Monday, December 12, 2016

Housing: Part 193 - The 5 million missing homeowners.

RealtorMag notes that about 6 million mortgages have been denied since 2009 because of overly tight standards (HT: John Wake).  That comports pretty well with my estimate of 4 to 6 million missing homes, either measured by the rate of housing starts compared to historical averages or by housing units per adult.

And, the fact that this shortage has been created by removing credit access for middle and lower middle class households means this shortage is all felt at the bottom half of the income distribution.  The rise in homeownership was not really related to credit access to households with marginal incomes.  That never really happened.  But the drop in homeownership is related to a lack of credit access.

New ownership was concentrated among high earners, but lost ownership is concentrated among low earners, such that the net result is homeownership is more limited to higher income households than it has been for decades.  Both the boom and the bust contributed to this.

How did we get this so wrong?  Here is an American Spectator article from 2009 that is trying to work out whether the Community Reinvestment Act or the GSEs or some other government intrusion is to blame for the "bubble". (Again HT: John Wake)  They pin much of the blame on the expansion of mortgages with loose terms in private securitizations and at the GSEs, and in an extensive description of changing market share among those groups, they couldn't find the space to mention that FHA market share had declined from 16% to 4% of the market by the top of the boom.  The primary source of low down payment mortgages.  I don't think this is purposeful.  FHA went down the memory hole because it didn't fit anyone's narrative of excess.  And the narrative had to be excess, right?  I mean, look at those prices, the rising ownership rates, etc.  So, we collectively forgot that 12% of the market that used to be dominated by 3% down payment mortgages had disappeared, and, lo and behold, like the pet rocks of the 1970s, suddenly we found a bunch of institutions who were offering low down payment mortgages, and they were gaining a lot of market share!  Scary!

The American Spectator closes:
PREVENTING A RECURRENCE of the financial crisis we face today does not require new regulation of the financial system. What is required instead is an appreciation of the fact–as much as lawmakers would like to avoid it–that U.S. housing policies are the root cause of the current financial crisis. Other players–greedy investment bankers; incompetent rating agencies; irresponsible housing speculators; shortsighted homeowners; and predatory mortgage brokers, lenders, and borrowers–all played a part, but they were only following the economic incentives that government policy laid out for them.If we are really serious about preventing a recurrence of this crisis, rather than increasing the power of the government over the economy, our first order of business should be to correct the destructive housing policies of the U.S. government.
The details are more subtle than this, though, aren't they?  It was the retraction of federal involvement that clearly led to this.  Limits in the FHA framework had prevented those loans from funding Closed Access housing at prices that reflected the true value of future rents.  They also tended to have more stable terms than the terms that developed in private securitizations.  The retraction in the FHA conduit was destabilizing.

I am still working on the data, but it looks to me like the main thing the new terms in the private securitizations did was allow high income households to bid up the prices of low tier homes in the Closed Access cities, and it accelerated the migration of low income households out of those cities, many of whom cashed out of their homes.  The private securitization boom, ironically, may have been a massive redistribution from high income to low income households as high income households were able to get mortgages that allowed them to get into the Closed Access enclaves.

Given that we are stuck with Closed Access cities, I think this was all for the best, such that it was.  If we are going to saddle ourselves with cities set up to only be able to house high skilled and rich people, we might as well get on with the business of moving them all in and moving everyone else out.  And, if a bunch of working class homeowners got six figure capital gains from it, it seems like that's quite a ways down the list of things to complain about.  The problem was that we all had a freak out about it and we've been shooting ourselves in the foot ever since.

And, further, thinking about narratives and interpretations, I have come to view paragraphs like the quoted one above with some exasperation.  That's quite a list of dupes and villains they have there.  Go to a place like Wikipedia or any other public description of the period, and the list will be even longer.  Certainly an overly-accommodative Fed would usually be on there.  This should be a sign of how wrong that story is.  There are so many holes in the story that literally a dozen or more different groups had to become irrational, in turn, with a variety of different motivations, to plug all those holes in the story.

Most discussions about the period are arguments over these dei ex machina.  Everyone takes one or two out, switches out a villain for a dupe, etc., and then argues about the slight differences in how they plug the holes in the story built on false premises that they all agree on.  My favorite hole plug is the villain/dupe.  The investment banker villains who became so greedy that they duped themselves.  On the other hand, I suppose that's what I am claiming we have done to ourselves - duped ourselves into self-destruction - not so much from greed but from an addiction to confirmation bias and attribution error.  So, I guess, who am I to judge?

But, none of these narrative machinations are required if we simply step back and ask, "Wait a minute, in cities like Atlanta and Houston and Dallas, where homes were perfectly affordable in 2007 and where there really never was that much of a spike in defaults, what exactly happened that required the top quintile homes to fall 10% and the bottom quintile to fall more than 20%?"  It never had to happen.  There are no holes to fill.


  1. Here is the plan:

    1. Zone property to create scarcity.

    2. Through underwriting standards, prevent low-income buyers from acquiring property.

    3. Argue against rent control.

    4. Tell voters that the free-enterprise system is absolutely the best. See?

    1. Benjamin, how could you of all people forget step 3.5? Create a monetary shock and insist that banks need to fail and homeowners need to lose a quarter of their real estate value so we all stay disciplined.

  2. One of the big "correctives" in Dodd Frank was "skin in the game". It sounds smart. But here's a fact it overlooks: the employees of Bear Stearns owned 33% of the company. Interests were very much aligned. They just got side swiped by a crazy Fed. I'm not sure how much of Lehman was employee owned, but it probably was also significant. These very smart people got overwhelmed by a tidal wave. Lack of skin in the game at the investment banks is another phony villain.

    1. Not to mention that there was much more credit risk exposure in private securitizations than in GSE and FHA securitizations, and that exposure was frequently held by the underwriters.