Youngsters Have Been Duped!

Paul Kasriel at Northern Trust wrote an excellent commentary on 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. Trouble with nontraditional mortgage products, subprime lending, short sales, and foreclosures are no myths.