Monday, May 8, 2017

Housing: Part 227 - The Housing Boom was progressive wealth redistribution

One of the notions about the housing bubble that is horribly backwards is that it was characterized by lenders trolling for low income borrowers to put them in overpriced homes.  The "they did this to us" narrative implies that, somehow, a rapacious financial sector was able to push home prices up in some cities to maybe double or more than their reasonable values by pressing all this new credit onto the marginal market.

I have many posts about this.  About how, in the aggregate, this wasn't happening at all.  Here is some data from the American Housing Survey that addresses the point.

First, here is the average price paid for homes by owners in each income quintile.  (These are based on national income quintiles.)  There is a general pattern across cities here.  (Open Access here refers to the entire country outside the Closed Access and Contagion cities.)  Home prices for top quintile owners tend to be a little more than twice the level of home prices in the second quintile, in all cities.  But, this isn't a measure of home values.  This is a measure of the price paid.

The thing is, Closed Access cities have dysfunctional housing markets, so families that manage to get into a home tend to stay in that home.  In California this is also encouraged by property tax rates that reset when a property is sold.  So, average length of tenure in Closed Access cities is much higher than in other cities.  And, length of tenure is higher for owners with lower incomes than it is for owners with higher incomes.  This is because (again, despite what you read in the papers) it is when households have higher incomes that they tend to make opportunistic home purchases.

This means that when prices are rising, most households with lower incomes are living in homes that are worth a lot more than what they paid for them.  Here is a graph of home values (in other words, today's market price), by income.  Now, the picture changes a bit.  In Contagion and Open cities, the pattern is similar than it is for prices paid, but a little flatter.  But, for Closed Access houses, the pattern is much flatter.  The value of the average home owned by a household in the 2nd quintile is not much different than the value of the average home owned by a household in the 4th quintile.  The main difference is that the household in the 2nd quintile is sitting on a pile of capital gains.

One thing we might expect to see in this context is the use of home equity credit by those households with lower incomes, to spend some of those gains without having to sell their homes.  All else equal, this is bound to happen, because they are the households with more capital gains to draw on.  Researchers who have noticed that outcome sometimes refer to those households as having "limited self control".  I'm sure many of them do.  I certainly do.  You probably do, too.

It should also not come as a surprise that when home prices started dropping like a stone, owners who had taken out equity loans tended to default more often than similar households who had not.  How could there have been any other outcome, really?  But, this mathematical inevitability just added to our resolve that in the midst of a systemic breakdown, lending standards needed to be tightened and liquidity constrained mortgage markets should be left to die.  Otherwise, we would be letting the ones that did this to us off the hook.

Here's one more graph.  This shows the ratio between price and value for 2007 and 2013.  At the height of the boom, owners with low incomes were sitting on a lot of capital gains - much more than owners with high incomes.  This is because high income owners were the buyers.  They were more likely to have bought their homes recently.  (Also, most homes owned by households in the bottom two quintiles are owned free and clear.)

This idea that rising mortgage debt was the product of households with stagnant incomes desperately mortgaging their futures to fund current consumption is just plain wrong.  The idea that the housing bubble happened on the backs of low income borrowers is just plain wrong.  (The bust did happen on the backs of low income borrowers.  But that's on us.  That has been a public policy choice made through the state-controlled GSEs and Dodd-Frank.)

1 comment:

  1. But I find so much comfort in convenient and orthodox politico-economic commentary...

    ReplyDelete