Wednesday, February 1, 2017

Housing: Part 205 - First-time home buyers and Last-time home sellers

'Member that time when predatory lenders were beating the bushes for new home buyers to feed their greedy mortgage origination machines? 'Member? 'Member when they ran out of qualified home buyers so they started convincing a bunch of households who had no business getting mortgages to take on debt and buy a home?  Then they sold those mortgages off to unsuspecting investors, who were left holding the bag when those unqualified new homeowners defaulted.  'Member?

There is a very specific time period where this was happening.  From about 2004 to 2007, the number of privately securitized loans that were part of this scam was much higher than in any other period.

Just think how many new, unsuspecting homeowners must have been drawn into the housing market by this massive amount of activity.  Nearly $2 trillion in predatory loans to unsuspecting, unqualified borrowers.  That would have to translate into more than 10 million borrowers.

In any given normal year, there might be a million and a half first-time home buyers.  Just think how much first time home buyer levels must have jumped, even if a small portion of those $2 trillion in new loans had gone to those unqualified borrowers.

Finally, I have some data from the American Housing Survey to document this terrible predation.  This massive expansion of marginal homeownership to households who had no business being owners.  2017
This first graph is an annual estimate of first time homebuyers.  The second graph is a bi-annual estimate of the number of existing homeowners who sold and didn't repurchase homes - in other words, households that exited the housing market.

If you are trying to figure out how you are reading these graphs wrong, you can stop.  You're reading them correctly.  There wasn't a surge of first time homebuyers.  There was a drop in first time buyers during the private securitization boom, and at the same time, there was a surge of households out of the housing market.  2017
There are two lessons to take away from this, both of which are difficult, especially the second one.

First, to a first approximation, everything we thought we knew about the housing boom is wrong.  Take your brain, shake it up like an etch-a-sketch, and start over.  Until you can do that, you will be pointlessly defending false pretenses.

Second, remember how we had to have the housing bust and the recession, because the previous period of overconsumption and over-borrowing, built on the backs of the lower middle class, required it?  Remember how deregulated markets allowed lenders to put debt on millions of households, and healing meant letting those lenders go bankrupt and those borrowers default?  Remember how we had to sharply curtail lending to households who had been borrowing from banks and GSEs for decades because national financial penance and prudence demanded it?  Remember how the Federal Reserve couldn't provide cash for an ailing economy, because it would just allow these housing speculators to skate by without the discipline of the market?  Learning the first lesson means recognizing this second lesson.  Learning this second lesson probably means feeling guilty or defensive, or incredulous.

Take that etch-a-sketch and shake away those feelings, too.  The health of the American working class requires us to.  To the extent that many households on those margins are still hanging on to their homes, their home values have probably, generally, been dealt a 20% negative shock or more because we have devastated the owner-occupier market for those homes that had been in place and stable for decades.  If a home normally is worth about 3x an owner's annual earnings, then we have wiped away the savings of millions of American households to the tune of 6 months earnings or more.

A lot of damage has been done.  The good news is, some of this can be undone.  The millions of first-time homebuyers missing over the past decade can still buy homes, if we let them borrow like millions of Americans safely had for decades.  By the way, that will require millions of new workers in the construction sector.  Many of those workers might be Mexican immigrants.  The animus those immigrants will experience in an economy where they are building homes for working class families will be much less than the animus they experience now in an economy with few homes for them to build.  It will also help regain working class savings in home equity and it will lower the cost of living for so many families renting in markets that are lacking in supply.

The bad news is that we did this.  The good news is that this means we can change it.  And, we are all in this together.  Across the political spectrum, the errors that have been committed change.  Some blame deregulation and bankers.  Others blame the GSEs and the CRA.  Others blame the Federal Reserve.  But, everyone has been blaming their selected foils for something that did not happen.  We all did this in our own ways.  Now, we can all shake our internal etch-a-sketches, and work together on the one thing that needs to be done, which is to simply give up our false presumptions and stop fighting political battles over phantoms.


  1. What's your data-consistent narrative about the actual causes of the collapse? Second-time homebuyers?

    1. The exodus of capital from the housing market led to a sharp decline in housing starts from early 2006 onward. By late 2007, that adjustment had gone about as far as it could, future price declines were expected to lead to defaults to the extent that AAA CDO securities were just beginning to trade below face value. By then, the housing market had absorbed a tremendous amount of contraction. Prices hadn't fallen yet because prices had never been out of line, in the aggregate. In the face of that, before the August 2007 FOMC meeting, the Wall Street Journal editorialized:
      "Credit panics are never pretty, but their virtue is that they restore some fear and humility to the marketplace."

      At the September 2007 FOMC meeting, according to Bernanke:
      As in August, we again discussed the issue of moral hazard – the notion, in this context, that we should refrain from helping the economy with lower interest rates because that would simultaneously let investors who had misjudged risk off the hook. Richard Fisher warned that too large a rate cut would be giving in to a “siren call” to “indulge rather than discipline risky financial behavior.”

      This sort of talk continued through September 2008, and continues to this day. The cause of the collapse was that there was widespread confidence in a version of events that simply was factually in error. We had the collapse because we demanded it.

    2. Do you attribute the exodus of capital out of housing to fed policy at the time?

      It's an interesting topic, as I just finished reading an old article by John Tamny blaming the crisis on the diverting of savings away from 'productive' investment into the 'nonproductive' housing sector.

    3. I would agree with that assessment. I just would blame it on Closed Access cities creating value from exclusion instead of blaming it on credit and money.

      In a way, the causation goes both ways. I think there was a lot of profit-taking from working class families in Closed Access cities who weren't capturing economic rents from labor because they weren't in the high skilled labor sectors, and it became increasingly inappropriate for them to remain in those cities, even if they had little or no mortgage. Why stay in a city where you make $40,000 a year and own a million dollar home, when you could go to Dallas and make $40,000 a year and pocket $700,000 in capital gains. So, I think there was a lot of profit-taking from existing owners selling in Closed Access cities. I'm hoping to get more detailed data on that, but the basic migration data shows a lot of Closed Access out-migration at the peak of low income/low education/homeowner residents. So, I think there was (ironically, given rhetoric about the housing boom) a huge transfer from aspirational high income buyers to legacy Closed Access residents who migrated away. This transfer related to an increase in leverage in 2005-2006 because new owners were replacing old owners who were taking out equity by selling and migrating to less expensive areas. The Fed assumed that rising mortgages outstanding were being used to fund consumption, but actually, the new mortgages were a burden on the new owners who had to allocate such a large part of their incomes to mortgage payments, and the cash was going to the old owners who were sticking it in money market funds and CDs (and CDOs). So, they pulled back on the money supply to counter what they assumed was credit-fueled demand, but actually, the rising mortgage leverage was a deceptive signal of a flight to liquidity.

      That's why the first signal in the aggregate data here isn't a decline in first time buyers. It's an increase in exits. It was "frivolous" lending that was keeping first time buyers high, because in the Closed Access cities it was funding buyers with 6-figure incomes who, nonetheless, had to spend 40% of their incomes on mortgage payments.

      But, without getting into those complications, I think this should sow doubt in the mind of anyone who thinks the private securitization boom had anything to do with extending the margins of homeownership. $2 trillion in just 3 years was lent through those channels, and it doesn't show up anywhere. No decline in the typical income of homeowners. A decline in homeownership. A decline in first time buyers. Before I should even have to bother with my counterfactual, there's a lot of 'splainin' to do to defend the consensus view.

    4. Thanks for the reply.

      So would a good summary be that the fed thought the overavailability of credit was leading to bad investments in housing, and its evidence was the skyrocketing total amount of credit going to mortgages, and it sought to stifle the flow of credit to solve the problem.

      But what was really going on was a skyrocketing allocation of credit to mortgages needed to sustain the same - or decreasing - level of housing consumption due to rising prices from supply restriction, which would in fact warrant an expansionary monetary policy, not a contractionary one?

      So when is that book coming out?

    5. Yes. Exactly. To take it a step further, the collapse in cash flows for MBS that failed was mostly from the federal clampdown on low end mortgages that happened after late-2008, through regulatory pressures and the federally controlled GSEs. Even after the contractionary monetary policies of 2007 & 2008, it was the disastrous federal control of mortgage markets in 2009 and 2010 that created the most damage. In a sort of time-travel paradox, the losses at the GSEs and in the private MBSs which were booked in 2007 and 2008 were created by discretionary regulatory decisions in 2009 and 2010. The real dislocation was in low-end home values in 2009-2010, which dropped disastrously in every city because we killed demand in those neighborhoods through regulatory control. In most places, there had never been any particular rise in prices in those neighborhoods.

      Editing, etc. now. Still hoping for late summer publication.

  2. Another great post.

    We can build more housing to meet demand, or we can build less housing and let prices ration supply.

  3. If there were a boom based on frivolous lending, wouldn't we still expect first time buyers (presumably poorer than the other buyers) to start dropping out of the market prior to the peak and the bust? Even if it is first time borrowers getting loans they shouldn't get that drives up price, once prices do skyrocket, maybe more and more wealthier (previous or current home owners) start buying in to take advantage of the (at the time, presumed) eternally increasing housing prices. In that scenario, the previous/current owners replace some of the first timers exiting the market, delaying the peak and the bust until some time after the peak in first time owners. Granted, the delay probably wouldn't be as long as your graph suggests...

    Alternatively, one could argue that just because first time borrowers are declining doesn't mean there aren't too many of them. As current/previous owners buy in en masse, and prices skyrocket, it is 'appropriate' that this crowd out the first time buyers. Maybe it was only through 'frivolous lending' that the number of first time buyers didn't decline much more? I imagine you may have data on foreclosures of first time vs. current/previous owners to suggest otherwise of course.

    Basically I'm playing devil's advocate and trying to come up with every alternative explanation, haha.