THE Wealth of Older Americans and the Sub-prime Debacle

1. THE Wealth of Older Americans and the Sub-prime Debacle Barry Bosworth Rosanna Smart

2. 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.

3. 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

4. Household Wealth as a Ratio to Income, 1970-2008

5. Household Net Worth: SCF and Flow of Funds

6. Indexes of Home Price Change, 2985-2007

7. Home Equity Extraction, 1991-2008

8. 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.

9. 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.

10. 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.

11. Average Net Worth of Households by Major Component and Age of Head

12. 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.

13. 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.

14. Change in Net Worth Components from 2007-2009, by Age of Head

15. 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.

16. Change in Net Worth Components from 2007-2009, by Age of Head and Income Tercile

17. Changes in Net Worth and Total Wealth by Age and Income

18. Changes in Net Worth and Total Wealth by Age and Income

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.

20. 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.