Thursday, February 26, 2015

Housing Tax Policy, A Series: Part 14 - The Subprime Crisis and Incomes

A couple more graphs regarding the shape of the mortgage market during the housing boom.

Here, I have estimated the income levels of the family holding the median dollar of mortgage debt, the median net new dollar of mortgage debt, and the median homeowner.

As with earlier summaries I have done of the Survey of Consumer Finances, these measures also show that new mortgages were not going to lower income households during the boom.  The income percentile of the average homeowner was roughly flat throughout the period, and mortgages went to families with slightly higher incomes in the 2000s compared to the late 1990s.

You can think of the median mortgage holder measures I am using here in this way.  Imagine that the banks line up all of the dollars they have lent out in mortgages, in order, by the incomes of the debtor families.  Then they start counting up, until they have counted half of the total.  These measures are the measures of the income level of the family that holds that mortgage.

Interestingly, while the median income of home owners didn't decrease between 1992 and 1998, during the time when the CRA might be credited with expanding home ownership, but before home prices began to rise, the median income of mortgage holders did decrease.  During this period, homeownership increased across incomes (slightly more among high incomes).  But low income households did tend to buy relatively more expensive homes.

The two years where the median holders of net new mortgages are out of whack here are 1995 and 2010.  That's because in 1995, high income families were reducing their mortgage debt while low incomes families were increasing it.

In 2013, families were reducing their mortgage debt, and this was especially pronounced in low income families (presumably because many lost their homes in the aftermath of the crisis).  So, the low median income of the net mortgage loser has caused the median income of the remaining mortgage holders to rise.

This is not a picture, during the boom, of low income families being herded into large mortgages.  This is the picture of a fairly normal real estate market.

The 1990s and 2000s follow reasonable patterns of real estate investment, across incomes, whether in terms of total cash payments as a proportion of income or as compared to alternative fixed income investments outside of real estate (see previous posts in this series).  The picture of haves and have-nots comes in 2013, where only high income families can enter the mortgage market, and those that can enter, earn extremely high returns, in terms of (rent value / home price).  These are classic excess returns due to exclusivity, which are increased even more, by the way, by friendly tax policies.  (Although, one should not forget that most of these homeowners were dealt a large unrealized capital loss after 2006.)

This problem was mostly created by disastrous Fed monetary policy and by pro-cyclical bank regulations.  It would be solved by less volatile monetary policy (NGDP level targeting is a good place to start), the elimination of pro-owner and pro-borrower tax policies (which, because of the substantial value of untaxed imputed rent, can probably only be fully eliminated by eliminating capital and corporate taxation), and less cyclical regulatory meddling.

Is there anyone pushing to solve this problem with more regulation who has even stated an understanding of the relationship between prices and rents, and how universal access, liquidity, and fairness would have to be associated with significantly higher home prices?  Price = Income / Yield.  We're not going to move these measures by changing rents.  Rents are pretty stable.  The only way to keep prices down is to keep yields up.  The only way to keep yields up is to make an exclusive, non-arbitrageable market.  That is our current policy.

If you're complaining the home prices are too high, you're not helping.
If you're complaining that we're not being punitive enough with the banks, you're not helping.
If you're complaining about speculators in the housing market, you're not helping.

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