One More FollowUp to the Moral Panic...

I thought it might be interesting to chart the average home values of Fannie Mae borrowers on the same chart from the previous posts with the Atlanta home prices.

The median Atlanta home price has followed the US median (according to Zillow, via the ZHVI), except that it tanked a little deeper than average after 2008.

Then, remember, the chart also includes the Zillow home price estimate for ZIP code 30344, which today has an average income of about $50,000, and ZIP code 30022, which today has an average income of about $190,000.

As I have explained before, up to 2008, Fannie Mae was lending to the same families on the same homes as it had been for years, or decades. Each year the average value of the typical home with a new Fannie Mae mortgage was about the same as the average current value of homes that had received Fannie Mae loans in previous years.

And, both basically were moving along with US markets. The average Fannie Mae house tended to be worth about $50,000 more than the average US home tracked by Zillow. That was the case from the mid-1990s to 2007. (I’m just showing dates from 2002 on the chart.)

Then, the average value of homes that had previously received Fannie Mae mortgages declined along with the national averages. In 2009, it was still about $50,000 more than the average Atlanta home.

But, by 2009, the average home getting a new Fannie Mae mortgage was worth more than the average home in the rich Atlanta ZIP code where the average income is nearly $200,000.

One question to ask is would the values of the homes in poor Atlanta and average Atlanta have fallen if Fannie Mae and the other federal lending conduits had continued to serve them as they had before? My conclusion, which is reflected in the Erdmann Housing Tracker credit component, is basically no.

That tightening, which is tremendously clear in the Fannie Mae data, was responsible for, effectively, all of the loss of wealth after 2007.

You might say that I’m being too binary. I’m overstating the case. Maybe. I don’t say that lightly, and I didn’t come to that conclusion easily.

On the other hand, the economics academy has universally treated those price declines as if the declines are proof that credit had created a bubble in those ZIP codes and had needed to be retracted.

Home prices in the rich ZIP code bottomed out 19% below the 2007 peak. Prices in the poor ZIP code dropped 62%.

So, in the room I am standing in, maybe I’m being a bit strident. Maybe the tightening was only responsible for 80% of the losses after 2007.

The entire economics profession. Every book author. Every award winner. Every author of a published article in the top economic journals is in a room way down at the end of the hall, three floors down. They don’t even know my room is in the building. And, they don’t even know how much that room stinks.

Literally, they don’t even know this is an issue. I don’t think I’ve seen a single paper that tries to control for changing credit standards after 2007. There are lots of papers. And I haven’t read a lot of them. But, if anyone is trying to assess this issue, it hasn’t moved into the peripheral vision of the orthodoxy. If you write a paper for a distinguished journal, reviewer number 2 isn’t going to reject your paper because you didn’t control for the single most important development in American housing markets since the turn of the century.

Something else interesting has been going on here, too. When home prices started to rise again after 2012, the new Fannie Mae homes didn’t really join them. That’s not because lending standards have been loosened. If anything, the average credit score on new Fannie purchase loans has continued to rise since 2012.

For most of that time, Fannie was charging high fees so that borrowers could get lower rates in the jumbo market. So, my guess is that Fannie wasn’t getting a lot of the high end, low-default risk business during that time. It was more a case of giving up the top than of starting to lend again to the low end of their traditional clientele.

And the average new Fannie Mae home value didn’t rise at all during the Covid boom. Now, in addition to going to the jumbo market, a lot of homes were bought with all cash. In fact, I think the Fannie Mae measure will catch up a bit with the rest of the market now that prices have stabilized.

During the price spike, borrowers couldn’t match cash offers because they couldn’t get appraisals at the current market prices. But, once the market stabilized and appraisals caught up, mortgaged borrowers could compete. That is probably providing some pent up demand in the current market, and is likely one reason prices have been relatively stable rather than reversing.

And, the spread between conforming loans and jumbo loans is back to its normal relationship. Fannie loans seem to be cheaper again. Maybe they will also pick up more of the top-end of the market again.

What America needs them to do is to go back to lending to the same families in the same houses that they used to lend to before 2008. Or, lacking that, the federal government needs to assure private banks that it is ok for them to do the same.