Did Generation X Cause the Housing Crisis?

[stu2002]

The housing crisis resulted in a great deal of finger pointing. Politicians blamed Wall Street, Wall Street blamed government, and each political party blamed the other political party. What gets lost in the drama of political theater is that real people signed mortgages that could not be afforded. Somewhere in the buck-passing, we are left to wonder what happened and how financial consumers can avoid future foreclosure catastrophes.



A paper published by the St. Louis Fed, titled "The Foreclosure Crisis in 2008: Predatory Lending or Household Overreaching?" gives us an idea of the financial state of the average household in foreclosure during the housing crisis. The paper compiled characteristics of debtors in foreclosure during the recession and classified these struggling households using PersonicX Life Stage Segmentation, a classification that divides households into 21 groups based on socio-economics, marital status, and household size. Researchers found a number of trends in the collected data worth taking note:

Generation X was Most to Blame. The largest percentage of households in foreclosure belonged to those in Generation X--in particular, Gen-Xers who had high average household income ($59,500) and years of education (14.8 years). It seems counter intuitive that a well-educated and affluent group of families would lead the foreclosure charge. Yet this group of households made up more than 1 in 10 foreclosures. How do affluent families end up in foreclosure?

Luckily, the researchers provided statistics about the types of mortgages that were in foreclosure.

Mortgages with High Loan-to-Value ..

http://news.yahoo.com/did-generation...145635301.html

[Zippyjuan]

What percent of the house purchases during the bubble were GenXers? If they were 10% of the forclosures, that means that 90% of forcolsures were NOT GenX. If they were more than ten percent of the original buyers, then they did better than others. I don't consider "one in ten" to be "most to blame". That is a small minority.

I checked out the St Louis Fed article the piece mentions http://www.stlouisfed.org/publicatio...icles/?id=2124 and they include this chart:

To see which of the 21 PersonicX groups contributed the most disproportionately to the foreclosure crisis, we calculated the share of total foreclosures represented by each group and the share of all households represented by each group. We subtracted the household share from the foreclosure share to derive the "excess foreclosure shares" of each group. Group 07X, for example, accounted for 5.52 percent of all households but 11.3 percent of all foreclosures. The excess share of foreclosures is the difference of these two ratios, or 5.78 percentage points. Figure 2 plots the 11 PersonicX Groups with the highest excess foreclosure shares.

By combining household foreclosure data from RealtyTrac with household data from Acxiom, we were able to create a profile of households in foreclosure during the early stages of the financial crisis. We found that many foreclosed households were young with relatively high income and education levels. Moreover, geographic foreclosure patterns were consistent with bubble dynamics as illustrated by the positive correlation between home-price appreciation and subsequent foreclosure rates. The weight of the evidence supports the overreaching hypothesis. Consequently, strong predatory lending restrictions, while desirable, would likely be insufficient to avoid a future foreclosure crisis should another housing bubble emerge.

I might be inclined to think that "young" is a more significant factor in ending up forclosed on than the income levels (income allowed them of course to buy more expensive homes but their age may have led them to make more mistakes in deciding what to purchase).

[dannno]

I think the gen-Xers relatively high percentage was incidental to the life stage they were at when the crisis occurred. I am right in between Gen X and Y (technically the very beginning of Y) and if I were a little bit older I imagine I would have bought a house some time in the mid-2k's. I wouldn't have had very much of my house paid off by the time the crash hit and would have lost a lot of equity that might not have been there if I was 15 years older and I would have had more equity in my house as a cushion (unless I used the equity for other things).

Being in Gen Y, I haven't bought a house yet because when I was about 2 or 3 years into my career the housing prices peaked and then the crash happened so I'm still renting and my career has been relatively stagnant since then due to the bad economy so I don't have the means to purchase a house (especially since i'm in such an expensive area).

[Brian4Liberty]

A recent immigrant from China told me that he knew several other recent immigrants that were having contests on how many houses they could buy. All on liar loans or ninja loans. They averaged about 7 houses each, one guy had twenty. They went back to China when the bust came. Nothing like being able to play on credit in the world's biggest casino and just walk away when you lose. Privatize profits, socialize loses.

[Brian4Liberty]

The Dot-com bubble put a lot of cash into Gen-Xers pockets, who then spent on real estate. When the Dot-com bubble bust, many people went into the real estate industry in one form or another. Many speculators.

[newbitech]

[stu2002]

Thanks for the chart

[TonySutton]

I think it is overall belief of the people in the government. They see the government racking up huge expenditures and figure if it is good for the government it must also be ok for me. Since very few people are introduced and understand Austrian economics they don't realize they are screwed until it is too late. There was literally no one out there to stop them. The banks were approving loans that they new were bad. Normally the bank protecting it's bottom line is the check and balance to keep this from happening but since the bank can sell off the mortgage to Fannie/Freddie they approve the loan and pass the risk to the tax payers.

[BAllen]

Declining income is one reason.
http://www.huffingtonpost.com/2011/1...n_1022118.html

We have had factories moving overseas, and outsourcing of white collar jobs, coupled with immigration. This spells disaster. Real estate companies have a smaller pool of potential buyers. Rather than drop prices to affordable levels, they push bad loans. Government revenue also declines, so taxes increase in percentage, taking more of peoples' incomes.

[erowe1]

It seems counter intuitive that a well-educated and affluent group of families would lead the foreclosure charge.

It doesn't seem that counterintuitive to me, given the timing. I remember a lot of my friends around 2000 doing really well as young professionals with stock portfolios that had been skyrocketing for the past half-decade either buying their first houses or upgrading to bigger ones for their young families in the midst of the housing bubble in an area of the country where $400 thousand townhomes were common. People much younger than them weren't in a position to buy those, and people much older had no reason to move out of the homes they already had.