Wednesday, November 13, 2019

Comments on the Quarterly Report on Household Debt and Credit (2019 Q3)

Here are a few updates on the data.


 First, mortgage originations by FICO score.  This continues to remain near levels it has been since 2009.  In fact, the average FICO score of borrowers started moving up in the second quarter of 2007, just before home prices started to collapse.  They basically hit the new plateau in the second quarter of 2009.  As I have shown, much of the devastating loss of equity in entry level homes happened after 2008.

This is the actual cause of the housing bust (and the financial crisis). The general collapse in home prices came after credit tightening, and the continued additional collapse focused on low tier housing came well after credit tightened, after it settled permanently at the new normal.  To this day, the consensus response to that claim is that it had to happen in order to bring credit standards back to normal.  But, borrower standards were normal.  The typical FICO score of borrowers in 2006 was the same as it had been in 1999.  The squeeze continues.

Total mortgages outstanding seems to be settled at about 3-5% annual growth.  And total number of mortgage accounts outstanding fell from about 98 million in 2008 to 81 million in 2013, where it remains.  That would be a bit laggardly in a fully recovered market, but it is very laggardly in a market with a severe shortage of housing and a rent expense problem.

Second chart shows the balance of debt of different types.  Good job America!  We have managed to push all that borrowing out of HELOCs and into credit cards, because the lesson we all learned from the financial crisis was that unsecured debt is preferable to secured debt. I read the terms on my credit cards and I can't help but shout "Stability! Prudence!"  We're so much wiser now.  Kudos everyone.

Remember, if you sell your house short because you're 30% underwater, that's really bad.  But, if you have to sell your house because you hit a rough patch and nobody will lend on more than 80% LTV and/or perfectly documentable income, that's just being reasonable.  If that happens to you, try being a little gracious about it.  It was for your own good, silly.

Third, debt outstanding by age (adjusted to per capita). Some analysis of the crisis sets it up as rich (savers) vs. poor (borrowers).  But, really, the only reason it looks like that is because the crisis was more a matter of old (savers) vs. young (borrowers).  Borrowing was moving up as much for the old as it was for the young, but older borrowers tend to be less leveraged. The older groups have increased their borrowing since the crisis.  That is because they didn't tend to own homes with high leverage during the boom, so they escaped the housing collapse with less damage.  And, that has allowed them to continue borrowing after the boom, because borrowing scales with wealth and income, to a certain extent.  The younger borrowers took a hit in the foreclosure crisis and are now catching up.

Unless there is a return to looser lending, though, it seems like there is a limit to how much catch up can happen.

4 comments:

  1. And total number of mortgage accounts outstanding fell from about 98 million in 2008 to 81 million in 2013, where it remains. That would be a bit laggardly in a fully recovered market, but it is very laggardly in a market with a severe shortage of housing and a rent expense problem.--KE

    Egads, that is a stunning figure. Is it one mortgage account per house or do some houses have first and second mortgages that count as two accounts?

    There is an old joke that you want to live in a Latin country administered by Northern Europeans.

    Maybe the updated version is you want to live in a capitalist nation but in which housing markets are run by communists.

    https://www.scmp.com/comment/opinion/article/3036011/shenzhen-shows-way-forward-homes

    In Hong Kong, even yet, the discussion is about a few thousand more units by extraordinary measures considered by Hong Kong leaders.

    We may yet see Elizabeth Warren in the White House.

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    1. I believe the mortgages include all closed end mortgages (not lines of credit), both first mortgages and home equity loans. And, I think it includes mortgages on both primary residences and other properties. So, for instance, from 2004-2007 the number of mortgage accounts outstanding in this report increases much more than the number of mortgaged homeowners reported in the Survey of Consumer Finances.

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    2. > Maybe the updated version is you want to live in a capitalist nation but in which housing markets are run by communists.

      80% of Singaporeans live in government built housing. Not sure, whether to describe that as communist.

      I think the most important bit is to suppress NIMBYs and restrictions on constructions. Then markets provide housing just fine.

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    3. Matthias: housing is becoming one of the major issues of our time. By the way, housing is expensive in Hong Kong...and Santiago, Chile.

      If you look at a Canada, a United States, a Great Britain, and Australia, Hong Kong and Chile you find governments that are utterly incapable of providing a solution to skyrocketing housing costs.

      Elizabeth Warren will only make the problem worse, but I really cannot fault voters for preferring socialism if the capitalist proposal is $2,500 for a small apartment and $1,000 a month for medical insurance. And what is the solution to this? Immigration and more free trade.

      The Libertarians are very helpful, by piously pointing out all the theoretical weaknesses of rent control.





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