As mortgages become a more popular means of financing homes, home equity falls. Also, once mortgages are common, high inflation increases the amount of equity you have in your house, relative to the residual value of your mortgage. And don't forget to tune in at 11 for our special investigative report: government subsidies cause increases in whatever it is they are subsidizing.
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This just in
09 Oct 2007 09:04 pm
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You're confusing the stock with the flow. The GI bill ultimately disbursed about 2.4 million home loans--a lot, but not nearly as many as there were houses. In the 1950's, the rising popularity of the long-term amortizing mortgage, to replace the short-term balloon mortgages that had previously been popular, meant that most first time homeowners did indeed have large mortgages relative to their equity. But the larger number of existing homeowners did not have those mortgages. What you're seeing in the 1950s in the gradual replacement of that old stock by the new flow of mobile people taking out mortgages, then an uptick in equity-to-mortgage ratios as inflation erodes the value of the mortgages taken out in the 1950s and 1960s, and then a long, slow decline again as homeownership increases and inflation declines. Your graph shows the inevitable effects of well-known secular changes in credit markets, real interest rates, and inflation which have pretty much nothing to do with who happened to be president when they took place--though I suppose you could congratulate Richard Nixon for having lousy taste in central bankers.
It's hysterical! He mentions that only Nixon/Ford and Carter did anything to increase home equity, while completely ignoring the obvious thing that was happening at the time - inflation. Forgive my generalities, but that post is typical of left thinking - everything that happens is caused by who's in charge.
Josh,
I don't think I mentioned Nixon/Ford and Carter as being the only ones to do something about home equity. I mentioned that they were the only ones under whom it rose. But I also mention that the trend began under JFK/LBJ (typical rightie reading comprehension?).
Josh & Megan,
I see that I should have mentioned inflation... certainly, it had an effect. But JFK/LBJ put some effort into the housing market with assorted programs intended to boost home ownership, and if I recall correctly, it eventually was all merged into HUD. I haven't overlayed the graphs, but offhand it seems to me that the HOE trend reversed itself before inflation started to rear its ugly head. I could, of course, be wrong on this.
I also note... there don't seem to be big spikes in HOE to correspond with the big spikes in inflation (especially late Nixon/Ford, and late Carter), which presumably one would expect to see if inflation was the primary driver. Similarly, later, in the late 80s, when we saw a bit of an uptick in inflation, it didn't seem to have the same effect as whatever it is we saw happen starting in the JFK/LBJ administration.
In sum, sure, inflation makes a difference, and I was wrong to leave out all mention of it. But inflation as the primary driver might indicate a graph with a different shape.
Uh, yes, you are in fact incorrect; the inflation uptick starts with the Vietnam buildup in 1966, pretty much exactly the same year that the curve inflects. The late eighties trend is a one-year temporary inflection in a basically downward-sloping curve, and moreover, came at a time when inflationary expectations were higher, so that real interest rates compensated for the higher inflation.
Home ownership rates have been roughly stable in the 60's for more than forty years. Such programs as there were, AFAIK, encouraged homewoneship by . . . encouraging people to take out bigger loans against the value of their house.
I suppose you could blame the late eighties inflection on tax-simplification; but that's broadly good policy, and moreover, has nothing to do with Reagan's policies on encouraging home ownership. And the other presidencies very clearly have nothing to do with the rates of equity, except insofar as Lyndon Johnson's inflation, ably continued by Nixon/Ford/Carter, somewhat increased home equity at the small price of wrecking the economy.
Your general tendency to attribute any factor you like to some benign or malign influence from the president is the problem with this whole series, but nowhere more clearly than here.
There are several other factors I see coming into play:
- people are buying more house. So they may have less equity, but it's because they have less equity in a house that's twice as big and has more features than a house did 30 years ago.
- home equity loans have gotten common the last few years. So people who did have equity in their homes have refinanced and taken that equity out. Chances are, if they hadn't, they would have more equity... but would also be carrying other loans at higher interest rates. The fact that they aren't isn't a bad thing.
- mortgages with less money down have become more common (well, at least until the recent credit crunch), so people are starting out with less equity
"Uh, yes, you are in fact incorrect; the inflation uptick starts with the Vietnam buildup in 1966"
There is a slight up trend in HOE starting in 1966, but inflation that year (2.9%) is less than in 1957, and just a smidge more than in 1958 - years in which we didn't observe any change in the trend. (Data from the BLS.)
I note just as happenstance, HUD came into existence, and it took a decade or so before it became the ultra corrupt entity it was for some years.
Also... the first really big jump to double digit inflation since 1947, from 6.2% in 1973 to 11% in 1974, was accompanied by an abrupt fall in HOE which on the graph at least, came out of nowhere. That drop was the largest annual drop by far until that point, and the second largest one in the sample (almost as big as the drop in 1990).
Other problems with inflation... the flattening out of the downtrend in the late 1990s began in 1997, and 1997 had the lowest year on year percentage change in CPI since 1986. The trend stayed flat even as inflation stayed low for a few years.
Inflation as an explanation fits some of the facts, but it seems not to fit of many of the facts, and contradicts some of the key facts. It may be an explanation, but at best its one of several.
I really don't know how many times I can keep typing stock =/ flow. Yes, year to year variations in home equity will not match up with year to year variations in inflation, because the economy is not a three variable macro model (or, as you would have it, a one variable macro model where the only important variable is whether the guy in the oval office happens to have a D or an R after his name). But over time, the trends match up extremely well with exactly what you could predict knowing only that:
1) Long-term amortizing mortgages became more popular in the 1950's, eventually coming to dominate the housing market.
2) Inflation accelerated from the mid-1960's through 1980.
3) Post 1980, there was a broad long term decline in, first, inflation, and then inflationary expectations, and finally, real interest rates.
4) Changes to the tax code in the mid 1980's privileged housing debt over other kinds of debt.
Sure, a stock is not a flow. But if you say that inflation is the reason why HOE is increasing, you need a better reason than " a stock is not a flow" to explain why, the first time in 35 years inflation hits double digits (and almost twice the rate from the previous year) you see a very sharp fall in HOE. You also have to explain the other anomalies that don't fit.
Umm ... because an economy is not a one-variable model where only one thing, like say, the party of the president, makes things change? I can think of any number of potential explanations that make more sense than yours; the most plausible is that something . . . like, just pulling a random example out of my head here, a massive oil price shock, if you could imagine such a thing having happened in the early 1970's . . . . might have temporarily driven down home values.
Your story, where changes in HUD policy that you haven't even identified, are a more powerful explanation than all of the things that we know, beyond a shadow of a doubt, drive changes in equity, is . . . I don't even know how to respond to it. You have no plausible mechanism by which the president could effect the housing market this much; you have been presented with all of the very plausible non-presidential mechanisms that we pretty much know beyond a shadow of a doubt affect home equity; and you choose to cling to your theory that it's just gotta be the president.
A President's effect doesn't have to be just those that he planned. GW's economic plan called for so much debt to be paid off in fiscal 2007 that there weren't enough retiring bonds to spend the money on. It didn't come to pass.
So now you say... a massive oil shock affected the US housing market. Its not like the US president had anything to do with their being an oil shock. (Whether the steps taken in the 1973 Arab Israelis War were good or bad or neither, they had an effect. ) And you mention inflation mattering... but then act as if US president had no effect on inflation either - consider LBJ's and Nixon war spending, or Nixon's pulling out of Bretton Woods. Again - whether these actions were good, bad, or neither, they had an effect. On HOE, and on a bunch of other things too. And some of their effects were positive on the whole, and some were negative on the whole.
The whole point of my series of posts has been to look at how everything out that I can find has been moved. And I've broken it out by President because the President has an effect - whether direct or indirect.
The simple fact is, this particular series, of all of those I have put up so far, is the one for which the effects have been most indirect and most unintended. But the effects are still there.
Besides, the Presidents themselves like to take credit for this sort of thing... it was only a few years ago that GW was still talking about his ownership economy. If they're going to take credit for these things, they damn well better be willing to take the blame too.
Indeed, they do ... and I think we both know they're full of it. That doesn't excuse you doing it.
Moreover, you're *really* grasping at straws now. OPEC's policy of oil embargo on the US, which was directly connected to the Yom Kippur war, was a miserable failure; the production cuts, which were aimed at keeping the price of oil high, is what affected the economy. Furthermore, Nixon's Israel policy was a continuation of Johnson's more Israel-friendly stance, which just illustrates how big a role chance plays in these things. Had the embargo/recession been connected to the Six Days War instead of Yom Kippur, would you accept this as "proof" that Democrats aren't good at managing the economy?
Your belief in the superiority of Democrats doesn't seem to be falsifiable; when one mechanism looks wrong, you just switch the mechanism. I am prepared to believe that there are policies that make the economy grow, and I am prepared to believe that Democrats are currently more likely to follow those policies. But you have to say what those policies are. A product of UCLA's PhD program should not be caught dead insisting that correlation is causation.
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The problem with putting it all on mortgages is that the home equity went up from the mid 1960s to about when (as one of the reader's of that post noted in comments) tax laws affecting the deductibility of mortgages changed.
Presumably the trend toward increased popuarity of mortgages began long before the 1960s. Why would it have just reversed course for two decades - if not longer, had the changes to the afore-mentioned tax laws not taken place?
Posted by cactus | October 9, 2007 10:59 PM