From Boom to Bust: Did the Financial Fragility of Homeowners Increase in an Era of Greater Financial Deregulation?

Abstract:

After 1995, the United States experienced housing and mortgage booms, fuelled by increased lending from less regulated institutions, such as hedge funds. At the micro level, the housing boom may have left families with more wealth, but the mortgage boom may have increased their financial vulnerability. Using the Federal Reserve’s Survey of Consumer Finances, we consider both wealth creation and a select number of financial vulnerability measures of homeowners. The data indicate that the housing boom was not only associated with larger house values, but also moderated wealth gains and substantially greater financial vulnerability of homeowners. Both trends were more pronounced among middleincome and Hispanic families, who saw larger wealth gains, but also greater increases in financial vulnerability than their counterparts. Given the breadth of the spread in homeowners’ financial vulnerability alongside sharply higher house prices, our results support the link between more deregulated financial markets and rising financial instability.

Keywords::

• mortgages
• variable interest debt
• home equity
• leverage
• portfolio allocation