Friday, November 16, 2018

Housing: Part 330 - Mortgage Originations by Age

The New York Fed now reports mortgage originations by age in its quarterly Household Debt and Credit report.  After the 3rd quarter of 2007, mortgage originations for households under 50 years old dropped by nearly half, and the number has remained stable at that level since then.  Households above 50 years of age have continued originating mortgages at about the same rate as before.

This chart really helps highlight the generational aspect of the housing bust.

Here, I have created a chart that shows the scale of the decline for each age group.  There was a bump in originations in 2003 due to tactical refinancing, so for this ratio, I used 1Q 2004 - 3Q 2007 and 4Q 2007 - present.

Keep in mind, homeownership rates were not increasing from 1Q 2004 to 3Q 2007.  The denominator for this ratio is a rate of homebuying in a static ownership context.

This is an example of how relentlessly overzealous the rhetoric about housing is.

One example of how rhetoric is overzealous is how homebuyers' expectations or hopes are always described in terms of their price expectations.  This creates an image of speculation.  But, rent is highly correlated with price, both in terms of the level and in terms of the rate of change.  So, hopeful homebuyers could just as accurately be described as having high expectations about rising rents.  This paints an image of hedging.  In fact, in my experience, homeowners and homebuyers more often fit the image of hedgers than of speculators.  Even when they express their expectations in terms of price, they are generally thinking about costs.

Analysts and researchers, whether from the credit supply school, the passive credit school, or any other school of thought regarding the housing boom, invariably impose the speculative image on homebuyers.  When academics ask homebuyers what their price expectations are, their choice of question is the key ingredient in the conclusion they will reach.  The answers they receive would correlate highly with the answers to the question of what rent expectations homebuyers have.  Do academics ever ask homebuyers about their rent expectations?

The age data highlights another area where housing rhetoric is overzealous.  Homeownership rates were pretty close to 64% for years, then they increased from 1994 to 2004 to about 69%, then they fell back, and are now lower than 64%.  Firstly, that flat trend at 64% before 1994 was misleading.  Homeownership was being balanced by two opposing forces.  By age, homeownership was declining, but at the same time, baby boomers were aging into age groups that generally own their homes.  The flat ownership rate was a mirage.  After 1994, the shift change was mostly among younger families, and it was simply a return to the homeownership rates of the late 1970s and early 1980s.  Among working age households, no age group was rising into unprecedented territory for homeownership.

But, many people believe that, essentially, 64% of Americans were qualified to own homes, then we recklessly made mortgages to 5% of Americans who had no business owning homes, and finally, after 2007, we came to our senses when those Americans started defaulting on their mortgages, and homeownership dropped back down to the reasonable level.

That description bears little resemblance to anything that happened.

But, passing around homeownership charts with a y-axis from 60% to 70%, that isn't disaggregated by age, creates another image of overstated excess.  It is more accurate to think of homeownership in terms of age.  The more reasonable way to think of it is that 80% of Americans will eventually own their homes.  In 1993, those households might have been making their first purchase at, say, 33.  And, by 2004, they were making that first purchase at 32.  The shift really is that small.  For instance, for 35 to 44 year olds, in 1994, the homeownership rate was 65% and by 2004 it was 69%.  In any post-WW II housing market, all of those marginal new homeowners were going to be homeowners by the time they were in their 50s in any case, and the shift required in the age of first time buyers to change the ownership rate by 4% is nothing.

The shift in imagery is enormous here.  Rather than beating the bushes for unsuspecting new suckers to take on unsustainable mortgages, mortgage lenders were lending to (1) more households in their 50s and 60s who had ownership rates that never shifted significantly over decades and to (2) households who were generally going to become homeowners anyway, but they were making those mortgages now somewhat earlier - in a shift, in the aggregate, that literally could be measured in months.  It amounts to practically nothing.

What has happened since then doesn't amount to nothing.  Ownership among all working-age age groups is well below previous HUD era lows.

1 comment:

  1. In politics and macroeconomics, the game is to control the narrative.