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A mirror image of mortgages and equity

The story of the Great Recession told with two intersecting lines


Take a look at mortgage or real estate data on FRED. The main story (for a number of years, now) is all about the Great Recession, which is clear in the graph above. Let’s unpack that story.

In blue, we have the share of equity in the real estate that households own. In the 1950s, 70-80% of the value of the average house was owner equity, and 20-30% was owned by a financial institution. The share of owner equity essentially stayed within a 60-70% band until the end of the millennium. Then it quickly dropped to below 40%, before rebounding today to its previous level (from 2001 or so). What happened during the Great Recession is clearly a deviation from normal.

This being a ratio, the deviation could have come from changes on either side of that ratio: 1. Mortgages could have sharply increased without a change in owner equity. 2. Owner equity could have dramatically shrunk. To help figure this out, we can look at the red line, which tracks household mortgages normalized by GDP. It shows the opposite pattern of the blue line: Mortgages clearly become more popular in the initial years, as the financial sector develops. Then they stabilize, with a push in the 1980s before really taking off, earlier than the blue line, and then they crash; soon after, the blue line shoots up.

What does this teach us? First, there was clearly a sharp increase in mortgages before the crisis. But it was accompanied by an equivalent increase in the value of the homes, so there was no visible change in the share of owner equity until the value of homes stopped keeping up with the mortgages and even dropped. At the bottom of the crisis, owner equity is at its lowest, and it is only then that mortgages start decreasing: Virtually no new mortgages are issued, current mortgages are gradually paid off and some existing ones are foreclosed, returning to their historical levels.

How this graph was created: Search for and select “Household equity in real estate” and click “Add to Graph.” From the “Edit Graph” panel, use the “Add Line” tab to search for “home mortgages.” Select a series in levels and add it to the graph. From the “Customize data” search bar, search for and add the nominal (not real) GDP series. Finally, apply formula a/b*100.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: GDP, HMLBSHNO, HOEREPHRE


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