Monday, March 6, 2017

Housing: Part 210 - Credit and Home Prices

There were a handful of cities where home prices rose especially sharply and where home prices at the low end rose significantly more than at the high end during the boom.  This has been widely attributed to credit access to marginal households.

In the end, I think this really was a natural reflection of intrinsic value, created mostly by our highly regressive income tax policies regarding homeownership.  As home prices increase, there is a positive feedback on price, because low priced homes tend to provide very little tax benefit but high priced homes tend to provide tax benefits near the marginal tax rate for high income households.  This means that up to about $400,000 or $500,000, the more a home is worth, the more valuable it is as a tax haven.  Somewhere around that level, any marginal new increase in value will continue to accrue tax benefits at the maxed out rate.  So, Price/Rent ratios increase up to about $400,000 or $500,000, then level off.  (I have been lazy and left the scale in the graphs in natural log.  In the graphs, $400,000 is about 12.9.)   2017    Source: Zillow Data
So, the counterintuitive conclusion we should make about home prices in Closed Access cities is that it wasn't low priced homes that were rising more than they should have.  It was high priced homes that were rising less than they would have in any other cities.   2017    Source: Zillow Data
We can see the difference here, between LA and Seattle.  The reason low priced home prices didn't increase significantly more in Seattle than high priced homes was because high priced homes generally had not reached that plateau level yet, so high priced homes still were capturing the positive feedback of a rising Price/Rent ratio as prices in general increased during the boom.

By 2006, practically the entire MSA in LA and San Francisco had reached that peak Price/Rent level.  Seattle is marginally a Closed Access city.  Their peak Price/Rent ratio in 2006 suggests that buyers expected continued rent inflation, which is a sign of Closed Access housing policies.  But, Seattle has not gotten so bad that there is a systematic and persistent migration pattern of low income households being forced out.  It appears that, for the most part, households in Seattle can still cope with their housing supply constraints by downsizing or moving to a longer commute within the MSA.  And, prices and rents there haven't moved up so high that whole areas of the city average more than half a million dollars per unit.     Source: ACS
Consider this as a starting point.  Credit expansion leading to irrational prices is not necessary as an explanation for unusual price changes in low tier Closed Access real estate markets.  I have just begun to look at data from the American Community Survey to get a look at this from another angle.  Unfortunately, this data only begins in 2005, so it misses much of the boom period.  (I hope to get some data for the earlier period soon.)  But, even the post 2004 data is telling.

One thing to keep in mind is that mortgaged homeownership rates in low tier neighborhoods in Closed Access cities are very low.  This graph shows the percentage of households in Closed Access cities in 2005 that were within each subcategory (Q1...Q5 refer to national income quintiles.)  So, for instance, 6% of households in Closed Access cities were 35-45 year old homeowners in the highest income quintile who owned homes with mortgages.

Notice here that a large portion of homeowners below the median income are retired households with no mortgages.  Of all households in Closed Access MSAs in 2005, only 8.4% were households in the bottom 60% of the income distribution, under 65 years old, with a mortgage.  (Only 3.6% are in the bottom 40% of incomes.)

Note, this is just a count of households.  As a portion of mortgage debt outstanding, this would be an even lower proportion.  It is simply implausible, on its face, that credit availability to these households could have had any significant impact on housing markets.

Outside the Closed Access cities, working age households in the bottom 60% of incomes with mortgages represent about 17% of all households - nearly triple the proportion in Closed Access cities.  Wouldn't it be odd if the place where credit to those households upturned the housing market is the place where those households are barely even in existence, and in fact were bolting town by the thousands?

The trends since 2005 also give us a window into the market.  Between 2005 and 2007, there was little change in the composition of Closed Access homeownership.  But, since 2007, after the collapse of the mortgage market, there have been clear trends.  The following graphs show the changes in the rate of homeownership with a mortgage for each subgroup.  For instance, in Closed Access MSAs, in 2005, 9.7% of 65+ year olds with first quintile incomes owned homes with mortgages.   In 2014, 11.1% did.  So, mortgaged homeownership increased by 1.4% for that group.

Unmortgaged ownership is highly concentrated among 65+ year olds, across incomes, and in all city types, unmortgaged homeownership rates have dropped by about 6% or so for all income quintiles.  I'm not sure what the cause of that shift has been.

Before we look at shifts in mortgaged ownership among the other subgroups, keep in mind that in all areas after the bust, low priced homes dropped by more than high priced homes.  In the Closed Access cities, where the difference was strongest during the boom, it was also strong during the bust in the other direction.  By 2016, low priced Closed Access homes had lost about 40% more from their peak levels than high priced Closed Access homes had.     Source: ACS
Notice the shift in mortgaged homeownership in the Closed Access cities.  There has been little shift in low income mortgaged ownership compared to the other categories.  The reason is mostly because very few low income households can possibly own homes in those cities.  Ownership rates for all age groups in the first two income quintiles range from negligible up to 30%.     Source: ACS
Even though prices dropped the most in the lowest priced areas, the decline in buying pressure was highly concentrated among the highest income groups.  It was especially concentrated among high income young people.     Source: ACS
In the Contagion cities and in the rest of the country (labelled here broadly as "Open Access"), the pattern is similar, but less defined.  More of the drop in ownership in those areas was among low income homeowners (compared to Closed Access trends), but still, the drop in ownership has been strongest among high income young households.

Notice that among low income households, there is less difference between age groups.  These were probably households that experienced economic dislocations, foreclosures, etc.

But, among the high income groups, age makes a big difference.  Older households have been able to get mortgages and younger households have not, in spite of high incomes.

In sum, after a "bubble" that appears to have had little to do with changing homeowner characteristics, we have responded by forcing a number of low income households into economic dislocation and by cutting off mortgage availability to high income young families.

Those 55 and over who are not owners now are more likely to have incomes below the median.  Those 45 or under who are not owners now are more likely to have incomes above the median.

We know from the Survey of Consumer Finances that the boom-period rise in ownership was concentrated among higher income households and also among the young but that the drop in ownership since the bust has been balanced among all incomes, leaving the net result as a drop in low-income homeownership.  Income is now a more important factor regarding homeownership than it was before the boom.

The drop in high income mortgaged ownership, then, is probably a reversal of boom-period trends.  The drop in low income ownership has simply been a painful imposition, unrelated to the causes behind the so-called bubble markets, and felt more strongly in the vast parts of the country that never saw a price bubble than it was felt in the Closed Access cities that are the true cause of housing stress.  If anything, the private mortgage market was helping high income aspirational households buy out Closed Access baby boomers who were taking their Closed Access windfalls and moving to Colorado.  The largest groups of Closed Access out-migrants, by age, in 2005 and 2006, were 45-65 year olds with mortgages.  The notion that mortgages were systematically being foisted on households with low incomes who had no dream making the payments is a myth.  A very damaging myth, it turns out.

I had thought that maybe a side effect of that migration pattern might have been a transfer of wealth to low income households who happened to own homes in Closed Access cities.  But, that is probably not as much of a factor as I had guessed.  During the boom, the tactical outmigration from Closed Access cities was among high income households.  Outmigration among those households has settled down since home prices dropped.

Low income households own very few homes in the Closed Access cities.  Outmigration of low income households looks like it is largely among renters, and so it has persisted even as home prices have fallen, because it is rent inflation that pressures those households to move, and that is as bad as ever - because we killed the housing market.


  1. Excellent post.

    Evidently, it is "hip" in some circles today to applaud sinking homeownership rates.

    The higher homeownership rates were artificial, etc.

    But no one ever says the home mortgage tax deduction is artificial, or property zoning.

    I reference Kevin Erdmann here:

    1. I saw that post. And, since then, odds of rate hikes have moved up.

  2. FYI

    “China’s premier says cities pressured by rising prices need to boost land supply

    BEIJING (Reuters) — Chinese cities under pressure from soaring home prices need to boost land supply appropriately while authorities take targeted measures to fight an inventory overhang in smaller cities, Premier Li Keqiang said.
    China is looking to keep the property market stable this year after prices of new homes soared 12.4 percent last year, the most since 2011. Local authorities in more than 20 cities have introduced curbs to cool the market since October.”


    Jeez, do you suppose supply and demand can affect housing prices?

  3. Other than Miami, Seattle is probably the most permissive coastal city when it comes to allowing housing supply growth.

  4. This was an outstanding blog post. I loved it. I’ll be back to read more. Thanks !

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