Paul Krugman on mortgage defaults and inequality

Two unrelated posts from Paul Krugman’s blog, both with links to some interesting places.


December 14, 2007, 11:04 am

Why negative equity matters

In today’s column I emphasized the importance of what looks like a coming avalanche of negative equity — homeowners who owe more than their homes are worth. Why is this so important?

Well, I was strongly influenced by recent Boston Fed research, which finds a crucial role for negative equity in causing foreclosure.

We attribute most of the dramatic rise in foreclosures in 2006 and 2007 in Massachusetts to the decline in house prices that began in the summer of 2005. Subprime lending played a role but that role was in creating a class of homeowners who were particularly sensitive to declining house price appreciation, rather than, as is commonly believed, by placing people in inherently problematic mortgages.

negative equity is a necessary but not sufficient condition for default, because selling dominates defaulting if a borrower has positive equity.

The Calculated Risk calculations I mentioned are here. Read it and tremble.


December 13, 2007, 9:51 pm

Bush boom bah

You know you’re a serious wonk when you wait eagerly each year for the arrival of the CBO’s “Historical Effective Federal Tax Rates.” But it’s much more than a tax report — it’s the single best estimate we have of trends in income and income inequality. The tables (Excel file) are here.

Lots to parse in this report — which only gets us up to 2005 — but here’s one quick calculation. As you may know, for several years the Bush administration and its defenders did a lot of whining about the economy, wondering why they weren’t getting credit for what they insisted was a great economic success.

Well, if you look at the estimates of gains from 2003 to 2005, by position in the income distribution, all becomes clear.

Here’s what the numbers say about percentage gains in after-tax income from 2003 to 2005:

Bottom quintile: 2%
Next quintile: 2.4%
Middle quintile: 3.9%
Fourth quintile: 3.7%
Top quintile: 16%

Top 10%: 20.9%
Top 5%: 27.7%
Top 1%: 43.5%

It was a boom, all right — but only for a few people.

One other thing that’s striking from the report, by the way, is that over the 26 years the estimates span, the only significant gains for the bottom two quintiles, and most of the gains for the middle quintile, took place during the Clinton years. Exactly why is an interesting question, but the empirical fact is that over the past generation the only good years for lower and middle income families were when a Democrat was in the White House. This is an example of a broader, and honestly mysterious, correlation identified by Larry Bartels in his paper “Partisan politics and the U.S. income distribution.”

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