Monday, February 1, 2016

Housing Part 111 - More data on mortgages to low income households

Previously, I have looked at homeownership rates through the Survey of Consumer Finances.  And, there I find no evidence of a rise in homeownership among low income households.  This is incredible, given the vats of ink that have been spilled discussing that very topic.  It happens that the Census Bureau has some detailed data on homeownership, going back to 1994, which covers just enough time for us to analyze the boom.  This data also shows absolutely no rise in the relative share of low income homeownership.

Here is the graph of Census data.  Homeownership rates rose for both households above and below the median income.  The black line is the proportion of owner-occupied homes owned by the top half of the income distribution.  This line is straight as an arrow, just above 60%.  As I pointed out in the earlier post on the subject, in a period with rising homeownership rates, we should expect to see this decline.  For instance, if the homeownership rate was 100%, then 50% of homes would be owned by the top half of the income distribution.  So, in order for this measure to remain flat, new homeowners among the pool of potential buyers had to be slightly biased to higher incomes.

The Census Bureau also tracks ownership rates by age group.  Somewhere back in a previous post, I have taken a stab at demographically adjusted homeownership rates before.  But, this data is more complete than what I used before.

Here are several graphs to help think through the effects.

First is simply a graph of homeownership rates, by age.  Then, below that, I have included a graph of these age-specific homeownership rates, relative to the levels as of 1Q 2004, when homeownership had generally peaked.

Notice that homeownership among older households was fairly flat.  Households over 65 years old generally have very high equity positions in their homes.  (They also tend to have lower incomes than they did when they were younger and working.  This tends to create confusion regarding statistics in the lower income quintile.)  Their large equity positions tended to protect them from the collapse.

As we move down the age scale, homeownership tends to have risen more steeply and then fallen more steeply.  I think this may not be very widely appreciated.  But, when we look at homeownership by age, homeownership rates for all age groups under 65 are well below the rates that applied back in 1994.

But, the aggregate homeownership rate is at about the same level as in 1994.  How can this be?  As with so many things, homeownership rates are being skewed upward as baby boomers move into age ranges that tend to have high ownership.  So, homeownership rates have collapsed much more sharply than it first appears.

The next graph shows the actual homeownership rate, and an estimate of what the homeownership rate would be if age demographics were still what they were in 1994.  I had thought that the peak homeownership rates might have overstated the rise in homeownership because of these demographic issues.  And, it did, somewhat.  But, much more than that, the demographic effects have masked the devastating fall that has come with the collapse.

If we adjust for demographics, the current homeownership rate has fallen to below any level we have seen since the Census Bureau began tracking it on an annual basis, back in the mid 1960s.  And, to think that many observers are warning about a new phase in irresponsible lending.

I would also like to point out how this relates to a topic I have been reviewing in a couple of recent posts.  Low real interest rates appear to have a much stronger affect on homeownership than credit terms.  Price/Rent ratios were high in the 1970s, even when mortgage payments were extremely high.  This should be somewhat shocking.  Even in that environment, where, surely, outrageously high mortgage payments would have served as a high obstacle to both ownership and to buyer willingness to pay, home prices appear to have approximated the higher intrinsic value created by low long term real interest rates.  But, it is even more shocking than that.  Not only were prices efficient, but, homeownership rates were high then.  And, adjusted for demographics, they were nearly as high as they were at the top of the boom in 2004.

Given low long term real interest rates, it appears that the facts that nominal rates were under 6% instead of being over 12%, and many new financial instruments were being used to help households take on mortgage debt, had very little effect on homeownership.

Taking all of this in, a broad theme starts to coalesce, I think.  There is a significant age story here.  There are many attempted explanations about why young families are less likely to buy homes than they used to.  But, since the story of what happened is so misunderstood, nobody is fingering the cause.  The unnecessary housing bust decimated the balance sheets of young households.  Look back at those age-group graphs.  The boom was mostly about increasing homeownership for households under 45 years of age.

The marginal new mortgage originations weren't facilitating new homeownership of poor households.  They were facilitating ownership for high income young households.

One of the themes that runs through Mian and Sufi's book, "House of Debt", is that the boom and bust especially hurt low-wealth households, who tend to hold a lot of debt, while it may have actually benefited high-wealth households, who have claims on that debt because they are savers.  This is all true enough, as far as it goes.  And, it must seem to fit into the standard narrative of the unsustainable bubble, built on the backs of low income households.

But, we have to be careful about who we imagine these households to be.  We tend to think of a category of households that are "poor" - both low wealth and low income.  But, this creates confusion.  In truth,  families we tend to think of as poor tend to have very little debt.  Low income households who own homes tend to have high equity levels, because the lowest income households don't tend to take out mortgages, regardless of the frightening anecdotes that have been traded around since the boom.  Debt is held, mostly, by high net worth, high income, and young households.  And, when it comes to debt and net worth, age is the most important factor.

So, really, what Mian and Sufi are describing is a loss of wealth for young households and an advantage to old households.  The households that really took a hit were young households who had tried to become new homeowners, who, it appears, tended to have high incomes.  In fact, since incomes also tend to rise with age, the relative tendency of new homeowners during the boom to have higher incomes is especially strong given that they also tended to skew younger.  But, since they were young, they had high debt levels and low net worth.  The younger the age group, the worse the collapse in homeownership rates has been.  This is because young families tend to be new homeowners with little equity.

While households over 65 have generally recovered - especially those with high net worths - as of 2011, the median household in the 45-54 age range had net worth 35% below the 2005 level, and the median household in the 35-44 age range had net worth less than half the 2005 level.


In the reading I have done so far, I have not yet seen a single reference to this piece of evidence.  It's sort of fascinating for me, because I now have some support for publishing my findings in book form, and the task is daunting, because I have to go, piece by piece, through all the evidence that I can find and explain why my thesis stands.  If something like this census data was out there that contradicted my story, and I didn't have a good explanation for it, it would be a significant black mark against my argument.  Something this broad and clear would probably lead many readers to write off the story and go no further.  But, among all the writers who have filled library shelves with stories of a credit bubble, I haven't seen a single one, yet, that even noticed this data.  This isn't a state secret.  Numerous people are involved in creating this data and making it available.  I assume some number of people look at it on a regular basis.  I think it has just been edited out of notice.  I mean, if everyone believes a story very strongly, and they are all sharing what seems to be insurmountable evidence for it, if you see something that blatantly doesn't fit, it seems reasonable to simply ignore it.  Something must be wrong with it.  We all do this everyday.  Making these decisions is a necessary part of understanding our world.

So, on the one hand, the task before me is daunting, because I don't have that benefit.  I can't just ignore the data that doesn't fit my story.  On the other hand, while normally there aren't any $100 bills on the ground, because "someone would have picked them up already", on this topic, I am swimming in them.  Telling the story is as easy as reproducing basic charts from the Census Bureau.  The hardest part will be before readers even open the book.  The most important part of the publishing process, I think, will be getting a broad range of authorities to say, clearly, "This is a book you need to read to the end.  I was surprised by it, and it changed me."  Otherwise, at the slightest hint of a weak argument, readers will be tempted to put it down as a lark before they see all the intertwining facets.


  1. Terrific post. Wow!
    I grew up in the Los Angeles of the 1950s through 1970s. I know how middle-class families lived. They do not live any better today.
    I think Kevin Herman is nearly alone in beginning to put his finger on it. Add in higher Social Security, taxes much higher sales taxes and a picture begins to emerge.

  2. 1994 marks when the U.S. Census Bureau began digitizing its collected data - for data before that time, you might need to slog through scanned documents to extract the relevant data. The Census recently got around to grouping many of those older documents in one place:

    If the data you're seeking isn't there as yet, try the following link, which was the previous collector site for pre-digital data:

    Hope this helps!