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3.2 Bosworth

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					 THE Wealth of Older
Americans and the Sub-
        prime Debacle
         Barry Bosworth
         Rosanna Smart
Objectives
   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 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
Household Wealth as a Ratio to Income,
1970-2008

                     7.0

                     6.0

                     5.0
   Ratio to Income




                                                                       Capital Gains
                     4.0

                     3.0

                     2.0                     Net Investment/Saving

                     1.0

                     0.0
                       1970   1975   1980   1985    1990       1995   2000     2005

                                                   year
Household Net Worth: SCF and Flow of Funds
                      50



                      40
                                                                     SCF
 trillions of 2000$




                      30

                                                                            FoF
                      20



                      10



                      0
                           1983   1986   1989   1992   1995   1998   2001   2004   2007
                                                       Year
Indexes of Home Price Change, 2985-2007

        3.00
                      FHFA

                      Case-Schiller

        2.50          PSID

                      SCF

                      HRS
        2.00
Index




        1.50




        1.00




        0.50
               1985               1990   1995          2000   2005

                                                year
Home Equity Extraction, 1991-2008



                   500


                   400
                                                 Cashout from Mortgage
                                                 Refinancing
Billions (2000$)




                   300


                   200


                   100                                                    Home Equity Loans



                    0
                     1990   1992   1994   1996    1998     2000    2002     2004     2006     2008
Home Refinancing and Equity Withdrawal
   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 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 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 Major
      Component and Age of Head

                  800

                  700

                  600

                  500
Thousands 2000$




                                      50+
                  400

                  300
                         <50
                  200

                  100

                    0

                  -100
                               1983                 1989                   1995                  2001                    2007
                          Housing Assets    Capital Gain Assets   Fixed Value Assets   Housing Debt   Non-Housing debt
Implications 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 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 2007-2009, by
Age of Head
1200

1000

 800

       2007                               2009
 600

 400

 200

   0

-200
                    Under 50                                  Over 50

       Housing Assets      Capital Gain Assets   Fixed Value Assets   Housing Debt
       Non-Housing debt    DB Wealth             SS Wealth
Inclusion of Social Security and DB
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 2007-2009, by
Age of Head and Income Tercile
                                  LOW INCOME                                 MID INCOME                                            HIGH INCOME
                    2195


                    1995


                    1795


                    1595


                    1395
  Thousands 2000$




                    1195


                    995


                    795


                    595


                    395
                           2007         2009

                    195


                      -5
                                  <50              50+                           <50                 50+                     <50          50+

                                         Housing Wealth   Capital Gains Wealth     Non-capital Gains Wealth   DB Wealth   SS Wealth
Changes in Net Worth and Total Wealth by
Age and Income
                                                  Total
                             Net Worth            Wealth

         Category   2007- 1983     2009- 2007     2009- 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 Wealth by
Age and Income
                                               Total
                             Net Worth         Wealth
         Category   2007- 1983    2009- 2007   2009- 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
Conclusions

   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.
Conclusions

   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.

				
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