Home, sweet home equity


In the comments to my previous thread on home equity and mortgages, Cactus defends the notion that, once again, electing any president who is a Democrat has special, magical effects on desireable economic variables such as the amount of equity people have in their homes. The problem with this, as with most of Cactus' other demonstrations of amazing Democratic presidential economic power, is that it gives us an Underpants Gnome theory of economic good:

1) Elect anyone who is a Democrat to the office of president

2) ???

3) Awesome economy!

In the case of housing, however, this is particularly useless, since we already know what variables drive home equity:

1) How much you can affordably borrow against your house.

2) How much inflation is eroding the value of the money you have already borrowed against your house.

3) The value of your house

We also know, to a first approximation, what has driven these changes over the last fifty years:

1) More sophisticated credit rating systems

2) Increased global capital flows

3) The shift towards house financing via long-term amortizing mortgages following World War II

4) The growing trend towards securitization of mortgages

5) Changes in federal reserve policy that caused inflation to accelerate in the mid-to-late 1960's, then decline post-1981 as the Volcker Fed finally cracked down

6) The market reaction to above, which resulted in slow secular decline in interest rates from the 1980s to today.

7) Changes in the relative tax preference for housing-secured debt in 1986, which caused homeowners to prefer mortgage debt over other forms of consumer borrowing.

8) A slight rise in homeownership, particularly in recent years; first time buyers tend to be unusually debt-heavy.

Some of these things are affected by presidential policy, but most aren't, and moreover, those that are will almost never show significant variance within the term of the president who enacted the policy. That's because home equity is a stock, not a flow; except for inflation, any significant change in the amount, or terms, of new debt will take years to show up in the home equity figures.

For example, Lyndon Johnson's privatization of Fanny Mae, and Carter/Reagan era bank reforms undoubtedly enhanced the securitization trend, but mostly decades after they left office. Likewise, the breakdown of Bretton Woods ultimately gave us the global capital flows that so boosted the mortgage market in the 2000's, but made little difference during his own time. The one presidential policy that can reasonably be said to have enhanced home equity while those presidents were in office was the great inflation of 1966-1981. But since the side effect of this laudable boost in home equity was the slow-motion implosion of our economy, I'd hardly rush to take credit for that.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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