the commonly repeated anecdotes of janitors and checkout clerks being
handed $300,000 mortgages on a hope and a prayer do not appear to be representative. On net, all the new mortgages went to families with incomes around $45,000 and higher.
And elsewhere he writes,
growth in homeownership came from high income households and that households didn’t increase their debt payment/income ratios or their relative consumption of housing during the boom. The evidence against the standard narrative is even more stark when we look at dollar levels, because, despite frequent implications to the contrary, low income households don’t tend to take on nearly as much debt as high income households.
Consider two ratios:
Many narratives of the financial crisis focus on debt-to-income ratios. The oppressor-oppressed narrative is that greedy lenders imposed inappropriately high debt-to-income ratios on innocent borrowers, who then could not meet their mortgage payments. The civilization-barbarism narratives stress the use of houses as ATMs and the forced expansion of lending toward irresponsible borrowers.
It seems to me that Erdmann is suggesting that debt-to-income ratios did not got out of line, or perhaps they only got out of line for high-income borrowers. He may be right, although I would suggest looking at the Home Mortgage Disclosure Act (HMDA) data and not just the survey of consumer finances.
Ever since Bob Van Order explained the mortgage default option to me almost 30 years ago, I have viewed debt-to-equity as more important than debt-to-income. If we define sup-prime lending in terms of debt-to-income, then I am inclined not to attach much significance to the proportion of sub-prime loans. To me, the dangerous loans are the ones with low down payments. There is some overlap between those and loans with high debt-to-income ratios, but not enough overlap to equate the two.
Let’s take Erdmann’s analysis of debt and income as accurate. I see no reason to change my preferred narrative of mortgage lending and the housing boom. That is, there was a surge in lending with low down payments. I am pretty confident that the HMDA data support this. In addition, there was a surge of lending for non-owner-occupied homes (speculators).
Think of owner-occupants with low down payments and non-owner-occupants as the speculative component in the housing market. My narrative is that the speculative component soared during the housing boom. These speculators did very well until house prices started to level off late in 2006. Then what had been a virtuous cycle on the way up turned into a vicious cycle on the way down, and the speculative buyers got hammered.
Getting from that to a recession is the more difficult part for me, because I do not allow myself to use the words “aggregate demand.” Instead, to explain the recession I have to make a case that many patterns of specialization and trade became unsustainable, or were finally perceived as unsustainable, while new sustainable patterns were difficult to discover. I might argue that the surge in government economic intervention exacerbated the difficulty of discovering new patterns of sustainable specialization and trade. TARP and the stimulus were largely efforts at redistribution, and that gave people a bigger incentive to focus on grabbing some of the loot than on developing a sustainable new business. Of course, Keynesians will tell you that the problem is that the surge in government intervention should have been bigger and lasted longer.