Housing: Part 292 - Dodd-Frank was an unprecedented assault on working class homeowners.

I have looked at this from a few different angles already.

I have put together a new measure that helps to focus on the effects of credit collapse on home prices.  I have graphed the relative prices of the median homes in each zip code in the top 20 metro areas.  I split each MSA into 5 quintiles, by median home price.  Then, over time, I compare the relative change in those prices, indexed to the year 2000 (Quintile 5 divided by Quintile 1).

Here, I have taken the average measure for MSAs, which I have divided into three categories:

1) Closed Access cities (NYC, LA, Boston, San Francisco, San Diego).
2) Contagion cities (Miami, Phoenix, Riverside, Tampa).
3) Other cities in the top 20.

As I have discussed earlier, the peculiar rise in low-tier home prices which has been attributed to credit supply is (1) generally limited to the Closed Access cities and (2) happened because high tier prices systematically rise at a slower pace than low tier homes.  It is unlikely, then, that this effect was due to credit access to financially marginal borrowers.  Furthermore, there are an insignificant number of middle class home buyers in the Closed Access cities.  And, there was no relative rise nationally in borrowing among households with less income, education, etc.

We can see that in the graph, here.  I have inverted the y-axis, so that where low tier prices rose relative to high tier prices, the measure rises, and where low tier prices declined relative to high tier prices, the measure declines.  (This is all from the awesome data available at Zillow.com.)

Here, we can see how the rise in low tier prices was mostly in Closed Access cities during the boom.  Most of the effect in the Contagion cities was in Miami and Riverside, because prices there reached levels where high tier prices begin to level off.  In other cities, on average, low tier prices never rose at a faster pace than high tier prices.

The housing market was then faced with a succession of three credit shocks.

1) The CDO collapse.  The first shock hit private mortgage securitizations.  By scale, these loans were mainly facilitating home purchases by buyers with high incomes buying into Closed Access cities.  So, there was little effect in the other cities.  Even in the Contagion cities, relative prices of low tier homes only really began to decline in 2008.  The private securitization panic mostly hit the Closed Access cities.  (And, in hindsight, prices in these cities are justified by rising rents, and have continued to show strength in the long run, even in tight credit conditions.  Prices across the board have been stronger there.  And, notice that, while low tier prices in the Closed Access cities have retreated from their highs, they remain stronger than low tier prices in other cities.  Low tier home prices in every city have been hammered by credit contraction, but in total, credit contraction didn't hit the Closed Access cities any harder than it hit anywhere else.  That is because the relative rise of low tier prices in the Closed Access cities wasn't the result of credit supply.)

2) GSE Conservatorship.  Credit access was tightened to an extreme at the GSEs (Fannie Mae and Freddie Mac) after they were taken over.  Looking at FICO scores, the GSEs practically closed down lending to the bottom half of the existing market.  The book of business with FICO scores below 740 declined sharply, even in absolute terms.  The drop in Closed Access prices continued, and then leveled off.  The price drop in the low tier markets of Contagion cities accelerated.  And, the relative price drop in low tier markets in other cities started to moderately grow.

3) Dodd-Frank.  In the summer of 2010, with the passage of Dodd-Frank, a clear downshift happens in all of these markets.  In the Closed Access cities, the last bit of a downshift in low tier prices happens.  In the Contagion cities, where low tier prices were beginning to level off after the GSE shock, now reaccelerated downward.  And, now, low tier markets in other cities, which had never risen to high levels, and which had held up relatively well all the way until mid-2010, suddenly down-shifted.

It has taken me a while to fully appreciate the damage that Dodd-Frank did to the net worth of working class families in this country.  Maybe this graph is the best picture I have developed so far of the damage.  It would be difficult to overstate the gratuitous scale of the damage here.  This was the summer of 2010.  The entire country had just crawled through a generation defining financial crisis.  Unemployment was at multi-decade highs, and was beginning to finally decline.  Borrowers were losing their homes by the millions.  And most of the damage of Dodd-Frank was imposed on homes outside the Closed Access and Contagion markets that had made it through the crisis relatively unscathed!

This was after the crisis.  This was very late in the process.  Consider what we have done.  First, consider the Contagion cities.  This was a double-whammy to the Contagion cities, which had first been overwhelmed by a migration event as households flooded into their cities to escape the high costs of the housing-deprived Closed Access cities.  Then, when that migration event suddenly stopped in 2007 and 2008, their local economies and housing markets were devastated.  This was worsened first by the contraction in GSE lending, and then, after all of that, when homeowners across those cities were sitting on high double digit losses, another shock was leveled on them that pushed low tier prices another 15% lower compared to high tier prices.  So, by 2014, after this series of shocks, low tier home prices had been pushed down by more than 30% compared to high tier prices.  The misinterpretation of these events is so ubiquitous in the American conversation, that I can hear many readers, still, saying to themselves as they read this that this was simply a reversal of the excesses of the boom.  So, I will reiterate: This was a reversal of nothing.  These zip codes had never appreciated significantly more than the higher tier zip codes in their cities.  This was a wealth shock amounting to more than 30% of property values.

As devastating as this was to the Contagion cities, the story in the other cities is even worse.  In many other cities, prices in general had never risen to "bubble" prices.  And, in other cities, low tier home prices had managed to hang on relatively well, even through the first two credit shocks and the financial crisis.  These are markets with stable, low prices, which households with less savings and lower incomes can afford to purchase.  After the passage of Dodd-Frank, low tier housing markets dropped by 13%, relative to high tier markets.  From July 2010 to 2013.

The damage here has been drowned out by the scale of events of the other shocks.  But, imagine that it is 2007 again, and none of these shocks had happened.  Even the naysayers and housing bears would have considered a 13% drop, by itself, to be a cataclysmic event.  And of all of the zip codes in the country, these zip codes would have been at the bottom of the list of places where even the housing bears would have said that this sort of price drop might have happened.

Since public consensus has coalesced so strongly around the issue of banking risk and financial regulation, the conversation about Dodd-Frank has mostly been about its effects on banking stability.  But, in terms of its affects on working class housing markets, its effects have been disastrous.  We may just have well salted the fields or contaminated the drinking water.  Those policies would have been just as justified and just as useful.

It would be hard to conceive of a law whose timing and policy targets were more perverse.