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Discussion of “Cross‐sectional Patterns of Mortgage Debt during the Housing Boom: Evidence and Implications” by
Foote, Loewenstein and Willen
Atif MianPrinceton University and NBER
Comment # 1: Conceptual Clarification
• “The reallocation of mortgage debt to low‐income or marginally qualified borrowers plays a central role in many explanations of the early 2000s housing boom.”– This is a somewhat misleading characterization of one of the main explanations of the 2000s credit and housing boom.
– Yes, the expansion of credit to “marginal” borrowers is important, but the consequences of that expansion impact everyone (i.e. the “average”).
The Credit Supply Hypothesis• Mian and Sufi (2016): “an increase in credit supply unrelated to
fundamental improvements in income or productivity” leads to …– Extensive margin: individuals not able to buy a house due to credit
rationing earlier, now can– Intensive margin: individuals with debt can now borrow more for same
permanent income. – House price effect: greater credit availability boosts house prices,
especially where supply more restricted. [this feeds back into intensive margin]
• See MS 2016 for a very large literature establishing each of the above points.
• The credit supply hypothesis is distinct, but not mutually exclusive, from the idea that independently exuberant house price expectations drove the housing boom.
Precise Question in the paper
• My suggested first two lines for the paper:– “Did household leverage increase uniformly across the income distribution during the 2000s. Yes it did.”
• Let’s evaluate the evidence …
Comment # 2: Evaluating SCF data
• The paper closest to authors’ work is actually not cited: Kumhof, Ranciere and Winant (AER 2015)– Kumhof et al use evidence from the SCF to argue that leverage increased disproportionately for lower income households.
– Why the difference?• Kumhof et al, correctly, use change in debt to income across income cohorts in their analysis.
• FLW look at debt and income dynamics separately.
– Thus there is evidence from SCF itself that goes against the FLW conclusion.
Kumhof, Ranciere and Winant (AER 2015)
Comment # 3: Evaluating Homeownership evidence
A. Homeownership rate, as measured by FLW: (# of owner‐occupied homes) / (# of owner‐occupied homes + # of rental homes)
– The problem is that a credit supply shock effects both numerator and denominator.
– A better measure would be # of owner‐occupied homes per adult population.
– Appropriately correcting the definition shows an increase in homeownership rate throughout the credit boom.
Comment # 3: Evaluating Homeownership evidence
B. The marginal homeowner, is poorer and younger during the credit boom relative to previous trend – thus contradicting FLW claim.
Characteristics of marginal borrowers
Comment # 3: Evaluating Homeownership evidence
C. Owner‐occupied housing transactions increased more from 02‐05 for subprime zips, and the same does not hold for investment purchases.
Comment # 4: Evaluating Equifax Panel Evidence
Credit growth in much stronger for lower credit score individuals
Age‐adjusted
Beware of individual credit‐score dynamics during the credit boom
Comment # 5: Debt to income in Saez, Zucman (QJE 2016) data
Debt to income change is higher for lower income brackets in 2000‐2007
Summary1. The paper’s scope should be defined a bit more modestly
Did household leverage increase uniformly across the income distribution during the 2000s?
2. The paper claims “yes”, but evidence from a wide range of sources suggests otherwise:i. Kumhof et al (2015) show that debt to income rises faster for
lower income households during the 2000s in SCF data. ii. Homeownership rate, properly defined, increases throughout
the credit boom and marginal homeowners are younger and poorer in Census / ACS data.
iii. Credit growth, at the individual level, is faster for individuals with lower credit scores from 2000 to 2007 in Equifax panel.
iv. Debt to income rises faster for lower income brackets from 2000 to 2007 in Saez‐Zucman IRS data.