The U.S. housing bubble of the early 2000s sent home prices soaring before the market crashed in 2007-08, triggering a foreclosure crisis and a deep recession.
A popular explanation is that lenders suddenly made it much easier to buy a home with a very small down payment. But W. Ben McCartney, an assistant professor at the University of Virginia’s McIntire School of Commerce, examined 25 years of mortgage data and found a different story.
W. Ben McCartney, an assistant professor at UVA’s McIntire School of Commerce, analyzes 25 years of mortgage data to better understand who takes on risk in the housing market. (Contributed photo)
McCartney spoke with UVA Today about what the data reveals about who took on the risk during housing booms and busts and what it means for today’s homebuyers.
Q. What is the biggest takeaway from your research for the average homebuyer or homeowner?
A. There’s a very common story about the housing bubble that goes something like this: Suddenly, people could buy homes with only 5% down, which brought a flood of highly leveraged buyers into the market, and home prices skyrocketed. The problem is that this story is essentially at odds with the data.
Low-down-payment mortgages were already extremely common before the housing boom, remained common during it, and remained common afterward. What changed dramatically was who supplied them. Before the boom, many were backed by the FHA (Federal Housing Administration) and the VA (Department of Veterans Affairs). During the boom, private lenders took over much of that market. After the crash, FHA and VA stepped back in.
But the utilization of low-down-payment mortgages hardly changed at all.
Q. You found the amount people borrow compared with the value of their homes has stayed remarkably steady for 25 years. Why is that important?
A. Because it challenges a very influential explanation for housing booms. If easier down-payment requirements were pushing prices higher, we should see buyers borrowing an ever-larger fraction of their homes’ values during booms. We don’t.
The amount of mortgage debt relative to the value of the house (the loan-to-value ratio, or LTV) was remarkably stable, even in places where home prices boomed and then crashed much more dramatically.
Q. Home prices have risen sharply in recent years. What does your research tell us about how people are financing those higher-priced homes?
A. The striking thing is that higher home prices recently have also not been financed by buyers borrowing a larger share of the purchase price. If anything, the opposite has happened recently. Since 2020, as home prices rose sharply, loan-to-value ratios actually declined somewhat, meaning buyers with mortgages were putting more equity into the purchase and financing a smaller fraction of the home with debt.
Of course, this does not mean buying a home has become easier. A smaller loan relative to the house’s value can still be a much larger loan in dollars when the house itself costs far more, and higher interest rates make those dollars more expensive to borrow. But the recent run-up in prices is clearly not a story of households stretching further by making smaller and smaller down payments.
Q. Mortgage rates are significantly higher than they were a few years ago. How might that affect borrowing and the housing market?
A. For today’s housing market, there are two competing forces. Higher rates reduce how much buyers can afford, which weakens demand. But higher rates can also reduce supply, because existing homeowners with low-rate mortgages may be reluctant to sell.
Q. If borrowing levels haven’t been the main driver of housing booms and busts, what factors do you think play a bigger role?
A. Our results tell us more about what didn’t cause housing booms than they do about exactly what did. We can rule out a simple story in which down-payment requirements loosen dramatically during booms and tighten during busts. Other dimensions of mortgage credit could still matter: how large a payment lenders allow relative to income (debt-to-income constraints), documentation standards, mortgage products or other lending terms.
