September 10, 2014
The NYT Magazine had a piece asking whether subprime mortgages are coming back. The gist of the argument is taken from an Urban Institute study arguing that if we had the same lending standards in place as in 2001, there would have been 1.2 million more purchase mortgages issued in 2012. It goes on to tell readers that reduced sales are holding back the housing market and the recovery. All of these claims are questionable.
First, asserting that 2001 is an appropriate base of comparison is rather dubious. House prices were already rising considerably faster than the rate of inflation, breaking with their long-term trend. Furthermore, the number of home sales had increased hugely from the mid-1990s, which were also years of relative prosperity. If the Urban Institute study had used the period 1993-1995 as its base, before the beginning of the bubble, it would have found few or no missing mortgages. It is a rather herioic assumption to pick a year of extraordinarily high home sales and treat this as the reference point for future policy.
The idea that we should expect more sales to be a big trigger for the economy is also dubious. The factor that determines building is house prices. House prices are already more than 20 percent above their trend levels. There is no reason that we should expect prices to go still higher or even that they would necessarily stay as high as they are now. One factor that is likely suppressing construction is the fact that vacancy rates are still above normal levels. It is understandable that builders would be reluctant to build new housing in a context where there are still many vacant units available.
Finally, it is worth noting that it is not clear that many people are being harmed by not being able to get a mortgage. As the piece notes, the benefits of homeownership are often overstated. With prices already at historically high levels, homebuyers have a substantial risk of price declines and little reason to expect that the price of their home will rise by more than the rate of inflation.
Furthermore, there are large transactions costs associated with buying and selling a home, with the combined buying and selling costs equal to roughly 10 percent of the purchase price. This means that people who move within 3-4 years of buying a home will likely lose on the deal. This is an especially important point if the marginal homebuyers are younger people who are likely to have less stable family and employment situations.
The latter point is especially important in a context where much of the elite is demanding that the Fed raise interest rates to slow job growth. If the labor market does not improve much further, then it is likely that many people will find themselves in a situation where they have to move to get a job. That is not a good situation for a homeowner to be in.
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