THE Wealth of Older
Americans and the Subprime 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
Ratio to Income
6.0
5.0
Capital Gains
4.0
3.0
2.0
Net Investment/Saving
1.0
0.0
1970
1975
1980
1985
1990
year
1995
2000
2005
Household Net Worth: SCF and Flow of Funds
50
trillions of 2000$
40
SCF
30
FoF
20
10
0
1983
1986
1989
1992
1995
Year
1998
2001
2004
2007
Indexes of Home Price Change, 2985-2007
3.00
FHFA
Case-Schiller
2.50
PSID
SCF
HRS
Index
2.00
1.50
1.00
0.50
1985
1990
1995
2000
year
2005
Home Equity Extraction, 1991-2008
500
Billions (2000$)
400
Cashout from Mortgage
Refinancing
300
200
Home Equity Loans
100
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Home Refinancing and Equity Withdrawal





SCF has asked about refinancing and equity
withdrawal since 1995.
Pattern is similar to aggregate statistics with
sharp rise after 2001
Nearly half of households under age 50
refinanced in 2001-04 and one-third of those
over age 50.
In 2001-07, annual equity extraction averaged
about 1.5% of home value – similar for young
and old.
Consumption accounts for about half of equity
withdrawal.
Modeling Equity Withdrawal

Hurst and Stafford





Financial motivation –interest saving.
Consumption smoothing – liquidity constrained
households.
Extend Probit analysis to cover 1995-2006.
Refinancing dominated by financial
motivation
Equity withdrawal correlated with home price
appreciation, low loan-to-value, and low
levels of liquid assets.
Overall Wealth Position

Strong wealth gains between 1983 and
2007.



Percentage gain for older households greater that
for the young.
Rise in wealth-income ratio.
Consistent with prior studies that reported an
improving relative wealth position for older
households.



Largely due to composition changes
Lower mortgage to home value.
Greater reliance on non-housing wealth.
Average Net Worth of Households by Major
Component and Age of Head
800
700
Thousands 2000$
600
500
50+
400
300
<50
200
100
0
-100
1983
Housing Assets
1989
Capital Gain Assets
1995
Fixed Value Assets
2001
Housing Debt
Non-Housing debt
2007
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
600
2007
2009
400
200
0
-200
Under 50
Over 50
Housing Assets
Capital Gain Assets
Fixed Value Assets
Non-Housing debt
DB Wealth
SS Wealth
Housing Debt
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
Thousands 2000$
1595
1395
1195
995
795
595
395
2007
2009
195
-5
<50
50+
Housing Wealth
<50
Capital Gains Wealth
50+
Non-capital Gains Wealth
<50
DB Wealth
SS Wealth
50+
Changes in Net Worth and Total Wealth by
Age and Income
Total
Wealth
Net Worth
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
Wealth
Net Worth
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.