40-90% income range, but this basic pattern was fairly similar across incomes.  That is because income isn't (wasn't) a very useful way to disaggregate homeownership.  Ownership is mostly a lifecycle issue.  Most of the ownership in the lower income quintiles is unencumbered ownership - probably mostly retired or semi-retired households who bought and paid for their homes when they were younger and had higher incomes.  Even most of the low income owners with mortgages are likely older owners with very high equity levels.  That is why the recent drop in ownership is focused strongly on the median income quintile.  I will be interested to see how far that has fallen when the 2016 SCF data is published.

One theme I am building in the book is that the "subprime bubble" was not associated with housing expansion.  Ownership peaked in early 2004, which is when private securitizations were just beginning to rise.  The SCF data is noisy, but it does confirm this point.  Notice that the middle and lower quintile mortgaged ownership levels peaked in 2004.  All of the rise in mortgaged homeownership from 2004 to 2007 was among the top 40% of incomes.  That period basically encompasses the full period of the private securitization boom.

Looking at the age groups, we see two distinct groups.  Below age 55 there isn't much unencumbered ownership, so what we mostly see is just a rise in mortgaged ownership reflecting the rise in homeownership.  Among the older age groups, home ownership rose slightly, but there was a much larger shift into retaining mortgages within the existing pool of owners.  The over-65 groups are the only groups that have higher mortgaged ownership rates than they did in 2004.

Putting all of this together, tracking shifts in homeownership, we need to focus on specific groups at the margin.  There are many older households of all income levels whose ownership is relatively unaffected by housing and mortgage market changes.  And there are some high income younger households whose ownership is relatively unaffected by housing and mortgage market changes.

The errant post-boom crackdown on mortgage lending is specifically targeted at the marginal market of middle class, middle aged and younger households who would be taking their first step into ownership, usually with significant leverage.  Where this will show up is mostly in the mortgaged owners in the median income quintile, and a little bit in the 20-40% income quintile. And in the 44 and under categories.  I suspect that these categories will continue to collapse.  These charts end in 2013, and ownership has dropped considerably since then.

And, now, because the authorities have decided it should, homeownership does track more with incomes.  Mortgaged ownership by income is bifurcating between the top 40% and the bottom 60%.  Around 65%-70% of households in the top 40% of incomes have a mortgage.  For the median quintile, that is surely now well down into the 30s%.  This is generally back to the levels of 1995.  But, the ownership within that group would be skewed now to higher ages.  Since 1995, homeownership should have risen by about 3% simply due to aging baby boomers hitting the age where 80% of households tend to be owners.


  1. Amazing post.
    We are removing homeownership from the middle class.

  2. Kevin: I thought you get a grim chuckle from this, and from William Dudley NY Fed, no less:

    From WSJ Jan 5, 2015:

    "Yields on 10-year Treasury notes have fallen for eight consecutive trading sessions, by a total of 0.31 percentage points to 1.95% Wednesday. The 10-year yield is now around levels that prevailed before the famed “taper tantrum” of the summer of 2013, when it was considering ending its bond-buying program known as quantitative easing.

    If falling yields are a reflection of diminishing inflation prospects, as is typically the case, it ought to prompt the Fed to hold off on raising short-term interest rates in the months ahead. If, on the other hand, lower long-term rates are a reflection of investors pouring money into U.S. dollar assets, flows that could spark a U.S. asset price boom, it might prompt the Fed to push rates higher sooner or more aggressively than planned.

    The latter interpretation is less conventional, but it is one that New York Fed President William Dudley made at length in a speech in December. He argued the Fed had the wrong reaction to lower long rates in the 2000s, a mistake that might have contributed to the housing boom that ended disastrously.

    Here is a key passage:

    Dudley: During the 2004-07 period, the (Fed) tightened monetary policy nearly continuously, raising the federal funds rate from 1 percent to 5.25 percent in 17 steps. However, during this period, 10-year Treasury note yields did not rise much, credit spreads generally narrowed and U.S. equity price indices moved higher. Moreover, the availability of mortgage credit eased, rather than tightened. As a result, financial market conditions did not tighten. As a result, financial conditions remained quite loose, despite the large increase in the federal funds rate. With the benefit of hindsight, it seems that either monetary policy should have been tightened more aggressively or macroprudential measures should have been implemented in order to tighten credit conditions in the overheated housing sector."


    So, there you have it. The Fed erred in 2004-8, by not raising rates more aggressively, and also by not crimping off credit to the housing market.

    If the Fed have moved higher on rates faster, and limited lending to housing, that would prevented the housing bust.


    In one regard, i envy central bankers and tight-money crowd. No matter the economic problem, no matter what inflation or interest rates are, or the economic growth rate, there is always the solution: Tighter Money!

  3. So, I think there is loose money in the financial system and tight money on main street. So, they want to keep that tight. But they don't want to hurt the bond market. Sumner won't talk about bonds, but they do matter. This is what Jeremy Stein, a contrarian fed guy said about the Fed: “Society would be better off appointing a central banker who cares less about the bond market,” write Mr. Stein and co-author Adi Sunderam.

    The Fed cares only about the demand for bonds, and to give main street a bone and to stop business cycles.