If you knew nothing about U.S. economic policy over the past decade or so, looking at this chart from the St. Louis Fed would certainly give you the idea that Washington did something to a) make housing more affordable to low-income households and b) to boost housing prices (and thus the incomes of low-income households). As the bank notes, “It is important to remember that low-income households are more likely to have extracted home equity by using non-traditional mortgages and home-equity lines of credit, which would also explain the disparity across income groups.” A bit more:
Continuing problems in the U.S. housing market are a significant concern for the ongoing economic recovery. The drop in U.S. home prices since their peak in 2006 caused household wealth to decline by around $7 trillion. Prior to this wealth shock, home prices increased rapidly for over a decade … the appreciation in house values and the associated rise in home equity from the 1950s to the early 1990s seems to closely match the growth in personal disposable income (i.e., income net of taxes).
Even before 2000, the increase in home equity did not appear disparate to the growth in personal disposable income. However, the two series show a growing “misalignment” after 2000, which was accompanied by the rapid growth of nontraditional mortgages from 2000 through 2006.
The increase in the supply of credit, especially credit facilitated by nontraditional mortgages, particularly for subprime mortgages, is believed to have contributed in no small measure to this misalignment. First, these mortgages provided an opportunity for homeownership—especially for first time home buyers—in an environment of rapidly increasing home prices by lowering the initial down payment. Second, subprime mortgages were designed as credit accommodation and debt consolidation products, which depend on the appreciation of the underlying asset rather than the ability of the borrower to repay the loan. Third, these mortgages encouraged investors to speculate in the housing market; some estimates show that investors account for half of purchase originations in states that experienced the largest housing booms and busts.
And, of course, we know what the reality is (and what happened to housing prices afterward). In the 1990s, Washington began to look at housing policy as social welfare policy, as outlined in the book Reckless Endangerment:
The mortgage crisis started with the “housers”—President Clinton and others who pushed for creative mortgage financing because they believed more Americans should own their own homes.
Then quasi-public Fannie Mae and Freddie Mac did away with their traditional underwriting criteria. That resulted in a wave of new mortgages and produced profits that pumped up executive bonuses at both institutions.
Then private mortgage execs took cues from Fannie and Freddie and wrote loans for individuals who would not have been deemed creditworthy a few years earlier. The problem was exacerbated by a mix of new products, corporate chutzpah, understaffed regulatory agencies and government moves opening lending, lowering reserve requirements and loosening appraisal rules.
Now, Mitt Romney said last night that if elected he might eliminate the Department of Housing and Urban Development. He’s also no fan of Fannie and Freddie and the whole GSE housing model. They all give Washington the means and the motive to use government to distort markets. And when you distort markets, this is what you get: