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The Federal Reserve Bank of New York’s 2017 SCE Housing Survey indicates that expected home price growth over the next year has increased compared with twelve months earlier, and is at its highest level since the survey’s inception in 2014. Five-year growth expectations have also risen, albeit more modestly. In line with these findings, the majority of households continue to view housing as a good investment. Respondents expect slightly larger increases in mortgage rates than they did in last year’s survey. Renters’ perceived access to mortgage credit continued to ease.
Rajashri Chakrabarti, Nicole Gorton, and Wilbert van der Klaauw
Evidence overwhelmingly shows that the average earnings premium to having a college education is high and has risen over the past several decades, in part because of a decline in real average earnings for those without a college degree. In addition to high private returns, there are substantial social returns to having a well-educated citizenry and workforce. A new development that may have important longer-term implications for education investment and for the broader economy is a significant change in the financing of higher education. State funding has declined markedly over the past two decades, a trend that has coincided with a significant increase in college tuition. To cover the rising cost of college, students and families have increased their reliance on student loans, funding a greater share of an increasing overall college cost. While the federal student loan program has undoubtedly helped mitigate the impact of higher costs on college access and enrollment, more and more students now leave college with higher amounts of debt. Given these trends, it is critical to understand whether holding student debt has affected young Americans’ later life outcomes, such as homeownership.
Rajashri Chakrabarti, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw
An examination of recent developments in household borrowing was the focus of a press briefing held this morning at the New York Fed. President William Dudley offered opening remarks on the latest developments, then Bank economists briefed the press on their analysis of household indebtedness, placing a spotlight on student loans. Their research is based on the New York Fed Consumer Credit Panel—which is based on Equifax credit report data—as well as data from the National Student Clearinghouse. The presentation contained three components: (1) an analysis how aggregate household debt today differs from its 2008 peak, (2) new evidence on student debt growth, delinquency and repayment, and (3) an investigation of the relationship between homeownership, student debt, and educational attainment.
W. Scott Frame, Kristopher Gerardi, and Joseph Tracy
The Federal Housing Administration (FHA) played a significant role in maintaining mortgage credit availability following the onset of the subprime mortgage crisis and through the Great Recession. Not surprisingly, the FHA’s expansion during a period of falling home prices and deteriorating economic conditions resulted in material losses to its mortgage insurance fund arising from mortgage defaults and foreclosures. These losses, in turn, have generated increased policy interest in the design of the FHA mortgage insurance program. In this post we analyze how the cost of FHA insurance is shared between mortgage defaulters and non-defaulters and find that non-defaulters pay a disproportionate share. Although the ten-year cumulative default rate for our sample of FHA mortgages is 26 percent, defaulters only pay 17 percent of total mortgage insurance premiums. We discuss changes to the FHA mortgage insurance pricing that would shift more of the premium cost to defaulters.
Editors’ note: The labels on the x-axis of the chart “Debt Payment Prioritization by Year” have been corrected. (March 7, 2017, 9:10 a.m.)
When faced with financial hardship, borrowers might choose to repay some debts while falling behind on others—potentially going into default. Such choices provide insight into consumers’ spending priorities and can help us better understand the condition of borrowers under financial distress. In this post, we examine how consumers prioritize their default choices. Do consumers under financial stress default on their credit cards first? Or are they more likely to default on their mortgage?
Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw
The latest Quarterly Report on Household Debt and Credit from the New York Fed’s Center for Microeconomic Data showed a substantial increase in aggregate household debt balances in the fourth quarter of 2016 and for the year as a whole. As of December 31, 2016, total household debt stood at $12.58 trillion, an increase of $226 billion (or 1.8 percent) from the third quarter of 2016. Total household debt is now just 0.8 percent ($99 billion) below its third quarter 2008 peak of $12.68 trillion, and 12.8 percent above the second quarter 2013 trough. But debt looks very different in 2016 than it did the last time we saw this level of indebtedness.
The homeownership rate peaked at 69 percent in late 2004. By the summer of 2016, it had dropped below 63 percent—exactly where it was when the government started reporting these data back in 1965. The housing bust played a central role in this decline. We capture this effect through what we call the homeownership gap—the difference between the official homeownership rate and the “effective” rate where only homeowners with positive equity in their house are counted. The effective rate takes into account that a borrower does not in an economic sense own the house if the mortgage debt is greater than the house’s value. In this post, we show that between 2005 and 2012, the effective rate fell well below, and put downward pressure on, the official rate. We also demonstrate that the increase in house prices and the exit of millions of homeowners through foreclosure has largely eliminated the gap between the official and effective homeownership rates.
Andreas Fuster, Eilidh Geddes, and Andrew Haughwout
Housing equity is the primary form of collateral that households use for borrowing. This makes it a potentially important source of consumption funding, especially for younger households. In a previous post we showed that owner’s equity in residential real estate has finally, thanks to increasing home prices, rebounded to and essentially re-attained its 2005 peak level. Yet in spite of a gain of more than $7 trillion in housing equity since 2012, so far homeowners haven’t been tapping this equity at anything like the pace we witnessed during the housing boom that ended in 2006. In this post, we analyze the changes in equity withdrawal.
Andreas Fuster, Eilidh Geddes, and Andrew Haughwout
In yesterday’s post, we discussed the extreme swings that household leverage has taken since 2005, using combined loan-to-value (CLTV) ratios for housing as our metric. We also explored the risks that current household leverage presents in the event of a significant downturn in prices. Today we reverse the perspective, and consider housing equity—the value of housing net of all debt for which it serves as collateral. For the majority of households, housing equity is the principal form of wealth, other than human capital, and it thus represents an important form of potential collateral for borrowing. In that sense, housing equity is an opportunity in the same way that housing leverage is a risk. It turns out that aggregate housing equity at the end of 2015 was very close, in nominal terms, to its pre-crisis (2005) level. But housing wealth has moved to a different group of people—made up of people who are older and have higher credit scores than a decade ago. In today’s post, we look at the evolution of housing equity and its owners.
Andreas Fuster, Eilidh Geddes, Benedict Guttman-Kenney, and Andrew Haughwout
Housing is by far the most important asset for most households, and, not coincidentally, housing debt dwarfs other household liabilities. The relationship between housing debt and housing values figures significantly in financial and macroeconomic stability, as events during the housing bust of 2006-12 clearly demonstrated. This week, Liberty Street Economics presents five posts touching on various aspects of housing, from the changing relationship between mortgage debt and housing equity to the future of homeownership. In today’s post, we provide estimates of housing equity and explore how vulnerable households are to declines in house prices, using methods introduced in our paper “Tracking and Stress Testing U.S. Household Leverage.”
Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.
The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Donald Morgan, all economists in the Bank’s Research Group.
The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
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