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Interest Rates and Equity Extraction During the Housing Boom
Using credit record panel data from 1999–2010, we show that the likelihood of home equity extraction (borrowing, on average, about $40,000 against one’s home) peaked in 2003 when mortgage rates hit historic lows, and estimate that a 100 basis point rate decline is associated with a 25 percent rise in the likelihood of extraction. Further, this relationship is amplified in ZIP codes with substantial house price growth. Differential responses to interest rates and home price appreciation by age and credit score provide new evidence of financial frictions. Finally, equity extraction is ...
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Identifying "Tipping Points" in Consumer Liabilities Using High-Frequency Data
The concept of a "tipping point" captures the idea of a threshold where debt is no longer sustainable and becomes a drag on household financial well-being. In the most severe cases, a "tipping point" represents the point at which a household experiences a debt default. This paper constructs different measures based on the dynamics of the monthly debt payment to after-tax income ratio. The preliminary examination using data from the Credit Risk Insight Servicing McDash (CRISM) dataset suggests that some of these measures have some predictive content when compared to alternative risk measures ...
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The Demographics of Loan Delinquency: Tipping Points or Tip of the Iceberg?
Loan-delinquency rates differ sharply across demographic groups. Families that are younger, less-educated and non-white are much more likely to miss payments than older, better-educated and white families. Controlling for a host of observable variables—including differences in balance sheets, family structure and measures of luck such as income shocks—reduces but does not eliminate the ability of some demographic factors to predict missed payments. This result provides only limited support for the view that "demographics don’t matter," according to which families with delinquency-prone ...
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The Sustainability of U.S. Household Finances
The financial sustainability of U.S. households is usually proxied by intuitive measures, like the debt-income ratio, that are only loosely linked with a more rigorous definition of sustainability. We employ balance sheet and income date from the PSID to project lifetime resources and compare these resources with household consumption to assess household financial sustainability. Preliminary results show that while the vast majority of American households were sustainable in the mid 1980s, sustainability declined sharply through the early 2000s and remained low until the eve of the Great ...
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Household Debt at the Tipping Point: When and Why Does Household Borrowing Hurt the Economy?
While household credit booms and busts are not new phenomena, the financial crisis in 2008 and its devastating effects have spurred a deeper examination of the mechanics underlying these episodes. We review this growing literature and attempt to answer four primary questions: What drove the recent (and previous) household credit booms? What factors precipitated the tipping point in household borrowing in the economy? How did the following deleveraging efforts affect the economy? Can the literature guide us on how to avoid these destructive cycles or mitigate the damage in the future? Looking ...
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The Great American Debt Boom, 1949-2013
The American economy experienced a dramatic increase in household debt since World War II. Relying on newly compiled archival micro data from historical waves of the Survey of Consumer Finances (SCF) going back to 1949, this paper makes the first systematic attempt to dissect the ascent of household debt in postwar America. We show that debt-to-income ratios have risen similarly across income groups and that debt growth since the 1970s occurred mainly on the intensive margin of housing debt. A quantitative assessment of household balance sheets demonstrates that financial vulnerabilities of ...
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How Do Credit Supply Shocks Affect the Real Economy? Evidence from the United States in the 1980s
We study the business cycle consequences of credit supply expansion in the U.S. The 1980's credit boom resulted in stronger credit expansion in more deregulated states, and these states experience a more amplified business cycle. A new test shows that amplification is primarily driven by the local demand rather than the production capacity channel. States with greater exposure to credit expansion experience larger increases in household debt, the relative price of non-tradable goods, nominal wages, and non-tradable employment. Yet there is no change in tradable sector employment. Eventually ...
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Mortgaging Household and Global Financial Stability: To What End?
Debt-financed housing was central to the recent financial crisis and subsequent Great Recession. Millions of leveraged homeowners lost trillions of dollars of wealth and the global financial system nearly collapsed. Our system of highly leveraged homeownership therefore deserves critical scrutiny. At the household level, three key features are involved: 1) A widespread preference and policy support for ownership over renting; 2) External financing exclusively in terms of debt (rather than equity); and 3) A relatively high amount of leverage, especially among ex ante financially vulnerable ...