Posted on 02/27/2007 6:11:22 AM PST by RobRoy
Paul Kasriel at Northern Trust wrote an excellent commentary last Friday but came up a little short in the conclusions section- stymied by a lack of data it seems.
Perhaps some assistance can be provided here, where the lack of data rarely hinders the offering of an opinion or the forming of a conclusion.
The question at hand involves rising home ownership rates, home ownership by age group, and housing affordability over the last ten years. Specifically, how youngsters in America have been duped into buying homes with nontraditional mortgage products while the older crowd has largely passed on risky borrowing.
[Oops! The conclusion has been offered up a bit prematurely. Oh well.]
Chart 1 shows that the national homeownership rate (the percentage of occupied housing units that are owner occupied housing units) started rising sharply around 1995, hitting a record high in 2004. Why this sudden rise in homeownership?
Was it because of a sudden and steady rise in housing affordability, which is a function of the price of a house, the mortgage rate and the income of the buyer? Well, housing affordability did start to rebound in the early 1980s. But, as shown in Chart 2, housing affordability topped out in 1993 – before the rapid ascent in homeownership. Moreover, the homeownership rate remained near its record high of 69% (set in 2004) even as housing affordability was falling significantly in 2005 and 2006.
What is interesting is that about the time the national homeownership rate was rising, the homeownership rate for the relatively young – under 35 years old – was rising relative to that of the homeownership rate of seniors – 65 years old and over. This is shown in Chart 3.
Was there a sharp increase in the incomes of adult children relative to their parents that could explain the increase in the kids’ relative rate of homeownership? Yes, there was some increase in the ratio of the median incomes of the 25-to-34 year old set to seniors starting in 1996 (see Chart 4). This may have accounted for some of the relative increase in homeownership rates for the under 35ers.
Unfortunately, I do not have data on the relative increase in sub-prime mortgages relative to prime. But if any of you out there in cyberland do, I would like to look at it. My hypothesis is that the sharp increase in homeownership rates in the past ten years or so is positively related to the amount of sub-prime and “exotic” mortgage products originated in this time period – products that most likely were marketed to younger potential homebuyers. If my hypothesis is correct, I would predict a sharp drop in homeownership rates as the underwriting standards for sub-prime and/or exotic mortgages are tightened significantly in the quarters ahead. And, oh yes, if my hypothesis is correct, the term homeownership might be a misnomer for the younger set. “Renters with options to buy” might be more accurate.
This hypothesis is surely correct - further corroborating data is not necessary.
Just ask any senior about how their grandkids are carrying on with their big houses, big cars, big TVs, and big debt loads - you're likely to get the same answer, "I don't know how they pay for all of that".
Well, they don't pay for a lot of it.
Never before has credit flowed so freely and never before has so much debt accumulated. Never before has it been easier to buy a house. That is, if you don't mind non-traditional mortgage products where no money down is needed and not only can you avoid paying down the principle (interest-only), but you don't even have to pay all the interest due (pay-option).
Of course, as a long-term plan, this looks like it may not work out so well now that housing prices are falling and subprime lenders are falling even faster.
The younger set has been fearless when it comes to taking on new debt over the last ten years. This is likely to change in the next ten years - all part of the Alan Greenspan legacy.
It's too bad that Lemming suicide is a myth - it would have provided a fine analogy for the headlong rush by youngsters toward the dream of homeownership and sure riches. The trouble is that nontraditional mortgage products, subprime lending, short sales, and foreclosures are no myths.
People need to prepare. It will NOT be pretty and this will affect everyone to one degree or another. In some ways it already is.
Oh, and the charts are at the link.
>>It will be pretty if one's hobby is buying foreclosed homes. :)
<<
Yep!
Unfortunately, mass adoption of this policy would bring the US economy to its knees.
bump
We have a big vinyl village here in Indianapolis (Heartland Crossing) that is supposedly 30% foreclosed.
I'm assuming you want to avoid places where there are mass wipeouts since it appears the whole neighborhood will tank?
Sometimes debt can be a positive. Well in the sense that keeping a long term mortgage and investing what you would have used to pay more principal is often more financially lucrative than paying off the house.
This hypothesis is surely correct - further corroborating data is not necessary.
Interesting approach - admit a lack of data on a key component of the hypothesis, state the hypothesis, project the expected results if the hypothesis is correct, and then conclude that the hypohesis is indeed surely correct and that there is no need for any further corroborating data. He may indeed be correct for all we know, but his "scientific method" sounds sort of like the science of global warming: we already know it to be true so therefore we don't need to conduct any further scientific investigation.
But if your doomsday scenario pans out...those of us whose jobs depend on the mortgage industry won't be buying a damn thing because we'll have no money to buy the foreclosed homes with...
No kidding.
Excellent post, however I will need to start off with the difficult questions.
1. Greenspan opened his yap yesterday and predicted recession later this year. Is this due to the mentioned credit bubble, or is it an adjustment for inflation or a mixture of the two, or something else entirely?
2. Do we know the rate at which sub-prime lenders are either going out of business, or not offering sub-prime loans as opposed to another year of significant economic downturn say 1929, 1870, etc?
3. How do these predictions of dire economic distress compare with the S&L scandal of the 80's and how close is the expected result to the depression of the 1930's or any other depression?
4. Is there a formula to compare the current situation to other times of gross speculation (if indeed this is the case).
Until it bottoms out, yes. After that, it depends on whether or not it appears things will rebound to more reasonable levels.
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No, we'd still have millions of illegals taking on the debt that Americans won't.
>>Everyone's financial mission statement should list Item One as "Get to ZERO debt as soon as possible."
Unfortunately, mass adoption of this policy would bring the US economy to its knees.<<
Yes, and yes. My wife and I have grasped the former with tenacity. The latter is inevitable regardless. 80 years or so of living on the credit card is about to cause the US to meet it's day of reconing.
It is a little like a balerina spinning. As she brings her arms and leg closer and closer to her body, she continues spinning faster and faster, or at least maintains the same speed. But once her body is totally compressed, the zero sum game catches up with her. She slows down and eventually stops.
The economy seems to be doing the same thing. We reduced interest rates more and more, and allowed less and less "standards" for loan acceptance until we pretty much squeezed all the "inertia" we could out of the market, manufacturing as much demand as possible. Like the balerina, we are fully compressed and can only watch as we exhaust the original energy.
Well, not fully compressed. We can continue to drop interest rates as Japan did at the end of the last century. 'Course, foreign money may leave, bringing other problems.
Hmmm...
>>We have a big vinyl village here in Indianapolis (Heartland Crossing) that is supposedly 30% foreclosed.<
My dad said that back in the 70's here in Seattle, the foreclosures were so bad that the Government was literally offering homes, 10 for the price of one. So you could buy an entire neighborhood and either sell cheap or rent them out. Then when the remaining homeowners were foreclosed on (you drove down the price of the neighborhood by selling cheap) you buy them as well.
The subprime lending market, 125% equity loans, and interest-only mortgages are causing increased foreclosure rates, no doubt about it.
I don't think it'll be as bad as the Japanese asset price bubble of the late 1980s and early 1990s, but you never know.
My brother is constantly refinancing his downtown condo. He has as little equity as possible. He then puts the money in other investments. If the market goes bad, he simply walks away and moves to his home in one of the other Americas (I am not at liberty to say), and lives off those investments.
>>But if your doomsday scenario pans out...those of us whose jobs depend on the mortgage industry won't be buying a damn thing because we'll have no money to buy the foreclosed homes with...<<
Every bust brings winners and losers. Of course there are more losers than winners. That's why it is called a bust.
Exactly, markets rise and markets fall, these things happen, the "key" is buying cheaply enough.
And even "if" sub prime lending leads to younger people owning homes, that will mean some will lose their homes and some will be able to keep them.
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