America’s Vanishing Middle Class, Housing and Mortgage Markets (In One Chart)

The problem of America’s vanishing middle class is well-known: fallling income growth, changing demographics, etc. America’s mortgage lenders are scratching their heads about what to do.

Well, mortgage purchase applications (courtesy of the Mortgage Bankers Association) rose rapidly from 1995 to 2005, slowed and then crashed only to finally start recovering again in 2015-2017. This peaking of the mortgage purchase applications roughly coincided with a local peak in home prices and homeownership (the housing bubble). Then the wheels came off (home prices crashed and homeownership fell). Home prices are rising again while homeownership is at early 1990s levels.

The question is … how can the US get its homeownership rate increasing again (assuming that this is what is the appropriate housing policy goal). The usual remedy is “lower credit standards.”  Hmm. We tried that before and nearly crashed the banking system. See the pink line in the following chart.

True, credit standards are tighter today than they were in the 2000s, but also the mortgage products have changed. Gone are the NINJA (no income, no job) loans as well as adjustable-rate mortgages with “teaser” rates (leading to a spike in interest rates for the borrower). We are now back in a one-size-fits-all mortgage economy with the 30-year fixed-rate mortgage with over 90% market share.

Can lenders as well as Fannie Mae and Freddie Mac lower credit standards to increase homeownership? And do it in a fiscally safe manner? A little bit. This reminds me of the following scene from “There’s Something About Mary.”

The real problem is the decline in income growth for the majority of the population, particularly since the last recession, the major cultprit in the decline of the middle class.

But also confounding matters are local zoning laws prohibiting construction of new supply, lack of inventory and a hyperactive Federal Reserve.  Now we have tons of money chasing after relatively few properties causing home prices to rise.

Lowering credit standards a little may be fine, but returning to credit standards from the mid 2000s is a fool’s errand despite what data manipulation can show.