THE Wealth of THE Wealth of Older Americans Older Americans

and the Sub-prime and the Sub-prime DebacleDebacle

Barry BosworthRosanna Smart

ObjectivesObjectives 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 MicroMacro 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

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1970 1975 1980 1985 1990 1995 2000 2005

year

Rat

io to

Inco

me

Net Investment/Saving

Capital Gains

Household Wealth as a Ratio to Income, 1970-2008

Household Net Worth: SCF and Household Net Worth: SCF and Flow of FundsFlow of Funds

0

10

20

30

40

50

1983 1986 1989 1992 1995 1998 2001 2004 2007

Year

tril

lio

ns

of

2000

$ SCF

FoF

Indexes of Home Price Change, 2985-2007Indexes of Home Price Change, 2985-2007

0.50

1.00

1.50

2.00

2.50

3.00

1985 1990 1995 2000 2005

year

Inde

x

FHFA

Case-Schiller

PSID

SCF

HRS

Home Equity Extraction, 1991-2008Home Equity Extraction, 1991-2008

0

100

200

300

400

500

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Bill

ions

(20

00$)

Home Equity Loans

Cashout from Mortgage Refinancing

Home Refinancing and Equity Home Refinancing and Equity WithdrawalWithdrawal 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 WithdrawalModeling 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 PositionOverall 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 Average Net Worth of Households by Major Component and Age of HeadMajor Component and Age of Head

-100

0

100

200

300

400

500

600

700

800

1983 1989 1995 2001 2007

Th

ou

san

ds

2000

$

Housing Assets Capital Gain Assets Fixed Value Assets Housing Debt Non-Housing debt

50+

<50

Implications of Asset MeltdownImplications 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 AgeAsset 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 Change in Net Worth Components from 2007-2009, by Age of Head2007-2009, by Age of Head

-200

0

200

400

600

800

1000

1200

Under 50 Over 50

Housing Assets Capital Gain Assets Fixed Value Assets Housing Debt

Non-Housing debt DB Wealth SS Wealth

2007 2009

Inclusion of Social Security and Inclusion of Social Security and DB PensionsDB 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 Change in Net Worth Components from 2007-2009, by Age of Head and Income 2007-2009, by Age of Head and Income TercileTercile

-5

195

395

595

795

995

1195

1395

1595

1795

1995

2195

Th

ou

san

ds

2000

$

Housing Wealth Capital Gains Wealth Non-capital Gains Wealth DB Wealth SS Wealth

<50 <50 <5050+ 50+ 50+

2007 2009

LOW INCOME MID INCOME HIGH INCOME

Changes in Net Worth and Total Changes in Net Worth and Total Wealth by Age and IncomeWealth by Age and Income

Net WorthTotal Wealth

Category 2007- 1983 2009- 20072009- 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 Changes in Net Worth and Total Wealth by Age and IncomeWealth by Age and Income

Net WorthTotal Wealth

Category 2007- 1983 2009- 20072009- 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

ConclusionsConclusions

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.

ConclusionsConclusions

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.