Thinking about mortgage lending with Timothy Taylor
Timothy Taylor does a fine job of thinking about mortgage lending, and how changes in the mortgage market have affected our economy. I would disagree (slightly) on one point, and make one additional comment.
First, the additional comment. Taylor comments on the difference between a mortgage lending rule mortgage payments that are 30% of the borrower's income, and 25%. Back in the dim past (1976), when I first bought a house, the rule of thumb was that the amount of the mortgage should not exceed twice one's annual income. Not quite the same thing.
Taylor's conclusions are these:
Let me offer a speculation: Say that the rules for taking our a mortgage had been tighter over time. Imagine the standard was that banks would decide what you can afford based on 25% of your income, not 30%, or that mortgages were typically available for 15 or 20 years, not 30. My guess is that bank lending for mortgages would be smaller. The size of homes might well have increased, but not as quickly. Less of US capital investment would be allocated to housing, which would make it possible for more to be allocated to investments that can raise the long-term standard of living. The US economy would be less vulnerable to recession. People who were less stretched in making their mortgage payments would be less likely to face default or foreclosure. And my guess is that many of us would have adapted perfectly well to living in smaller homes, because the smaller size would be usual and typical and what we expect. The money we weren't spending on housing would easily be spent on other forms of consumption.My disagreement comes from his conclusion that less home ownership would likely mean that "Less of US capital investment would be allocated to housing, which would make it possible for more to be allocated to investments that can raise the long-term standard of living." Two points. (1) Owner-occupied or not, there needs to be "enough" housing; in a world with less owner-occupied housing, this would suggest more rental housing. And it's not clear that the additional rental housing would be multi-family. So the shift from investment in housing to investment in other forms of capital might not be al that significant. (2) I think it's incorrect (or at least speculative) to say that investment in housing does not contribute (as much as other forms of capital accumulation) to increasing the standard of living over time. More housing is a good that people value. The real question is to determine the value of more (larger, etc.) housing relative to other forms of new capital.
But do read his piece. It's extraordinarily interesting.