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The Economist doesn't seem to know economics.
I was presented this article by Reddit as an ad. Though the ad used the subtitle about Trump as the title. This article packs more "wrong" in a coherently-written article than I've seen in a long time. The actual title is "America’s huge mortgage market is slowly dying".
Right out of the gate, we're told mortgage debt has dropped over 30 points as a percentage of the GDP since the housing crisis, and now is at its lowest level since 1999, before the bubble. Wait a minute? Isn't that a good thing? We've finally returned to normalcy after the bubble? In fact, the graph appears to show just that. Mortgage debt is still higher as a percent of GDP than any time other than the bubble.
We're then told "mortgage debt has shrunk to just 27% of the value of American household property—a 65-year low". Uh, yes, but those of us who are paying attention realize that this isn't because mortgage debt has shrunk, it's because the value of American property has increased. Which doesn't have much to do with any dying of the mortgage market.
Then we get this howler:
Uh, how exactly is lenders' appetite for risk a measure of mortgage availability?
The article then goes on to call this a "collapse in credit", because in 2003 (peak bubble), 35% of American mortgages went to people with credit scores below 720, whereas now that number is 22%. But the attached chart shows total originations are fairly close to immediately pre-COVID numbers. There's no real drying up in credit since the end of the bubble, just extension of the same credit to more creditworthy borrowers. Note that more than half of Americans with a credit score have one over 720. American's credit scores have increased, and lending less to people who are higher risk just makes sense. The bubble lending DIDN'T make sense, that's how we got the bubble!
Did I call the previous one a howler? No, that wasn't a howler. THIS is a howler:
Uh, bitch, prices are high. Time on market is low. There's LOTS of buyers. It's a seller's market. If developers aren't building (and indeed they aren't) it's not a lack of prospective buyers causing it.
This is heart of the problem with the article: if there is indeed a mortgage drought preventing people from buying houses, house prices should be falling, not rising. Basic Econ 101 stuff. The article completely ignores this right up until the very end, when it notes
I don't know what G-S means by that, but "any policies meant to make mortgages more widely available will only push house prices higher" makes more sense than anything else in the article, and it contradicts the whole thesis of the article.
The housing market has plenty of problems. Unavailability of credit is definitely not one of them.
What you fail to understand, though forgivably, is that the Economist is not an economics paper for a regular person’s idea of the economy. It’s for a certain brand of finance person with international and political awareness interests.
To you and I, normally, mortgages are mostly about houses. It’s about the chance of default, about rates, and about the first degree effects. The Economist occasionally talks about this stuff. But usually, this is not actually the most interesting part about mortgages. The interesting bit about them in our modern financial system is that they are pools of presumably predictable risk, and since large scale finance is all about allocation and dynamics of risk, mortgages play a key role as a counterbalance, hedge, collateral, stress test statistic for banks, etc all rolled into one. That is, second order effects to be a little lazy about it. As just one example, all big banks have strict liquidity ratios that they are mandated to carry to pass the “stress tests”, and mortgages are a big part of that. I think you’re missing this context entirely. Mortgages backstop much of the risk pool of the lending activity of big banks.
The entire point of the article is that there is a such thing as too-safe mortgages, when taken in aggregate, in terms of their role as a risk sink in the broader financially engineered world of banks. This is a legitimate concern, systemically speaking. It’s also pointing out that traditional turnover rates on housing are way undershot due to a combination of hitherto unusual levels of inflation, excess bank loan skepticism, and this has acted as a subtle brake on home building. That last point is an arguable thesis, but it’s a commonly made one.
Homes aren’t purely about supply and demand even if that’s a huge part of it. There are hidden background regulatory pressures that have a stochastic effect on mortgage offers. The financial market historically “expects” a certain ratio of subprime applicants, and hasn’t been getting it, so it’s been throwing a few wrenches into the cogs.
One side effect of this state of affairs by the way is that the big banks instead of doing the riskier lending themselves now lend money to private equity which then does the riskier lending. Some people think this is bad. One solution is to undo Dodd-Frank, and indeed some people want to, but many others feel like that’s worse (the liquidity rules are there for a reason and a collapse of private equity funds is potentially less bad than a collapse of the main banks themselves).
I suppose this is better than the Rick and Morty copypasta. In any case, this article is definitely not operating on that level. If it were, it would at least have to get into mortgage-backed securities, FNMA, and Freddie Mac, none of which it mentions. No actual sophisticated financier is going to give this article two seconds of their time; it is, in fact, directed at the layman.
It’s totally possible and I’d posit even likely that the Economist, rather than “not knowing economics”, subscribes to a particular school of economics, and at the same time doesn’t care to explain economics. After all, the vibe the magazine cultivates is that everyone reading it is a metropolitan genius. Those are both good explanations of why the article is light on root-cause explanations (and Fannie and Freddie are indeed mentioned very specifically!)
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