the wealth of older americans and the sub- prime debacle barry bosworth rosanna smart
TRANSCRIPT
THE Wealth of THE Wealth of Older Americans Older Americans
and the Sub-prime and the Sub-prime DebacleDebacle
Barry BosworthRosanna Smart
ObjectivesObjectives Consequences of home-price bubble and
collapse on wealth for older households Use micro data to explore who was affected and
their response. Refinancing and equity withdrawal. Housing data largely from SCF and PSID HRS did not collect much information on
refinancing. Broader impact of crisis on other wealth
components.
Macro to MicroMacro to Micro Did the household surveys capture the
macroeconomic phenomena? General wealth changes Rise of home prices
Last SCF – mid-2007 PSID – 2006
Growth of refinancing and equity withdrawal
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1970 1975 1980 1985 1990 1995 2000 2005
year
Rat
io to
Inco
me
Net Investment/Saving
Capital Gains
Household Wealth as a Ratio to Income, 1970-2008
Household Net Worth: SCF and Household Net Worth: SCF and Flow of FundsFlow of Funds
0
10
20
30
40
50
1983 1986 1989 1992 1995 1998 2001 2004 2007
Year
tril
lio
ns
of
2000
$ SCF
FoF
Indexes of Home Price Change, 2985-2007Indexes of Home Price Change, 2985-2007
0.50
1.00
1.50
2.00
2.50
3.00
1985 1990 1995 2000 2005
year
Inde
x
FHFA
Case-Schiller
PSID
SCF
HRS
Home Equity Extraction, 1991-2008Home Equity Extraction, 1991-2008
0
100
200
300
400
500
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Bill
ions
(20
00$)
Home Equity Loans
Cashout from Mortgage Refinancing
Home Refinancing and Equity Home Refinancing and Equity WithdrawalWithdrawal SCF has asked about refinancing and equity
withdrawal since 1995. Pattern is similar to aggregate statistics with
sharp rise after 2001 Nearly half of households under age 50
refinanced in 2001-04 and one-third of those over age 50.
In 2001-07, annual equity extraction averaged about 1.5% of home value – similar for young and old.
Consumption accounts for about half of equity withdrawal.
Modeling Equity WithdrawalModeling Equity Withdrawal Hurst and Stafford
Financial motivation –interest saving. Consumption smoothing – liquidity constrained
households. Extend Probit analysis to cover 1995-2006.
Refinancing dominated by financial motivation
Equity withdrawal correlated with home price appreciation, low loan-to-value, and low levels of liquid assets.
Overall Wealth PositionOverall Wealth Position Strong wealth gains between 1983 and
2007. Percentage gain for older households greater
that for the young. Rise in wealth-income ratio. Consistent with prior studies that reported an
improving relative wealth position for older households. Largely due to composition changes Lower mortgage to home value. Greater reliance on non-housing wealth.
Average Net Worth of Households by Average Net Worth of Households by Major Component and Age of HeadMajor Component and Age of Head
-100
0
100
200
300
400
500
600
700
800
1983 1989 1995 2001 2007
Th
ou
san
ds
2000
$
Housing Assets Capital Gain Assets Fixed Value Assets Housing Debt Non-Housing debt
50+
<50
Implications of Asset MeltdownImplications of Asset Meltdown Last available survey is mid-2007 (SCF) Apply asset price changes from FoFs up to
March 2009. Projections reflect asset composition of individual
households Assume uniform price change within category Housing, other real estate, equities, pension
funds, business assets.
Asset Losses by AgeAsset Losses by Age
An average loss in excess of 25 percent of net worth
Losses are larger for young households – 30 versus 25 percent Reflects low ratio of home equity to home
value. A 20 percent loss in home value translates to
a 45 percent loss in home equity. Older households had larger portion of net
worth in fixed-value assets.
Change in Net Worth Components from Change in Net Worth Components from 2007-2009, by Age of Head2007-2009, by Age of Head
-200
0
200
400
600
800
1000
1200
Under 50 Over 50
Housing Assets Capital Gain Assets Fixed Value Assets Housing Debt
Non-Housing debt DB Wealth SS Wealth
2007 2009
Inclusion of Social Security and Inclusion of Social Security and DB PensionsDB Pensions
Focus on net worth ignores social security which is more important to low-income households and defined-benefit pensions Social Security valuation from Medlin,
Zedlewski, and Toohey (2006). DB pensions from Gale and Pence (2006)
Changes relative magnitude of loss by income class.
Change in Net Worth Components from Change in Net Worth Components from 2007-2009, by Age of Head and Income 2007-2009, by Age of Head and Income TercileTercile
-5
195
395
595
795
995
1195
1395
1595
1795
1995
2195
Th
ou
san
ds
2000
$
Housing Wealth Capital Gains Wealth Non-capital Gains Wealth DB Wealth SS Wealth
<50 <50 <5050+ 50+ 50+
2007 2009
LOW INCOME MID INCOME HIGH INCOME
Changes in Net Worth and Total Changes in Net Worth and Total Wealth by Age and IncomeWealth by Age and Income
Net WorthTotal Wealth
Category 2007- 1983 2009- 20072009- 2007
% change
All households 235 -26 -19
Under age 50 194 -30 -20
Age 50 and over 233 -25 -18
Income Tercile
Lower Tercile 188 -24 -14
Under age 50 109 -36 -16
Age 50 and over 215 -22 -13
Changes in Net Worth and Total Changes in Net Worth and Total Wealth by Age and IncomeWealth by Age and Income
Net WorthTotal Wealth
Category 2007- 1983 2009- 20072009- 2007
% change
Middle Tercile 189 -29 -15
Under age 50 153 -41 -17
Age 50 and over 177 -25 -14
Upper Tercile 253 -26 -20
Under age 50 224 -29 -20
Age 50 and over 230 -25 -19
ConclusionsConclusions
Home refinancing and equity withdrawal was common to households of all ages, but was primarily a response to lower interest rates Equity withdrawal was relatively small, and allocated mostly to non-consumption uses.
Older households were doing very well with respect to wealth accumulation prior to crisis.
ConclusionsConclusions
Post-2007 wealth losses have been very large and pervasive across all age groups. Losses to young are slightly larger than
those of older households. Losses of net worth particularly severe for
low-income households Inclusion of SS wealth and DB pensions
has a significant equalizing effect.